The Intrigue Called “Saudi Aramco”

It is believed that the world’s largest oil company is Saudi Aramco, which is based in Saudi Arabia.

It is noteworthy that Saudi Aramco is not “transparent” because it does not publish financial indicators such as profit, turnover, assets and market capitalization. Therefore, it is not represented in the ratings of the world’s largest oil companies, where, as you know, the first lines are occupied by American ExxonMobil and Chevron, Chinese Sinopec and PetroChina, Anglo-Dutch Royal Dutch Shell, British BP, French Total. However, everyone understands that these leaders of the world oil business are Lilliputians against the backdrop of the Saudi Gulliver.

Saudi Aramco owns more than 100 oil and gas fields in Saudi Arabia with reserves accounting for about a quarter of the world’s explored hydrocarbon reserves. According to the company’s production volumes, there are only scrappy data for some years. So, in 2013 Saudi Aramco produced 3.4 billion barrels of crude oil (about 11% of global production).

The annual production of oil and gas in a single equivalent, according to experts, the Saudi company is about twice as large as the largest US company Exxon Mobil. Saudi Aramco has branches, joint ventures and subsidiaries in China, Japan, the Philippines, the Republic of Korea, Singapore, the United Arab Emirates, the United States and Great Britain. There is a fleet of supertankers. Since Saudi Aramco is not “transparent”, it is not public and is not represented on the stock market.

The history of the oil giant dates back to 1933 when the California-Arabian Standard Oil Company emerged as a result of a concession agreement between the Saudi government and American company Standard Oil of California; Since 1944 the company has been called the Arabian American Oil Company.

In 1950, Saudi King Abdul Aziz ibn Saud threatened to nationalize oil in the country, forcing the American partner to agree to a profit sharing of 50:50. The company’s headquarters was moved from New York to Saudi Arabia (Dhahran). In 1973, after the American support of Israel during the Yom Kippur War, the government of Saudi Arabia acquired a 25% stake in the company, increasing its share to 60% by 1974.

Finally, by 1980, the Saudi government’s participation in the capital had reached 100%. In November 1988, the company was given the current name of Saudi Aramco (the full official name is Saudi Arabian Oil Company).

If Saudi Aramco has a leading position in the global oil industry, then in Saudi Arabia this company accounts for 90% of the national economy. Until recently, 90% of the company’s profits went to the state budget.

For many decades, Saudi Arabia was one of Washington’s most reliable allies in the Middle East. Especially after when in the mid-1970’s. the then US Secretary of State Henry Kissinger agreed with the Saudi King that Saudi Arabia would sell “black gold” solely for US dollars.

And Washington in return promised to supply arms and military-political support, as well as assurances that Washington’s strategic ally Israel will not pursue an aggressive and even unfriendly policy towards Riyadh.

The status quo of Saudi Arabia has wavered in the autumn of 2016. The US Congress passed a law authorizing the relatives of the victims of the New York terrorist attacks on September 11, 2001, to sue the government of Saudi Arabia and demand compensation from it. The basis for the adoption of the law was the alleged fact that most of the perpetrators of the terrorist attacks were Saudi citizens.

Against President Obama, who tried to veto the law, but Congress managed to overcome it. Of course, there were much more serious reasons for cooling relations between Washington and Riyadh. But this is the topic of a separate serious conversation.

Whatever it was, the “courtesy exchange” between Riyadh and Washington began. It even came to the point that Washington threatened to freeze assets of Saudi origin that were in the United States, in the event that Riyadh refuses to pay. The price of the issue is high: representatives of the Saudi ruling dynasty in the United States own investments of $ 750 billion.

The aggravation of relations with Washington led to the deterioration of the economic situation of Saudi Arabia. In particular, in 2016 the volume of exports from Saudi Arabia to the US decreased by almost a quarter (by 23.4%). This deterioration factor was imposed by another, even more serious – the long stay of world prices for “black gold” at an extremely low level.

Although Saudi Arabia had a good “safety margin” to counter low prices, this stock also began to dry out. For example, in 2016, the budget “hole” (the deficit of the state budget) was $ 90 billion. In 2015, the indicator of the relative level of the budget deficit was 15% of GDP, in 2016 – 13%, in 2017 – almost 9%. By the relative size of the budget “holes”, Saudi Arabia has become almost the world record holder. Unless in dysfunctional Venezuela, there are more “holes” in the budget.

And when Riyadh ended a long period of economic prosperity, the Saudi rulers for the first time in many years thought about how to continue living. In the short term – where to get money to close unexpectedly arisen state budget deficit? In the long term, how to ensure against high price volatility in the “black gold” market?

The idea of partial privatization of its “cash cow” under the name of Saudi Aramco came in order to help out good money. And at their expense close the “holes” of the budget. But the main thing is to conduct a radical restructuring of the economy, which would allow Saudi Arabia to eliminate the almost fatal dependence on oil, create new industries and production.

The outline of the project began to evolve in 2015. It was decided that the world’s largest sovereign fund with a capital of about $ 2 trillion will be created in Saudi Arabia, which will finance the program of structural reorganization of the Saudi economy. This program began to be prepared in 2015.

In April 2016 there was a widely publicized in Saudi Arabia meeting of the Cabinet headed by King Salman bin Abdul Aziz, at which this program was adopted. It was called “Vision – 2030”. As the name suggests, the restructuring of the Saudi economy should be completed by 2030.

The source of the fund’s capitalization should be the money received from the privatization of Saudi Aramco. Privatization should be carried out gradually, in stages. In order to get the maximum financial effect. At the same time, privatization should, as far as possible, be synchronized with the implementation of the Vision-2030 program.

It was not a question of full privatization. The company’s share in the company’s capital should ultimately be reduced to 50% plus 1 share. In January 2016, it was officially announced that approximately 5% of the company’s capital would be put up for sale. In the media, the figure for the possible capitalization of the entire Saudi company, $ 2 trillion, was received (peer review). Thus, the proceeds from the first stage of privatization were estimated at $ 100 billion.

Apparently, the planned operation was considered by Riyadh as a test step. Obviously, the money received for the capitalization of the sovereign fund and the financing of the program was not enough, with their help it was possible only to balance the state budget.

The site for conducting the initial placement of securities (IPO) Saudi Aramco at that time was still unknown. It was planned that during 2016 the exchange for listing will be determined. And the operation itself will be carried out in 2017.

However, last year the IPO was postponed several times, and finally, it was decided to implement it in 2018. A real intrigue began around Saudi Aramco’s privatization plans. There are countless versions of why the operation is transferred from time to time.

One of the trivial reasons why Riyadh stopped pushing the privatization of its oil giant is that prices for “black gold” in the world market went up. Today, they are more than twice the level that was at the time of the idea of privatization in 2015.

Another reason, often mentioned in the media, is that, supposedly, the figure of Saudi Aramco’s estimated capitalization of $ 2 trillion turned out to be over-optimistic. That in fact the “red price” of the company does not exceed $ 1 trillion. True, such understated estimates have been made and are being made by Western experts. And there is a suspicion that they are performing a “social order” of those who, for one reason or another, are playing the game “downgrade.” And if the price of the company is really lower than $ 1 trillion, then for Saudi Arabia, “the sheepskin is not worth the candle”.

Initially, Riyadh considered as potential sites for the operation of the exchange of London, New York, Hong Kong. It seems that after talking more closely with the consultants who worked on IPO preparation, the Saudi officials realized that all the stock exchanges require such “transparency” from the party to the operation, which they are not ready to go to. Unlike the “civilized” representatives of the West, conservative Saudis are not ready to undress to cowards. They tried to work out a variant of conducting an operation on their own stock exchange, but there are fears that serious investors will not go to a little-known site for them.

The list of reasons for postponing privatization can be continued for a very long time. A serious analysis of each of them deserves a separate article. In March of this year, the London Financial Times acquainted readers with a slight sensation: in 2018, the privatization deal will not take place at all. The term shifts to the first half of 2019 due to “difficulties in finding investors” and “unexpected legal risks”.

But the sensation is more serious: on July 6, 2018, the authoritative American edition of The Wall Street Journal referring to Saudi officials and sources familiar with the situation reported that there are doubts that the initial public offering of Saudi Aramco’s shares will occur at all. I do not think this is an informational “duck”. If I were in the place of the Saudi sheiks, I would definitely have refused the IPO. The proceeds from the sale of 5% of the capital are too high: the company, and eventually the whole of Saudi Arabia, will fall under the influence of the world’s scammers with their “investment ratings”, “audits”, “stock quotes”, etc.

Alternative sources of replenishment of the treasury also appeared. This is not only an additional billion of dollars from the rise in prices for “black gold”. Saudi Arabia also established the placement of sovereign debt in the world market (the first placements were not very successful, now things have gone better). Finally, a program for the privatization of assets other than Saudi Aramco was developed and started to be implemented.

It is a question of the government’s privatization program, which calls for raising 35-40 billion rials (about $ 10 billion) by 2020 through the sale of sports clubs, flour mills and a water purification plant, and some other facilities. It is clear that the revenue is modest against the backdrop of the astronomical sums of Saudi Aramco. But, apparently, Riyadh decided to “train” on small objects.

Although the public offering of Saudi Aramco shares has become very problematic today, the sale of a “piece” of the Saudi oil giant may still take place. There is no contradiction here. The intrigue around Saudi Aramco should necessarily be considered taking into account the “Chinese factor”. Until recently, Saudi Arabia was the main supplier of oil to the Chinese market (it recently moved to second place, losing to Russia’s leadership). The maintenance of stable relations with Beijing for Riyadh is no less important today than with Washington. Already for at least two years, Beijing has played on this interest of Riyadh.

First, Beijing insists that the supply of Saudi oil began to be paid in Chinese yuan. Riyadh was between the hammer and the anvil. After all, back in the 70s of the last century, he swore an oath to Washington that he would sell “black gold” only for the “green currency.” Riyadh pulls with the fulfillment of the conditions of Beijing, losing every month “points” (positions in the Chinese oil market). Sooner or later, Riyadh will have to agree to trade in RMB. He is preparing for this. And very concretely.

Last autumn, the Saudi King visited Moscow (for the first time in the history of relations between our countries). What wind brought the Saudi monarch to the capital? Behind the motley agenda of the talks, there was one main question that interested the king – the S-400 surface-to-air missile system. The king wanted to hide behind Washington’s expected anger.

Secondly, Beijing is ready to help Riyadh in the practical implementation of the plan to sell 5% of Saudi Aramco’s capital. He suggests that he become a buyer of this share. And without using such “prejudices” and “formalities” as an IPO. That is, by direct acquisition. In this way, Beijing wants to gradually squeeze out of Saudi Arabia its “lifelong ally” – the US, and also establish more effective control over the supply of “black gold” to the Chinese market.

Given the “Chinese factor”, the seemingly incomprehensible actions of Riyadh around Saudi Aramco acquire their logic.


Source: Katehon

 

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