As Aramco IPO is Cancelled, Saudi Arabia's Rhetoric Meets Reality

Published August 27th, 2018 - 11:35 GMT
Offices of Saudi Aramco (AFP)
Offices of Saudi Aramco (AFP)

By Eleanor Beevor

In January 2016, a very 21st Century black gold rush was provoked by the announcement that there would be an Initial Public Offering (IPO) for a portion of Saudi Arabia’s vast national oil company, Aramco. International stock markets publicly vied for Riyadh’s attention, hoping to land the chance to list the company on their exchange. 

And alongside the financial buzz was talk of real change in Saudi Arabia. The move was announced by the ambitious young Crown Prince Mohammed Bin Salman. He framed the IPO as the centrepiece of a package of radical social and economic reforms, which promised to breathe new life into the deeply conservative kingdom. The proposed IPO was a sign that the secretive oil giant, and with it the ruling House of Saud, were getting ready to open up to the world. 

At the time, these changes sounded sensible – indeed necessary. The kingdom’s vast oil wealth had for years allowed it to heavily subisdise the lives of their citizens, and employ a huge majority of them in the public sector. But even Saudi’s oil reserves are not limitless, and one day this would have to change. And when oil prices began plummeting in 2014,the impetus for change was even stronger.  

Mohammed Bin Salman’s package of reforms - which he called Vision 2030 – was meant to energise the private sector and push young Saudis into private sector work. In turn, they would be given a new degree of social freedom, as the kingdom’s strict religious laws on behaviour were relaxed.  

These promises of transformation received glowing praise from western leaders, no doubt relieved that their erstwhile but controversial ally in the Middle East was getting a facelift. But a lot of those promises of change now look distant, if not hollow. Limited social reforms did come. The infamous ban on women driving in Saudi Arabia was lifted. But the women’s rights activists who had long fought to lift it were then jailed on extremely dubious charges.  

And some western leaders were disconcerted to discover that even mildly criticizing Saudi Arabia carried a staggeringly high penalty under Prince Mohammed’s direction. First Germany, and then Canada, were the subject of extraordinary economic blockades by Saudi Arabia, after politicians from both countries voiced concerns about human rights and Saudi foreign policy.

And now, it seems that the much vaunted Aramco IPO was a premature celebration too. It isn’t entirely clear why, but this week, rumours of an impending IPO were finally put to bed. Reuters reported that “industry sources” had said that the IPO was being indefinitely postponed. Energy Minister Khalid al-Falih quickly denied that this was an outright cancellation of the IPO plan. Rather, he said, the offering would be shelved until a more convenient date. 

 

However, by the time the announcement was made, faith that the IPO was around the corner had dwindled anyway. There are a number of factors at play behind the decision to retire the IPO plan. But nearly all boil down to the gap between the expectations that Prince Mohammed’s fanfare set, and the complicated realities that got in the way. Dr. Kristian Ulrichsen, an expert in Gulf political economy at Rice University’s Baker Institute for Public Policy, told Al Bawaba:

“I suspect the IPO has been shelved -- at least for now -- because it has been found too complicated to put into place in practice. It may be that some of the preparatory work that has been done on the regulatory and legal environment could be useful as a staging-post should the plan be resurrected at a future point in time

Its apparent abandonment is a blow to the Crown Prince as it was he who announced it -- unexpectedly -- in January 2016 and thus was most closely associated with it. Questions may now be asked about other aspects of Mohammed bin Salman's ambitious plans to transform the Saudi economy, where there has been a similar challenge in translating vision into reality.” 

Like several of Prince Mohammed’s grand plans, the IPO was a bold new idea that became undone by its own hype. The plan was sound in theory. Back in 2016, Saudi Arabia needed a cash injection to cope with falling oil prices, and it would need even more money to push through Vision 2030 reforms. A 5% stake of Aramco listed on an international exchange could bring in a welcome $100 billion.

Saudi Crown Prince Mohammed Bin Salman (AFP)

But eyebrows were raised when Prince Mohammed announced he wanted Aramco valued at $2 trillion. Financial analysts were extremely skeptical of this claim – one Bloomberg columnist attempting a speculative valuation of Aramco said that getting to $2 trillion “…under any reasonable set of assumptions was nigh on impossible.”The ongoing lack of transparency within Aramco did not help quell these doubts. 

An over-valuation alone probably wouldn’t have forced the IPO’s early retirement. Aramco is still a respected operator in its field, and the tremendous value of its assets are beyond question. But many in Riyadh opposed the IPO in the first place, given the legal risks and transparency headaches that the listing would expose the company to. The embarrassment caused by the over-valuation compounded that reluctance.

Dr. Courtney Freer, a Research Officer at the Middle East Centre at the London School of Economics told Al Bawaba:

It's difficult to pin down the one main driver of the IPO being shelved. There were serious concerns with the accuracy of the $2 trillion valuation, and certainly offering an IPO on the international market would require more transparency, which could lead to rifts like the ones with Germany and Canada. I think the Saudis want to make sure that their valuation of Aramco is correct, so as not to set up the IPO only to be disappointed with results.

 

 

It is not necessarily all bad news for Riyadh. The IPO could still make a comeback at a later date, when the fundamentals are better worked out. Moreover, the fact that oil prices have risen substantially since the IPO was suggested in 2016 has lessened the urgency for the sale in the first place. And it will not necessarily stop other economic reforms getting underway. Professor Steffen Hertog, an expert in Gulf political economy at the London School of Economics, told Al Bawaba: 

“The IPO plans have been largely separate from the rest of the economic reform agenda, so there will be limited direct spill-over from this. And higher oil prices did probably make the decision to shelve somewhat easier.

But the shelving could cast further doubt on Prince Mohammed’s ability to make the reforms he claims he can. Expectations of Saudi Arabia’s social reforms have certainly been tempered. It is now clear that any new civil liberties Saudis get will be limited, and granted only at Riyadh’s convenience. And now, grand expectations of economic change could be dulled too. 

We have probably not seen the last of the IPO. Dr. Bessma Momani, an expert in Gulf political science at the University of Waterloo told Al Bawaba:

The shelving of the IPO is both a positive and negative development for Riyadh. But fortunes are temporary as oil prices are high because of supply share tragedy emanating in Venezuela, Iran sanctions and Libya. Long-term trends in development of oil fracking technologies and better and cheaper alternative energy sources means oil prices will have to decline. I think the plan will be back because Saudi Arabia is facing a cash crunch in the future. It has big and expensive ambitions, a citizenry still highly dependent on state coffers, and faces the prospect of oil prices eventually declining.” 

The question now is whether the plan will be willingly put forward again soon, or whether it will effectively be forced on Saudi Arabia as the kingdom’s fortunes start to change.  


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