01:04 GMT +3 hours26 July 2016
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This May. 3, 2009 file photo shows an oil facility in Jubeil, about 600 km from Riyadh, Saudi Arabia

How Saudi Arabia Wants to Privatize Its Oil But Keep the Profits

© AP Photo/ Hassan Ammar, File
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Plans regarding Saudi Arabia's oil company privatization suggest that investors would receive no control over the company, while royal family members pillage its finances through state-controlled intermediaries.

Saudi Arabia's effort to privatize its national oil company is a careful balance between finding more capital for the troubled sector and keeping it as a windfall for the royal family.

Both the oil minister and the company chief believe that privatizing the company would yield greater transparency. However, the proposed privatization scheme detailed by the company chief on Monday allows for the creation of two separate companies, one for extraction (upstream) and another for refining (downstream) with the logistics connecting them held by the state.

"So a listing of the main company, and obviously the main company will include upstream. We’re considering a listing one level below, which would include many of our downstream assets, including refining and petrochemicals," Saudi Aramco Chairman Khalid al-Falih told the Wall Street Journal.

According to the Atlantic Council's energy expert Jean-Francois Seznec, privatizing the production end of the company, rather than simply the subsidiaries could create transparency issues because of Aramco's direct payments to the Saudi royal family.

"The issue of payments from the [Saudi King's executive office] to members of the royal family is sensitive.  Perhaps one of the reasons why the privatization of Saudi Aramco has been delayed so long is that transparency could lead to questions about who is entitled to receive a payment," Seznec wrote.

Midstream Madness

Saudi Aramco owns most of its distribution, including the Dubai-headquartered Vela International Marine company, which operates 24 supertankers and five smaller tankers. The company's website also states that Aramco has a 20,000 kilometer pipeline system inside Saudi Arabia, which has also not been mentioned in the so far tentative remarks about privatization.

The Aramco chief also noted that the company would only be listed on the Saudi Arabian stock exchange, recently made accessible to foreigners. This would allow it to escape oversight that companies listed on major exchanges face, and also pave the road for potential insider trading by royal family members.

"At the end of the day, we will have to decide based on legal issues and jurisdictional complications given where the operation is and where the listing is," al-Falih told WSJ.

Al-Falih did not specify what Saudi Aramco would have in listing its assets on a major international exchange.

Financial Issues

Aramco's partial privatization may be driven in part by Saudi Arabia's financial issues, according to Brown University Professor Jeff Colgan, author of "Petro-Aggression: When Oil Causes War."

"Saudi officials are of course justifying the sale for reasons of management efficiency, transparency <…> but I think that’s mostly rhetorical cover for the fact that they are selling a piece of their best asset during tough economic times," Colgan told Sputnik.

In that sense, gains from the privatization could plug a hole in the Saudi budget, but it would likely not be enough for Deputy Crown Prince Muhammad bin Salman.

The Deputy Crown Prince's economic restructuring plans would require as much as $4 trillion of investments in the non-oil sector alone, according to a report by consulting company McKinsey, which works with the Saudi government.

In that sense, a privatization which allows royal family members to pillage the company through state-controlled logistics intermediaries, while also generating funds for the state, appears to be more of a stopgap measure than a transformative one for the Saudi economy.

Related:
Saudi Arabia Launches Aramco IPO to Raise Revenue Amid Low Oil Prices
Saudi Arabia Uses Cheap Oil to Boost Market Share, Destroy Iran’s Economy
Saudi Arabia Paves Way for Oil Market Competition With Russia
Tags:
privatization, corruption, Saudi Aramco, Mohamed bin Salman, Khalid Al-Falih, Saudi Arabia
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  • Glamoureus
    Sounds good, if anyone buys the downstream process, they have to accept any price Saudis put on. If the glove doesn't fit you're most likely gone.

    This deal is only for crazy one..
  • jas
    The Saudi royal family should know that this would be accepted by Wall Street. I don't see how it could even achieve NYSE or NASDAQ listing like that. How could a mutual fund or hedge fund ever justify that purchase?
  • There are a lot of fools willing to part with their money, but not many fools with the kind of money the Saudis are asking for!
  • pricer50
    When the U.S government and the globalist oil companies went into business with the Saudis, the Saudis were required to invest their profits in U.S. securities. The funds the Saudis invested are all gone, they can't get it back. Is it any wonder they want to control their own resource? A scam of unprecedented proportion was played on the desert dwellers who at that time were unsophisticated in business dealings. Is the current price of oil "blow back" from this?
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