New Saudi options

March 19, 2018
News of a possible delay in the initial public offering of a Saudi Aramco interest underscores the value of options.

News of a possible delay in the initial public offering of a Saudi Aramco interest underscores the value of options.

Saudi Arabia had few options when it began openly discussing plans for the IPO early in 2016. Its finances, like those of other major oil-exporting countries, had been battered by a crude-price slump. Murmuring had begun about coordinated production restraint by members of the Organization of Petroleum Exporting Countries and others. But prospects were far from certain that the countries could agree to coordinate supply or hold an agreement together long enough to work. Still, Riyadh needed to modernize its economy. It needed to expand and create industries able to employ a growing population it no longer could afford to tranquilize with free services, subsidized necessities, and the occasional handout. It needed money.

Much has changed since early 2016. Saudi Arabia, for example, has new options.

Production restraint

The agreement by 12 OPEC members and 10 collaborators to trim collective output by 1.8 million b/d lasted through 2017 and has been extended through this year. It marshalled the production discipline needed to hasten an inventory draw essential to revival of the crude price. An emboldened OPEC Secretariat is drafting an indefinite extension. The prospect of institutionalized supply management enhances a growing Saudi option not to rush the sale of 5% of Aramco. Indeed, Saudi officials hint that the IPO might not occur until 2019. They also hint that they might divest the Aramco stake through direct sales to sovereign rather than public investors.

Success of the production accord also gives Saudi Arabia a new geopolitical option: improved relations with Russia, which has met its commitment to trim oil production by 300,000 b/d. Cooperation in the oil market apparently makes both countries comfortable enough to look past differences such as Moscow’s alliance with Iran in support of President Bashar al Assad in war-ravaged Syria. Ambitious Saudi Crown Prince Mohammad bin Salman visited Moscow last May, followed by his father, King Salman, in October. Since then, Aramco has signed memoranda of understanding to cooperate on oil and gas projects with Gazprom Neft and on LNG and other gas projects with Novatek. Meanwhile, the Russian Direct Investment Fund (FDIF) has expressed interest in investing in Aramco.

For Moscow, alliance with Riyadh might represent an escape route from Syria and a chance to claim more-stable ground in a part of the world where it craves influence. For Riyadh, Russia represents an interesting and potentially lucrative option. Abandoning the IPO in favor of direct sales of the Aramco interest to FDIF and other sovereign wealth funds would free it from the disclosure requirements of public offerings, with which it has little experience. And partnership with Novatek would give it a latecomer’s foothold in LNG trade. At this point, Saudi Arabia’s flirtation with Russia is cautious. But it’s an option.

Another, more-measurable option comes from a 3-month shakedown of Saudi tycoons in what Riyadh called a corruption purge. Under direction of Mohammad bin Salman, authorities last Nov. 4 incarcerated 381 businessmen, government officials, and royal family members in the Ritz Carlton Hotel in Riyadh and made them negotiate for release. By late last month, most of the elite detainees had been freed. And the government, according to a late-January estimate, had claimed assets worth $107 billion.

Afford to wait

That’s about what Riyadh hopes to raise with the Aramco divestment, whatever its form. The authoritarian nature of the anticorruption enterprise of course raises concern about political risk in Saudi Arabia. But sovereign wealth funds seeking an Aramco stake and foreign stock exchanges courting Riyadh to host the IPO will get over it. The prize is large, the competition keen and expanding. The kingdom now can afford to wait.

It has options. Lest anyone forget, they include 2 million b/d of idle production capacity ready for use if Saudi rulers decide that weakening oil-exporting antagonists matters more than the price of crude.