Drilling Deeper Into Saudi Aramco's Bid to Go Public

4 MINS READOct 7, 2016 | 09:00 GMT
Saudi Aramco has long been criticized for its opaque practices, but the company is in the process of making its operations more transparent.
Saudi Aramco has long been criticized for its opaque practices, but the company is in the process of making its operations more transparent.

Saudi Arabia is taking steps to put its ambitious agenda for economic reform into practice. In a recent interview with Bloomberg, Saudi Arabian Oil Co. (Saudi Aramco) CEO Amin Nasser said the company's partial initial public offering (IPO) would list units across the organization — rather than just the downstream segments, as many had expected. The announcement hints that Riyadh may be making a serious effort to introduce greater transparency and efficiency into the state-owned energy giant's practices, as promised. More important, though, it indicates Riyadh's commitment to forging ahead with a massive overhaul of the Saudi economy, a plan that until now has seen more talk than action. 

The Saudi Aramco IPO and restructuring is a central part of Riyadh's Vision 2030, a program that aims to lessen the Saudi economy's reliance on oil exports. Though the offering is tentatively set to go live in 2018, its actual date will depend on how quickly oil prices rebound. In theory, OPEC's recent deal to cut production levels among its members could cause global demand for oil to outstrip supply by the end of 2017. If, however, the oil market does not correct itself until the following year, Riyadh may delay the company's partial privatization in hopes of fetching a higher price for it later.

Regardless, the Saudi Aramco IPO will happen sooner or later, and when it does, it will dramatically change how the company operates. Saudi Aramco has long been criticized for its opaque practices and finances, as well as its refusal to allow third parties to audit its oil reserves. However, the firm is reportedly in the process of overhauling its methods of accounting, recording and compiling financial data so that it can release the information in a more detailed and investor-friendly way during the next fiscal year. (In the past, annual reports served more to boost the company's image than to disclose comprehensive figures.) The government's inclusion of the firm's larger and more profitable upstream units in the IPO could be intended to set a standard for greater transparency among other Saudi companies in the future. 

That said, it is unclear whether Riyadh is willing to take similar steps in opening its oil reserves to public scrutiny. No third party has been able to verify how much oil the country actually has, and many Saudi officials do not want to provide proof of what has historically been considered a state secret. Riyadh may have little choice but to do so, though, if it begins selling off the company's upstream subsidiaries. The government's apparent willingness to do just that, even in the face of public opposition, could mean that Riyadh is similarly prepared to push through its other economic reforms, no matter the political cost. (The IPO, however, could still end up heavily slanted toward the downstream industry.)

To its domestic audience, Riyadh has tried to sell Saudi Aramco's partial privatization as a boon for the private sector and the non-energy areas of the Saudi economy. The revenue the IPO brings in will be funneled into the Saudi Public Investment Fund, which Deputy Crown Prince Mohammed bin Salman predicts could someday reach $2 trillion in assets. The fund's purpose is to finance strategic investments at home and abroad, which could give a much-needed boost to straggling Saudi industries outside the energy sector. 

As with most grand policy proposals, implementation continues to be the Vision 2030 program's greatest challenge. By and large, Riyadh is stuck in the planning stages of its effort to introduce major reform. In the few areas where the government has set its schemes in motion, including the attempted Saudization of the country's workforce, its results have been lackluster at best. Meanwhile, Saudi Arabia's plan to sell bank bonds to plug the gaping holes in its budget has been repeatedly postponed, leaving Riyadh strapped for cash.

Turning Saudi Arabia's corporate culture and economy around will be no easy feat. Many Saudi citizens, moreover, will continue to be reluctant to unveil information about their country's most valuable assets to the rest of the world. Nevertheless, most citizens are aware of the pressing need for an economic overhaul, and Riyadh knows it cannot afford to put off its reforms for much longer. Though the road to economic reform promises to be a bumpy one, Saudi Arabia appears ready to embark on it anyway, promising several interesting years ahead for the Middle Eastern kingdom. 

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