A joke among Riyadh businessmen is that Saudi Arabia’s ministry of planning has become the ministry of McKinsey.
The management consultancy has emerged as an influential force among other key advisers to the kingdom’s powerbroker deputy crown prince, Mohammed bin Salman, who is driving through a sweeping economic reform programme to counter the oil slump.
The latest idea to come out of this environment of radical change is a possible stock market flotation of Saudi Aramco, the secretive state-controlled oil company that is the House of Saud’s main source of power and wealth.
But the prospect of listing Saudi Aramco, the world’s biggest oil company, or some subsidiaries, would be fraught with complexity, including how the kingdom ceded control of even a sliver of an entity so bound up with the national interest.
Not only does Saudi Aramco control the country’s prized resource assets, but it is woven into the fabric of Saudi society responsible for building stadiums, schools and hospitals.
“Aramco is so integrated into state policy in other areas, that I really don’t see the advantage of listing,” one Saudi oil industry insider said.
As well as raising funds to reduce a ballooning budget deficit, the 30-year-old Prince Mohammed said a flotation would improve transparency and act as a check against possible corruption — a remark that angered Saudi Aramco executives.
Conversations with those senior in the country’s oil industry and people briefed by Saudi Aramco executives, however, suggest widespread unease, not just about a potential listing but also its hasty communication to the market.
Comments that Prince Mohammed was “enthusiastic” about a flotation — first reported by The Economist — were quickly followed by a statement from Saudi Aramco saying it was studying options, from listing some petrochemical and other downstream assets, to selling shares in the parent company, which includes the core upstream crude producing business.
The move would be another sharp response to the oil price collapse. A push towards privatisations, and spending cuts and subsidy reforms have already been announced.
Saudi Aramco has started asking advisers to put forward proposals for an offering of up to 20 per cent of the company, one person said, although the sale of a much smaller percentage of stock was likely.
But Saudi oil industry insiders said it was early days and it was unclear what form any listing could take. Discussions until recently had largely centred on the sale of shares in its refining and petrochemicals divisions.
“The idea [of a flotation] has only been around seriously since [King] Salman came to power,” one western diplomat said.
Some in the highest echelons of Saudi Aramco early last week made clear to Prince Mohammed that any listing of shares in the parent company and its most important upstream assets would be a bad idea, one person familiar with the matter said.
Among concerns are that any share sale would only benefit a small, wealthy pool of domestic investors and prevent the company from continuing to invest — without interference — in social programmes, according to two people close to Saudi Aramco.
The disquiet illustrates the division between the company’s leadership and the prince, who in May was appointed the ultimate head of the oil industry. “This [the IPO] has not been driven by those within Aramco,” one insider said.
A senior industry source added: “Rather than putting forward a well thought out proposal this has just created havoc. Let’s be clear. There is no consensus.”
Prince Mohammed believes a listing would boost transparency and help prevent corruption, with one financial analyst close to the royal family saying: “Aramco has been a closed box for too long.”
Certainly the company is opaque to outsiders even if things are different inside, where it is said to follow international standards and draws on ExxonMobil for its governance structures.
Even so, a potential listing would be complicated because of the secrecy surrounding Saudi Aramco’s inner workings, making it difficult to ascertain the true value of its reserves, particularly with oil prices at an 11-year low.
For investors, the question of where national interests end and shareholder ownership begins is unclear. The company’s profits are taxed at 85 per cent and it pays 20 per cent royalties on its oil production to the government, two people familiar with the company said. Tax, royalties and transfer pricing would all need to be factored into any valuation, industry analysts said.
Jim Krane, a fellow at Rice University’s Baker Institute for Public Policy, said although it was unlikely shares in the kingdom’s exploration and production assets — its crown jewels — would be up for grabs, how investors look at Saudi Arabia’s spare production capacity is an example of a potential conflict between any new shareholders and the current owners.
“The Saudi regime uses the excess capacity to generate power and [wield] influence internationally. Shareholders might bristle at the notion that they would invest in capital assets that are left unused,” he added.
Any flotation on Saudi Arabia’s domestic exchange would have to be carefully calibrated so as not to distort the market’s balance. Bankers and lawyers have said a listing on a big foreign exchange was unlikely as it would require detailed disclosures of the company’s reserves and production capacity which historically have been closely guarded.
“What we’re seeing is a money-grabbing exercise,” the senior industry source said. “This is not policy.”
Additional reporting by Simeon Kerr
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