Was Aramco’s IPO Destined To Fail?

Saudi Arabia appears to have scuttled its plans for the largest IPO ever — a move that may be explained partly by higher oil prices and partly by more dubious reasons.

By Kurt Cobb, Resource Insights, via OilPrice.com”:

Since late 2016 the financial media has been abuzz about what would likely be the biggest initial public offering (IPO) ever: The sale of 5 percent of the world’s largest oil company, Saudi Aramco, which is wholly owned by the government of Saudi Arabia. The IPO with its required disclosures would shed light on the inner workings of the company for the first time since it was nationalized in 1980 and lead to independent verification of its oil reserves and other assets.

It would be a large first step in unmasking the murky world of national oil companies (NOCs), the reserves of which are thought to represent 90 percent of the world’s total reserves of oil and natural gas according to one estimate.

With estimates that Saudi Aramco is worth $2 trillion, the sale of 5 percent to public shareholders would represent a potential $100 billion, a valuation that would make such an IPO an all-time record and result in roughly $1 billion in fees for the lucky bankers handling the deal.

All that anticipation, however, has now come crashing down as the Saudi government seeks the funds it might have gotten from an IPO through other avenues. So, what happened?

First, oil prices rose significantly. When the Saudi government officially confirmed that it was seeking an IPO for Aramco in October 2016, Brent crude, the world benchmark, averaged just under $50 per barrel that month. While the IPO was being considered earlier that year, oil had dropped below $30. Last week it closed just below $75.

The government was thought to be desperate to reduce its rising deficits—due in large part to a precipitous drop in oil prices—by selling a part of the company. That seems an unlikely reason for the sale since the Saudis have ample money in a sovereign wealth fund and substantial credit with major banks. The stated reason was a plan to diversify the Saudi economy.

With oil prices 50 percent higher than when the plan was proposed, rising revenues may be sufficient to justify waiting and may be able to provide investment funds for other purposes. (The Saudi government finances itself largely from oil revenues.)

Second, it’s possible the Saudis now believe that investors would not be willing to pay as much as the Saudis want for a variety of reasons that include:

  • Concern about the stability of the Saudi regime (with whom investors would become business partners).
  • The high taxes and royalties paid by the company to the government.
  • The lack of diversification because almost all of Aramco’s operations are in Saudi Arabia and thus subject to upheavals and conflicts in the Middle East.
  • The role of Saudi Arabia as an OPEC member and as the world’s largest swing producer which leads it to adjust its output for geopolitical reasons and not merely to maximize profits for the company.

These are merely a sampling of concerns discussed in the media.

But, I believe that perhaps the most important reason the Saudis are reconsidering the IPO is that the government simply does not want to subject the company to an independent audit that would for the first time since 1980 determine whether the country has been telling the truth about its oil reserves.

Saudi Arabia must have significant remaining reserves in order to pump at rates that make it the number one or number two producer in the world, alternating with Russia for the top position. But that doesn’t really tell us the relative size of Saudi reserves since Russia claims less than a third of the reserves that Saudi Arabia does and yet produces nearly the same amount of oil on a daily basis.

Despite the fact that one of the world’s largest producers of oil has not been audited in 38 years, official sources of energy information such as the U.S. Energy Information Administration and the International Energy Agency have been taking Saudi Aramco’s public claims about its reserves at face value and including them in their official statistics.

In fairness, what choice do these agencies have? They have no standing or power to compel an independent audit.

It might not be so bad if Saudi Arabia were the only case of this. But wherever there exists a government-owned oil company that monopolizes oil development in a nation, there is likely to be secrecy about reserves. The national oil companies of Iran, Iraq, Kuwait, and Venezuela represent some of largest corporations in the world. But because they are not publicly traded, they are not subject to the kind of scrutiny that large international companies such as ExxonMobil and Shell are. Wikipedia provides a lengthy list of NOCs demonstrating just how far the shroud of secrecy extends across the industry.

(Of course, not all these companies escape scrutiny. For example, the Argentine national oil company, known as YFP, in which the government holds a 51 percent stake, is traded on the New York Stock Exchange and thus required to adhere to disclosure and audit standards for listed companies. But most national oil companies are not publicly traded.)

The recent retreat of Saudi Arabia from its planned IPO is not only an important financial event. It’s an important informational event in that it highlights the opacity of the world’s oil producers. It should remind us that the numbers we accept from major governmental and international organizations regarding oil reserves worldwide are largely based on unverified sources, namely, the word and only the word of most of the world’s national oil companies.

That we continue to plan our futures—our cities, our transportation systems, or industrial developments—based on such numbers should be a cause for alarm and not the complacency we are currently exhibiting. By Kurt Cobb, Resource Insights, via OilPrice.com


Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.

  17 comments for “Was Aramco’s IPO Destined To Fail?

  1. Petunia says:

    In a politically correct world, a Saudi Arabian stock, would be a hard sell. It would become a target for a myriad of activist’s attacks. I can see this being a possible reason to withdraw the IPO.

  2. aja8888 says:

    It’s also common knowledge that SA’s oilfields are well into waterflood to lift oil these days and that’s an indication that the easy oil is not there anymore. Consequently, putting numbers on reserves is not what they would want to do. Also, the real “swing” producer with respect to normalizing worldwide oil production these days is becoming the U.S (shale plays).

  3. Unamused says:

    I think the House of Saud was just testing the waters in case they need to do it later, which they probably will.

    You might think that if they need the money they could profit hugely from the global sand shortage, but no, strangely enough, SA itself is running out and imports sand from Australia. Also camels.

    The world has been turning weird on me in ways I seem to be unable to fully appreciate and enjoy.

  4. Paul Morphy says:

    I think the author is correct about why the Aramco IPO was delayed/postponed, because there has always been questions as to the extent of the reserves held. Notionally the Ghawar oil field in Saudi Arabia was said to still hold huge reserves even since it was first accessed in 1948.
    How credible is the assertion that Ghawar still retains huge reserves in 2018? It is anyone’s guess as to the amount of oil remaining in that particular field and how viable it is to extract whatever amounts are there.

    Tom Bowers books about oil and the oil industry are very insightful, I think.

  5. Driller says:

    Additionally, what we really need to know is not just how much oil remains in the ground but how much is recoverable at a reason financial and environmental cost. Fracking tells us that the true cost of extraction includes earthquakes and ground water pollution, pollution which is likely irreversible.

    • Gibbon1 says:

      The dirty secret for Electric Vehicles. Batteries cost about $0.04 a mile, electricity is about $0.05/mile.

      So $0.09/mile.

      Gasoline costs ~$0.12/mile.

      Electric is cheaper per mile. Around 2021-23 electrics will be cheaper than gasoline on just sales price.

      Batteries will get cheaper as scale. And government world wide are starting to limit CO2 emissions.

      How much is that Saudi Oil in the ground worth again?

  6. Harrold says:

    I think the reason is that a lot of Saudi Royalty are robbing Saudi Aramco blind and don’t want to give that up.

    • robt says:

      If it’s theirs, it’s not robbery. It’s a good old-fashioned kingdom.

  7. Cynic says:

    Sensible article: the ‘the Stone Age didn’t end because they ran out of stones’ people should take note and reflect a bit……

    And no, ‘renewables’ will not be able to take up the slack.

  8. J.M.Keynes says:

    – Perhaps too many people had doubts about the financial future of Aramco ? Perhaps there were still too many “skeletons in the closet” ? Like:
    – What is the size of the oil reserves ?
    – How much money is the government extracting from the company ?
    – etc.

    – From day 1 Saudi Arabia announced they would give Aramco a public listing I had my doubts of the REAL value of the company.

  9. Nicko says:

    60% of Saudis are under the age of 35…. which is why it’s young ruler is about to spend trillions of dollars building a new economy from the sand up as well as liberalizing its laws. Sure, they won’t be on par with Europe or any other democracy for the foreseeable future, but they may get close to something resembling Dubai. It’s a remarkable opportunity for the region.

    • Ian says:

      I lived there for 3 years, if you think they will get like Dubai I have a desert full of electronic grade silica to sell you

  10. Iapetus says:

    A US listing would also have been tough because it would subject Aramco to the Foreign Corrupt Practices Act:


  11. kiers says:

    Perhaps…..other remuneration channels (code name “Jared”?) were opened obliviating the need for this. McKinsey had issued a report highlighting the benfits to KSA about the IPO and diversification, but now they talk about a “technology city” on the border with Jordan/Israel? Definitely, the IPO valuation was a problem. Capital Markets did not approve of KSA management of the asset is the impression i got, besides KSA asking for the moon in terms of price.

  12. TheDona says:

    The 2030 Vision should be called the 2050 Vision. Too many young people and they are educated in mainly religion and the women are disenfranchised. It will take a generation to change that.

    Too many Princes and Princesses, with the numbers growing exponentially, sucking from the saudi wealth fund which is Aramco. The house of Saud has been insulated with the wealth of Aramco so why would they want to open the books to what they are doing with the money.

    The tax structure on Aramco always changes in favor of the saudi wealth fund. It appears that the potential investors would never make any money although they could get reduced rates for oil. Maybe.

    “A marginal rate of 20 percent of revenue is due for oil prices up to $70 a barrel, 40 percent between $70 and $100, and 50 percent above $100. The government also widened the volume of crude covered by the royalties. Previously, the royalty was applied to exports. Now, it’s on production.” https://www.bloomberg.com/news/articles/2018-07-07/saudi-aramco-s-2-trillion-zombie-ipo

    They should have had this vision 30 years ago. It is too late for diversification now.

  13. Gunther says:

    The official Saudi oil reserves remain constant even if oil is pumped out of the ground. Common laws of physics state otherwise.
    An estimate of current affairs based on the last hopefully accurate data before the nationalisation minus the stated production should yield a different picture, Saudi oil reserves are way past prime.
    That argument was made in length here:
    The post is over ten years old but goes to considerable detail to explain to what extent the biggest oilfield in the world was depleted at that time.
    In short, the field was back then way more depleted then officially admitted.

    To justify the valuation of ARAMCO the amount of oil in the ground has to be much bigger then what it probably is

Comments are closed.