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By APD writer Mei Xinyu
Translated by Ma Qian
Saudi oil giant Aramco has been ready for its first initial public offering (IPO) in the second half of 2018, but it still has to wait for a green light from the government, the company’s CEO Amin Nasser said during the World Economic Forum on January 24 in Davos, Switzerland.
Saudi Aramco CEO Amin Nasser
The remarks have rocked the international capital market. Previously on January 5, the Saudi government announced that it would transform the state-owned oil giant into a shareholding company starting from January 1. On January 11, Reuters disclosed that Aramco has been seeking for billions of cheap loans from banks before the IPO launch. The above information all gives credits to Nasser’s remarks.
As an oil heavyweight with a daily oil production of over 10 million barrels and crude oil reserves of more than 260 billion barrels (10 times the size of the world’s largest publicly traded international oil and gas company Exxon Mobil), Aramco’s IPO launch has become a grand event that catches the eye of the international capital market, which is predicted to break the record of the capital amount raised through IPO around the world.
For Saudi Arabia, Aramco’s IPO is one of the key programs of Saudi Vision 2030, a comprehensive reform blueprint that the Saudi government released on April 25, 2016. The plan was made primarily to deal with the plunge in oil prices since the second half of 2014, which ended the great oil bull market that begun since early 21st century.
Revenues from the oil industry of the gulf countries, including Saudi Arabia, have thus plummeted, leading to the rapid consumption of their fiscal reserves. It was no longer possible to reap the dividend of exorbitant oil prices. Reform has become a way must for survival.
Yet Saudi Arabia’s target is more than that, with the aim of not only seeking to get rid of the financial plight, but also to make a breakthrough and diversify Saudi Arabia’s economic and diplomatic strategies, so as to lay a solid foundation for the country’s new leaders who has gained real power.
Economically, the purposes of Aramco’s IPO are as follows:
Firstly, to get a huge sum of cash through stock listing, so as to supplement the Saudi government’s fiscal reserve, remove potential fiscal liquidity crisis, and strength market confidence in the country’s finance. Although Saudi Vision 2030 does not specify the goal, it is the most direct and urgent motive behind the reform.
Since 2003, Saudi Arabia’s general government fiscal revenue has been turned into surplus consecutively. From 2003 to 2008, general government net surplus, in the Saudi riyal, was 9.7 billion, 94.3 billion, 221.4 billion, 293.9 billion, 183.7 billion and 580.9 billion respectively. In 2009, the aftermath of subprime mortgage crisis led to a deficit of 86.6 billion Saudi riyals of general government net revenue.
Yet since 2010 till 2013, the country’s general government net revenue has seen surplus in a row, recording 70.6 billion, 280.3 billion, 330.3 billion and 161.6 billion respectively. From 2014 to 2016, the revenue turned into a deficit of 96.1 billion, 385.6 billion and 311.5 billion respectively.
Last April, the International Monetary Fund (IMF) predicted that Saudi Arabia would continue to suffer deficits from 2017 to 2021 consecutively. From 2011 to 2015, the country’s oil revenue, in U.S. dollars, reached 275.3 billion, 303.9 billion, 288 billion, 238.4 billion and 118 billion respectively.
In recent years, despite the dramatic decrease in oil revenue, Saudi Arabia’s GDP has kept minor increase. This was done largely through consuming its fiscal reserve and foreign exchange reserve to support consumer spending and luxurious investment. As a consequent, general government fiscal deficit was sharply expanded and remained high. The government’s net assets rapidly shrank.
Secondly, to promote nation-level investment and diversify the Saudi economy and the country’s fiscal revenue, so as to improve the stability of the Saudi economy and finance. This is a goal that has been clearly proposed in Saudi Vision 2030. The plan is in essence an economic diversification proposal, with the aim of building a modernized economy that largely decrease and gradually get rid of its dependency on the oil industry.
The plan also said clearly that it will use the benefits gained from Aramco’s IPO and sales of other assets (The Saudi government expects to get over two trillion U.S. dollars.) to set up a brand-new, huge sovereign wealth fund, which would allow Saudi Arabia to get regular gains by investing non-oil assets, like Norway and other petroleum exporting countries.
On the day the vision was publicized, Saudi Arabia's King Salman announced the goal in a television speech: by 2030, Saudi Arabia will no longer depend on oil. To achieve the ambition, investment diversification is a must.
Thirdly, to bind its interests with more major powers through Aramco’s IPO, so as to improve the safety of the Saudi economy and politics. This is the deepest motivation behind Aramco’s IPO launch, and also a wise move with successful experience in the country’s history. Moreover, in the interest-binding strategy devised by the country’s top policymakers, China is undoubtedly a primary goal.
In history, the Saudi Arabian royal family was adept at utilizing other major powers to achieve its goals of survival and expansion. Ibn Saud, the first monarch and founder of modern Saudi Arabia, was besieged after he conquered his family's ancestral home city of Riyadh and founded the initial stronghold in January 1902.
He thought that although Britain was much stronger than the Ottoman Empire in terms of national power, the largest obstacle for him to conquer the Arabian Peninsula was the latter. What’s more, Britain could possibly provide him with support and protection.
Therefore, Saud decided to try his best to slacken the Ottoman Empire’s vigilance in order to avoid direct conflict. At the same time, he managed to take advantage of the British power to fight against Turkey and eventually gained independence from the Ottoman Empire. To achieve the goal, he even signed the Treaty of Darina in December 1915, which made the lands of the House of Saud a British protectorate in exchange for Britain’s support.
Just four months after he conquered Riyadh (May, 1902), Saud wrote a letter to ask for more protection. However, Britain refused his request considering its overall strategy. Despite the frustration, Saud continued to request for establishing diplomatic ties with the British government and for more protection for nine times through 1903 to 1913. In December 1915, the British finally agreed to sign the Treaty of Darina.
After World War I (WWI), the rapproachement between the two sides was gradually reversed into confrontation. Yet the Saudi Arabian royal family, likewise, smartly utilized other major country’s power, even including the Soviet Union, with which Saudi Arabia did not establish diplomatic ties.
Despite complete differences in political system, the Soviet Union, through a magazine article, praised the country’s Ikhwan policy, which was later seen as extremely bad in history, as an extraordinary political and social solution and labeled it as a blow to the British policy to set up vassals in the Arab world.
In July 1926, Saud held the Pan-Islamic Congress of in Mecca. The Soviet Union dispatched Muslim delegates to attend the congress. As for the interests binding with the United States after WWII, Saudi Arabia also did a great job.
With such successful historical experience, how would Saudi Arabia achieve its interests binding with more major powers through Aramco nowadays? In fact, Aramco is just a company co-owned and co-controlled by Saudi Arabia and the U.S.. Yet as the U.S. has been changing gradually from a net importer of oil and natural gas to a net exporter and sees gradual increase in its net export volume, the two countries will tend to have less common interests in Aramco and more clashes of interests.
Under such a situation, soliciting more net importers of oil and natural gas like China through Aramco’s IPO launch will help consolidate and improve the company’s market shares in shareholding countries including China. After all, China’s crude oil import volume has become world’s largest after 16 years of consecutive growth since 2002.
Competitions vying for China’s import market have also been much fiercer. In 2016, Russia, with the volume of 5247.8 tons, exceeded Saudi Arabia to become the largest crude oil exporter for China (according to Yearly report on China's foreign trade 2017), which has alarmed Saudi Arabia. This is the first layer of interests binding.
As the world’s largest oil exporter and a parameter for the global oil market for long, Saudi Arabia hopes to make profits in the oil and natural gas markets in a sustainable way. Therefore, different from countries like Venezuela that seek only for oil price hikes, Saudi Arabia hopes to set oil prices at a reasonable range. This would not only allow it to get high revenues, but also will not force oil importers, bearing too much pressure, to explore alternative energy with determination and large investment, which will speed up oil’s withdrawal from the international stage.
Since early 1980s, Saudi Arabia has recognized the above fact from the rapid progress made in exploring alternative energy and energy-saving technologies, which was caused by the boom of oil prices in the 1970s. In the New Year of 1981, Sheikh Ahmed Zaki Yamani, the then Minister of Oil and Mineral Resources, told students in a speech at King Fahd University of Petroleum and Minerals that skyrocketing oil prices would impair OPEC’s demand for petroleum.
At present, that means Saudi Arabia will call for more consuming countries and net importers of oil and natural gas like China to become shareholders and share relevant profits. It will also further weaken other countries’, including China’s, motivation of developing alternative energy. This is the second layer of interests binding.
On top of that, through launching Aramco’s IPO at international financial markets including New York, Hong Kong and London, Saudi Arabia will be able to achieve the third layer of interests binding with major powers like the U.S., China and Britain.
Intense competition has begun among the New York Stock Exchange, London Stock Exchange, Hong Kong Exchanges and Clearing Limited (HKEX), as well as large international institutional investors.
It’s reported that China’s consortium, comprising PetroChina and Sinopec, and Pension Fund of the Russian Federation have already expressed their willingness to becoming Aramco’s cornerstone investors. In November 2017, UK Export Finance offered Aramco a loan of two billion U.S. dollars, in hopes that the oil giant would launch its IPO in London. On Jaunary 24, Li Xiaojia, Chief Executive Officer of HKEX, said that Aramco’s IPO launch in Hong Kong would be a perfect match.
In such a large-scale and high-risk business, it will surely help improve the possibility of success by fully recognizing Saudi Arabia’s motive and strategy of binding its interests with that of major powers.
The author is a researcher at the Chinese Academy of International Trade and Economic Cooperation, an institution affiliated to the Chinese Ministry of Commerce. The opinions expressed above are his own and don’t necessarily reflect the view of APD.
(ASIA PACIFIC DAILY)
