Saudi Aramco is preparing an initial public offering (IPO) that could make Exxon Mobil Corporation (NYSE:XOM) look like small potatoes.
The biggest title in movie theatres now might be the latest Star Wars film, but the world is actually on the verge of an oil war. Muhammad bin Salman—officially the Minister of Defense and Deputy Crown Prince of Saudi Arabia, but unofficially the de-facto ruler of Saudi Arabia, given the “accounts” he oversees—is about to unveil the privatization and market listing of Saudi Aramco, officially the Saudi Arabian Oil Company. This is surely one of the most exciting chapters to date in the petroleum saga and it could not have come at a more delicate moment.
By privatizing Saudi Aramco and selling its shares on the world market, Riyadh expects to be able to continue financing its anti-Shiite and anti-Iranian policy, while forcing the U.S. shale oil industry under. In other words, in 2016, the price of oil will continue to fall and the entire Middle East will continue to burn.
The biggest victim of the oil wars are oil prices, which keep hitting new lows and are heading toward $31.00 per barrel. Prince Muhammad bin Salman’s strategy to win the oil war is to privatize Aramco, perhaps the world’s largest oil company and the very life source of the Saudi kingdom. As the oil embargo that has circumscribed Iran’s oil exports since 1979 ends on January 16, the very concerned sheiks in Riyadh have decided to undertake the economic equivalent of deploying a nuclear weapon—announcing the sale of part of Saudi Aramco.
The privatization of even a portion of Saudi Aramco, the world’s leading crude oil producer, symbiotically linked to the Saudi State and the Saudi Royal Family, leaves nothing short of a mushroom cloud within the Organization of the Petroleum Exporting Countries (OPEC). Salman sees this as necessary in order to fill the $90.0-billion budget deficit resulting from the ever-lower price of crude oil. Currently, crude oil prices sit at their lowest level in the past 12 years and are heading toward new record-lows.
The sale of Aramco is necessary because the country needs to avoid the alternative—adopting wide-reaching austerity measures in order to contain domestic socio-economic threats that could trigger wide-scale revolts.
Saudi Aramco owns the second-largest oil field in the world and is the world’s largest exporter of crude oil. Such giants as Exxon Mobil and Rosneft blush before the might of Saudi Aramco’s reserves of some 267 billion barrels, or a quarter of the world’s total. That’s enough to address demand for another century at an extraction capacity of 12.5 million barrels a day.
Indeed, Saudi Aramco owns some 20-times more reserves than Exxon Mobil. (Source: “Is Saudi Aramco really worth $10 trillion?” 24/7 Wall Street, January 8, 2016.)
Certainly, if Saudi Arabia sells part of Saudi Aramco in an IPO, the company could become the first listing worth more than a trillion dollars. Indeed, Saudi Arabia owns 16% of all world oil reserves, which is more than 260 billion barrels and some 10-times more than Exxon Mobil, the largest listed oil company in the world. Based on the market value of Exxon, amounting to some $317 billion, a privatized Aramco could be worth over $3.0 trillion!
The terms of Saudi Aramco’s IPO are still being studied, but it was enough for the company’s name to be linked in the same sentence with IPO or privatization for Bloomberg to describe it as “oil’s big bang.” (Source: “Oil’s Big Bang: Saudis Mull IPO of World’s Biggest Producer,” Bloomberg, January 7, 2016.)
Yet, what promises to be the market event of the decade could occur in a matter of months, based on an interview Salman granted The Economist magazine. According to economic analysts, Aramco could rival Apple Inc. (NASDAQ:AAPL) as the largest listed company in the world. (Source: “Transcript: Interview with Muhammad bin Salman,” The Economist, January 6, 2016.)
Saudi Aramco’s IPO Could Kill an Already Weakened OPEC
Doubtless, this will unhinge the current system of oil and gas prices; ironically, by privatizing Saudi Aramco, the al-Saud’s will have executed OPEC, sending oil prices on an extended roller coaster ride, according to The Rapidan Group founder Bob McNally. (Source: “Iran’s Bid for Oil Investment Seen at Risk From Saudi Dispute,” Bloomberg, January 8, 2016.)
Indeed, McNally considers Saudi Aramco’s privatization as momentous, but fraught with major economic consequences, just as when the Saudi kingdom nationalized its oil resources in 1970, causing a shock in the most energy-consuming economies, including the U.S. and U.K. Now, it is China that could see a shock, having become the largest importer of oil, Saudi Arabia’s best customer, and the locomotive of the global economy, even if it is running out of steam. (Source: Ibid.)
The Economist suggests that the IPO could cover five percent of Saudi Aramco, but the sales operation could then involve some subsidiaries, keeping state ownership of the controlling interest. Predictably, the kingdom will be targeting strategic investors, especially those from the United States. However, the sale comes during one of the kingdom’s most precarious periods.
Saudi Arabia is being tested by a dynastic crisis, the effects of a strategy to force oil prices lower as tensions with Shiites, within its borders and in Iran, intensify. The kingdom and the Islamic Republic have been engaging in more than a proxy war in the region. Meanwhile, despite the resources at its disposal, Saudi Arabia lacks an adequately diversified economy, ever reliant on revenue from energy resources.
Neither the Saudis nor the Iranians win from lower oil prices, but it is clear that Riyadh and its Gulf allies are convinced that the long-term damage will be greater in Iran than in Saudi Arabia for one simple reason: Iran has been absent from the world market for too long.
Saudi Arabia and Iran Close to a Direct Conflict
Iran has a population of 81 million, while Saudi Arabia has only 27 million. Nevertheless, the latter kingdom has an annual gross domestic product (GDP) value of $746 billion, which is almost twice as much as Iran.
Militarily, Iran has 554,000 well-trained and effective troops, while Saudi Arabia has 233,000 troops. However, the Saudis have access to an arsenal that would make even some American generals envious.
The uncertainty regarding U.S. foreign policy in the region has greatly helped the intensification of the crisis between these two giants. In the aftermath of the Islamic Revolution and Imam Khomeini’s rise to power in Iran, the U.S. cemented relations with Saudi Arabia to contain the latter, propping up Saddam Hussein in Iraq for the same purpose.
This balance cracked with the American invasion of Iraq and the overthrow of Saddam Hussein. Iran gained a chance to influence Iraq, especially as Shiite governments have dominated under the new rules.
During the Arab Spring, a series of miscalculations at the state department and the White House, such as the decision to abandon Egyptian President Hosni Mubarak to the will of those who occupied Tahrir Square, exacerbated the Saudis’ concerns about the reliability of having the Americans as allies.
Finally, the nuclear deal with Iran and the possibility of a rapprochement between Washington and Tehran has pushed the Saudis to do their own thing, deploying a series of regional traps to draw Tehran into proxy wars, such as Syria and Yemen. The latest salvo in this policy was the execution of Shiite cleric Sheikh Nimr al-Nimr.
The Saudis not only see Iran as a growing threat in the region, committed to supporting Shiite populations in the Gulf states and around the world, but they fear its advance in the Arabian Peninsula, especially Yemen, now that the alliance between the Sunni leaders in the region and Washington has weakened.
The Iranians, meanwhile, see the Saudis as oppressive domestically and elsewhere in the Middle East when it comes to Shiites. Economically, therefore, Saudi Arabia’s refusal to cut oil production, which keeps prices low just when Iran is going to fall in the world market, is a source of further tension in relations between the two nations.
Saudi Aramco IPO Coming Soon
As Reuters reported, according to some officials, the options range from the listing of some of the petrochemical plants and other companies to the sale of shares in the parent company. Over time, these shares could increase, but the monarchy wants to continue to exercise control over the company. (Source: “Exclusive: Saudi Aramco would sell downstream ops, not upstream – sources,” Reuters, January 10, 2016.)
Saudi Aramco is a peculiar case, perhaps unique in the world. Its closest rival in value would be Apple, given it ranges in value between $500 billion and $700 billion based merely on its oil reserves. However, Saudi Aramco’s listing would take place in the midst of one of the oil market’s most difficult phases.
For the moment, the impact of Saudi Aramco’s IPO would be limited, or at least the Saudi leadership has calculated that at worst, the oil market would not be impacted significantly. Perhaps, it even suggests some optimism that energy prices will eventually return to the highs of the past few years in a relatively short period.
What would change more rapidly is that the company would have to become more transparent and it may serve as the spearhead of a wider reform and diversification of the internal system, especially the excessive dependency on welfare and overly petrodollar-oriented economy.
Tehran’s return to global oil exports will weaken Saudi Arabia. Iran has developed new types of contracts to attract investment from foreign companies.
Aramco is a direct extension of the House of Saud and, therefore, the kingdom’s leadership. The potential IPO listing puts the current arrangement of this relationship in question. One of the likely effects will be to weaken the importance and role of the oil minister, because Salman’s decision is also linked to a growing internal power struggle within the royal family. Only a minority stake of Aramco would be floated, enough to render the oil minister pointless, while still leaving the vast majority of shares in the hands of the king.
Yet, the low oil prices are now a sufficient threat to the al-Saud dynasty that they could spell the collapse of the kingdom. Reluctant to make the radical shift needed to lead the kingdom out of a social and economic sinkhole, Saudi Arabia could go bankrupt in the matter of a few years. The partial sale of Saudi Aramco may allow the patient to live a few more years, but they would be in sectarian agony. (Source: “Iranian general says Saudi Arabia faces imminent collapse,” Times of Israel, January 9, 2016.)
Should the kingdom collapse, it could be a combination of the effects of the Arab Spring on Syria and Libya, tribal and religious revolts that could be more lethal than previous conflicts in the Middle East.
Presumably, oil prices should hit new highs if, or when, Saudi Arabia enters its breakdown phase. At that point, owners of Saudi Aramco stock could see some rather interesting returns if a Saudi Aramco IPO emerges.