All eyes on Aramco as Saudi Arabia pushes for its economic miracle

Publicly listing Aramco will technically make investments the source of Saudi government revenue, not oil, according to Saudi deputy crown prince Mohammed bin Salman. Fayez Nureldine / AFP

Saudi Arabia's powerful Deputy Crown Prince Mohammed bin Salman, has again talked of plans to take the kingdom's state oil company public, but left many questions unanswered about how such a sale might actually pan out.

In an interview with the editor-in-chief and reporters of Bloomberg, the 30-year-old prince was asked to expand on the idea of floating Saudi Aramco, which he first aired in an interview with The Economist in January.

He said he plans to push for the share sale for next year and will open it up to foreign investors. But asked whether plans are to float the entire company, his answer was vague.

“The mother company will be offered to the public as well as a number of its subsidiaries,” Prince Mohammed said, according to a transcript released by Bloomberg.

“We will also announce Aramco’s new strategy and will transform it from an oil and gas company to an energy/industrial company,” he said.

Pressed on the size of such an offering – presumably to determine what he meant to incorporate – the prince began talking of plans to build a huge solar plant, expand petrochemicals and create “a huge construction company”, but he did not specify what a public offering, or offerings, might comprise.

There are few who believe that Aramco will be sold off as a single entity incorporating its main source of wealth: the country’s oil reserves.

“The prince has indicated that Aramco is willing to change its overall economic approach and he has been testing the waters for a partial divestment, but one thing for sure is that it will never, ever entail upstream, not directly anyway,” said Cyril Widdershoven, an independent consultant who until December had been a long-time consultant for Aramco via the Dutch government’s applied science arm, TNO Energy.

Aramco’s most valuable asset is the 16 per cent of the world’s oil reserves it owns, an unchanging 268 billion barrels, which is “the most strategic state secret in the world”, says Mr Widdershoven.

An IPO based on those reserves would require making public an audit of Aramco’s recoverable reserves, the public estimate of which has remained unchanged for decades.

The extreme reluctance of Saudi officials to reveal reserves information was made clear by Aramco’s chairman, Khalid Al Falih, in January, when he sought to clarify the prince’s initial comments.

“What will be offered is the economic value of Saudi Aramco and not its oil reserves,” Mr Al Falih said then.

In India this week, Mr Al Falih underlined what is likely to be Aramco’s strategy as it transforms to the “energy/industrial company” that the prince envisions.

Mr Al Falih told Narendra Modi, the Indian prime minister, that India is Aramco’s “No 1 investment target”, for refinery/petrochemical investments and offshore oil exploration and development.

Aramco has been expanding its downstream operations domestically and abroad and is aiming to spend US$100 billion to double worldwide capacity to 10 million bpd.

Domestic refinery capacity is increasingly integrated with petrochemicals, including the giant $20bn Sadara joint venture with Dow Chemical that came onstream last year.

Warren Wilder, Aramco’s head of chemicals, explained in January the strategic importance of Sadara.

“By integrating chemicals production with our refineries – both home and abroad – we are leveraging our existing and future refining assets to provide additional revenue from a business that is growing faster than the oil business and would diversify our sources of revenue,” he said.

The Sadara plant uses naphtha – an oil by-product – rather than natural gas as a feedstock, which allows it to produce a wider range of products. More than half of Sadara’s 26 units make products never previously produced in the region, which, Mr Wilder pointed out, “support the development of several local industries”.

The report Saudi Arabia Beyond Oil, published by McKinsey & Co in December, is widely thought to be the initial blueprint for the National Transition Programme. It focused on petrochemicals as a key area for expansion.

The sector already accounts for two-thirds of the kingdom’s non-oil exports and McKinsey says that it can add $30bn to GDP and add thousands of high-skill jobs with investment.

Last month, Aramco split with long-time North America refining partner Royal Dutch Shell, but executives told employees that the company plans to expand in the US, in refining and in chemicals.

Aramco has refining joint ventures in China’s Fujian province, in Japan and in South Korea and plans to expand throughout the region, including India, both upstream and downstream.

“We target emerging markets like China, India, South Africa, Indonesia. We believe these are the main markets that we are targeting. We’re also targeting the US market,” Prince Mohammed told Bloomberg.

Aramco could put together an energy conglomerate that would look like a bigger version of ExxonMobil, but with a key difference: it would have long-term crude supply deals from the world’s lowest-cost producer but it would not have title to those reserves.

“This is the real strategy,” says Mr Widdershoven. “They will use part of the revenues from an IPO – a downstream IPO – to get a footprint in other areas,” to transform into an integrated energy company with a more diverse spread of assets.

Diversifying Aramco would be a key step toward diversifying the Saudi economy.

The kingdom’s crown jewels – the oil reserves – would remain ring-fenced.

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