Saudi Aramco IPO could prove to be a master stroke

One financial professional, according to reports, burst into incredulous laugher when he heard that Saudi Aramco could be privatised.

He, and many other participants in the plan, including the Saudi people, might just end up laughing all the way to the bank.

The possibility of selling shares in Aramco – revealed by the deputy crown prince Mohammad bin Salman in response to a well-primed question from The Economist – is a transformational event: transformational for global financial markets, the oil industry and the kingdom’s hard-pressed public finances.

With best-guess estimates of Aramco’s worth of around $2.5 trillion, that would make even a modest initial public offering of, say, 10 per cent by far the biggest in history, roughly 10 times bigger than the current record holder, China’s Alibaba.

If a full IPO of the Aramco group happens – and that is a big “if” at the moment – it will reverse the 60-year trend of national governments owning their oil assets. It comes as the oil industry grapples with the lowest prices in 11 years, and with the world energy map turned upside down by the emergence of US shale producers.

For Saudi Arabia, it would be the biggest imaginable step towards a fundamental reshaping of its oil-heavy economy, opening up the possibility of a shift towards a new regime of dynamic entrepreneurial enterprise led by the private sector.

It is true there are big challenges to be met before the ambitious plan comes off.

How much of Aramco would be sold? The Saudis would not want to endanger ownership or control of their biggest asset.

Where would it be listed? If on the Tadawul exchange alone, it would swamp the current market, opened to foreign investors only last year.

Would trading be allowed on foreign exchanges? Aramco could get a better valuation if its shares are traded in London and New York as well as Riyadh, but that would require levels of transparency the Saudis might baulk at.

There are other assets Saudi Arabia might consider first as IPO candidates, even other parts of Aramco that could be sold in a test run. However, the lure of a full IPO could be too tempting in the long term, especially if there is no recovery in oil prices.

But on current estimates, an IPO could wipe out nearly three years of budget deficit in a stroke. Who would be laughing then?

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Frank Kane

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