06:38 GMT +3 hours31 July 2016
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An Asian worker covers his face to protect it from the dust and the blazing sun at the site of Saudi Aramco's (the national oil company) Al-Khurais central oil processing facility under construction in the Saudi Arabian desert, 160 kms east of the capital Riyadh (File)

No One Wants Shares in Saudis' Secretive, Overvalued & Corrupt Oil Company

© AFP 2016/ MARWAN NAAMANI
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While Saudi officials contemplate whether or not to sell shares in their massive energy company – Aramco, some experts suggest that Riyadh may have underestimated Western investors' concerns about the company's secrecy, corruption, and the global oil glut.

The monster Saudi state energy company Saudi Arabian Oil Co. – better known as Aramco, with its 261 billion barrels in reserves and 60,000 staff, has confirmed rumors that it is considering offering investors an initial public offering (IPO) on a small percentage of the company (around 5%), as part of a broader package of economic reforms.

The company's valuation, according to officials speaking to The Economist, which broke the story, could be in the "trillions of dollars," with Bloomberg suggesting that Aramco, by far the largest energy company in the world, may be worth up to $2.5 trillion –which would make it the most valuable quoted company in the world. Even a small IPO of 5%, at a valuation of $1.5 trillion, Business Insider pointed out, "is still $75 billion."

Deputy Crown Prince Mohammed bin Salman has indicated that an IPO float could be made immediately following a review of the business, scheduled to be completed within the next several months.

However, not everyone is so blinded by the company's monster valuation potential to the point of ignoring some potentially important pitfalls. In their analysis of the possible IPO offer, Britain's The Guardian suggested, citing financial analysts, "that the Saudis could underestimate Western concerns about Aramco's traditional secrecy and the impact of falling oil prices."

Fadel Gheit, an oil analyst at the New York-based Oppenheimer & Co. retail brokerage firm, told the newspaper that despite the enormous possibilities for Aramco's IPO, it could be difficult for Saudi Arabia to reach a significant floatation given the company's traditional low levels of transparency. 

"And he pointed out," The Guardian noted, "that Prince Mohammed had raised another issue at Aramco that could concern any potential buyers: corruption."

"If Western investors are to be interested in Aramco they are going to want all sorts of details and reassurances about the way the company will run, its growth prospects and dividend policies. Will the Saudi government be willing to provide these and relinquish control?" Gheit pondered.

Moreover, the financial analyst recalled, "the company may have huge oil reserves but look at what happened when Petrobras (the Brazilian state oil group) was privatized. There was a total lack of understanding of free markets and the stock dived in value."

For his part, Investor's Business Daily contributor Bill Peters noted that with the "shares of global oil majors like Exxon Mobil, Chevron, Royal Dutch Shell, Total and BP" getting thrashed "since crude prices sank in 2014," the question which should be on investors' minds is "Would Aramco shares be any better?"

Echoing Gheit, Peters noted that given that "Saudi Aramco provides little information on finances or other measures of performance…any IP would come amid major strains for Saudi Arabia and the oil market overall."

Meanwhile, Oil Change International, an advocacy group for clean energy which has no love for big oil, nonetheless also suggests that Aramco's partial privatization, driven by Prince Mohammed's "reforming zeal," would be a mistake.

"It's not a smart economic move to sell off an asset when its value is at the bottom of the cycle. When governments are made desperate by low oil prices, they often make that mistake, giving foreign investors a bargain that well outlasts the commodity downturn." Given the existence of Saudi Arabia's sovereign wealth fund, it makes even less sense.

According to OCI, not only would the involvement of multinational investors not serve "as a guarantee against corruption (it is often in fact the opposite)," but "partial privatization of Aramco would require publishing financial and reserves data that is currently secret."

Moreover, "Saudi Arabia is a signatory to the International Convention on Settlement of Investment Disputes (ICSID), which allows investors to challenge governments in secret tribunals, with any compensation awards enforceable by seizing the state's assets in any of nearly 160 countries. While Saudi Arabia is still a long way off addressing the role of its oil reserves in climate change, the threat of investor compensation claims would have a chilling effect if and when action is taken."

Related:
Riyadh's Monster Oil Company May Issue Shares for First Time
Tags:
overvaluation, secrecy, partial privatization, shares, business, analysis, corruption, Saudi Aramco, Saudi Arabia
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  • jas
    If Western investors are to be interested in Aramco they are going to want all sorts of details and reassurances about the way the company will run, its growth prospects and dividend policies. Will the Saudi government be willing to provide these and relinquish control?" Gheit pondered.
    --
    Exactly. I'm not sure the Saudi royals have thought this through enough. Wall Street is corrupt, sure, but there is an element of analysis, guys who live for data review. They'll want to review every decimal point.
  • Jg38691
    No intelligent investor would want any part of a company that sets its own house on fire hoping the flames will burn their neighbors. Saudis have cut off their nose to spite their face. How would an investor rationally choose to buy shares in a company that sabatoges itself? KSA and OPEC have royally screwed themselves.
  • cuttingedge.blacksmith
    Perhaps Riyadh whould consider giving stock options to their Citizens.
  • support
    Saudi Arabia's petroleum industry has traditionally been a mono-product supplier of one particular type of difficult-to-process crude oil and therefore lacks the flexibility to address and adjust to the present normal cyclical fluctuations of supply and demand. How energy firms which are and have always strictly been free-enterprise petroleum and natural gas concerns survive for the long term is very simple: during times of high prices for crude product they invest in exploration and development and during times like today where there is a glut they invest in hydrocarbon processing facilities construction and operations to manufacture chemicals.

    Also, crude energy product in and of itself is of no value without matching supply to consumer needs for processed product tailored to specific markets. To identify those markets and fine-tune the energy firms' ability to meet consumer demand, government investment in research into petrochemical catalysis has been the usual industry tool for getting this complex job done. The Saudis' academic institutions between themselves have exactly one facility which conducts catalyst research and this facility could not compete with the very small facility at the University of Kentucky's coal-based catalysis lab.

    It baffles me that there is an outcry and a bemoaning of the present conditions of low energy prices as they normally presage a massive leap forward in global industrial development. My thoughts are that this is a journalistic problem not a real-world one as very few newspapers and other media organisations spend the time and money to recruit actual engineers in specific fields to report on industry developments and which lack of thoroughness is yet another symptom of the infantilisation of the media industry in general borne of pressure to reduce complex issues to the level of comprehension of the lowest common denominator.

    Nevertheless if you are an informed investor you should be pursuing the refined product end of things not bulk crude production. Even the Saudis are doing the "big spend" on expanding their refining capabilities which in my opinion is the last, best hope for Saudi Aramco.

    In my opinion the Saudis' biggest mistake beside letting religious politics dictate the focus of their level of academic engagement with the real world of chemistry was and is to partner with the USA. They should never have accepted Eisenhower's bribe of a 10-15% import duty tax offset for Saudi crude shipped to the States which came with the awarding of the Oil Import Stabilisation Act of 1958 following the short war with Egypt. By accepting this the Saudis sold away their national autonomy and thereby their actual worth as a business partner for proactive development of energy resources.

    The following is a short overview of what is going on in the real world of hydrocarbon engineering and associated trade. This trend will continue for ten years just like the past oil and natural gas boom then affairs which cycle from refining back to exploraiton and development again around 2025 or so.

    www.hydrocarbonprocessing.com/Article/3512244/Blogs/WINNERS-Top-HPI-projects-of-2015.html

    www.hydrocarbonprocessing.com/Article/3432614/Petrochemicals/Borealis-CEO-says-oil-crash-creates-pet

    Mother Russia does not need the Saudis after they so thoroughly and overtly funded the Chechnyan and Afghanistan conflicts against the Russian people and continue to fund Islamic terrorism worldwide. The Russian Federation has its own resources to process in new refineries to address the world's markets.
  • MsLiberty
    Why an IPO at all, and why now? What effect will this have on a long standing agreement with USA since the early 1970's that is the origin of "Petro-dollar?" Jim Willie has been reporting there is a problem that has arisen in the Saudi reserve. That problem is salt water. He says that what Aramco has been pumping is like 95% water-5% oil - meaning that Aramco reserves have been used up, and the volume replaced with seawater. And now the exclusive Aramco wants to sell shares? Who would want a piece of that action when it's not really worth anything now? Jim Willie's sources could be wrong but still, it should be interesting to see how this plays out.
  • Ivan Zadorozhny
    Who would want to buy into a crumbling kingdom.
  • in reply toMsLiberty(Show commentHide comment)
    MsLiberty, Well said and I agree. I also fully agree with what J.W. says. He seems at times a bit OFF TAP about some things but the man IS IN THE KNOW!!! As he predicts, this could very well be the beginning of the end?
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