The headquarters of Saudi Arabia’s state oil company is less than a mile from the spot where US geologists struck the Arabian peninsula’s first crude deposits in 1938, transforming energy markets.

Today, an enormous compound sprawls out from Saudi Aramco’s offices in Dhahran. It includes houses modelled on 1950s American suburbia, along with schools, hospitals, a golf course, its own security force and even an airline — reminders of the company’s unique role as a state within a state.

Aramco employs 65,000 people and has long had a high degree of independence from Saudi Arabia’s monarchs. But now the connections between the country and the company that funds it are being scrutinised like never before.

The nature of Aramco’s relationship with Riyadh — and, in particular, Mohammed bin Salman, the hyperactive deputy crown prince — is being watched closely following the announcement last month of a radical plan to shift Saudi Arabia from its “addiction” to oil. Much of this investment plan, dubbed Vision 2030, is built around the use of Aramco oil revenue to diversify the economy, enhance the private sector and create jobs for its overwhelmingly young population — two-thirds of its 28m people are aged
under 30.

As the company prepares for an initial public offering that officials say could value it at $2tn, there are an increasing number of questions about what this plan — and other activist policies from the 30-year-old Prince Mohammed — means for potential investors.

“There are wildly different prognostications about how successful an IPO will be,” says Jim Krane, a fellow at Rice University’s Baker Institute for Public Policy in Houston, Texas. “But the Saudis don’t have a choice but to get it right. There is an urgent push to diversify their one-trick economy.”

The prince and the oil minister

Some see Prince Mohammed’s activism as part of a more politicised oil policy. A last-minute intervention by the prince led to the collapse of last month’s talks in Doha to freeze oil output in a bid to bolster prices. Weeks later, Ali al-Naimi, the veteran oil minister, was replaced.

As the self-appointed chairman of a new Aramco governing council, the prince has redirected power towards himself, raising concerns among potential investors that his influence on operations could grow. Yet others argue the opposite, saying a part-privatisation of the company, a push for more transparency and greater oversight may build a higher wall between the state and its biggest revenue earner.

The listing, driven partly by the severity of the oil price fall, could come as early as next year, according to Prince Mohammed. It has whet the appetite of international bankers, investors, lawyers and consultants and placed the global energy major under the microscope.

Riyadh’s finances have been savaged by the collapse in the oil price since mid-2014. The fall from $115 a barrel to $27 in January, unleashed budget cuts and energy subsidy reforms to rein in a deficit that stood at $98bn at the end of 2015. Even with prices now touching $50 a barrel there will be little respite.

The theory is that diversification from oil — paid for by a $2tn-$3tn sovereign fund whose wealth is built on ownership of Aramco and the proceeds of any listing — could propel investment into everything from mining to tourism.

“Saudi Aramco is at the heart of this vision,” Amin Nasser, its chief executive, told reporters last week in Dhahran. His message echoed that of Khalid al-Falih, Aramco chairman and a trusted adviser of Prince Mohammed. Mr Falih told top executives soon after his appointment as oil minister that it was compelled to lead the country’s modernisation, according to a person briefed on the matter.

When asked if the IPO was simply to secure an initial cash injection for its sovereign wealth fund, executives insisted that Aramco would be “setting an example” for future privatisations. It has already grown from an oil producer to a refiner and manufacturer of petrochemicals in an effort to squeeze more value from each barrel.

Diversification drive

Set among rusty-red sand dunes near the kingdom’s Empty Quarter, expansion projects in the giant Shaybah oilfield are concentrated on doublingproduction capacity to 1m barrels a day as well as building a plant to produce feedstock for the kingdom’s growing petrochemicals business.

A push into industries such as shipping, healthcare, construction, information technology and transport is also under way.

“We will be building the tankers and the rigs, we will make ports and we will make engines,” says Mr Nasser, giving the example of a maritime complex on the Gulf coast at Ras Al-Khair, set to be operational by 2021.

The entry of private investors into Saudi Aramco could give them a head start for any further offerings, industry observers say. But some investors paint a gloomier picture for the country’s economy. They highlight previous failed diversification drives, the plunge in oil revenues and rising costs from the country’s social policies.

“Aramco needs to ensure that it doesn’t overextend itself,” says one energy banker. “Too broad a remit could mean a loss of competitiveness. They should stick to what they are good at.”

Saudi Arabia’s hydrocarbon resources are managed from its nerve centre in Dhahran. Floor-to-ceiling screens show the movement of each molecule of oil from fields such as Ghawar, the world’s largest onshore oilfield, through pipelines, into refineries and on to tankers. All of it is monitored by technicians.

Here, the kingdom’s geology and Aramco’s management of its energy assets are on display. It is the world’s biggest crude exporter and, with more than 260bn barrels, has the largest reserves of conventional oil and condensate. It also has the fourth-largest reserves of natural gas.

Aramco sets itself apart from some other national oil companies: it bases its governance on ExxonMobil and has a reputation for professionalism and technological prowess.

Combined with the prospect of greater oversight, transparency and efficiency it makes the company more attractive, argues one western diplomat in Riyadh. “The purpose of the offering is just as much about weaning the government off Aramco as it is about weaning Aramco off the government.”

No matter how tantalising an investment, Saudi Aramco is fraught with complexity. The company’s true worth is unknown. While other state-controlled national oil companies have gone public, such as Russia’s Rosneft and Brazil’s Petrobras, their shares have generally performed poorly.

Mr Nasser says a “huge” Aramco team is working on the IPO — which could be the biggest in history — that would see an offering for close to 5 per cent of the company. Single and dual listing options are being considered. “We are still looking at how much to list and where to list,” says Mr Nasser. Only the largest stock markets, such as in New York and London, could handle its vast size.

The structure of any IPO remains unclear. A stake in the parent company, which controls exploration and production of the kingdom’s oil riches, would be highly sought after by investors and would achieve the highest value. But a separate company within a holding entity containing select assets could also be available, analysts say.

Valuation is also based on other factors. Up to now data — from profits to government remittances, as well as information about reserves — has been secret. Any IPO could open up the Aramco “black box”, although the sale of a minority stake may not give investors as much influence as they have at other international oil majors.

While the government traditionally holds back from involvement in Aramco’s day-to-day running, it does control production policy. Prince Mohammed has spoken of independent board members and Aramco’s separation from the government, but it could be difficult to navigate.

“Anyone who wants in on this [IPO] knows that being subject to Saudi policymaking is part of the deal,” says Mr Krane, when asked if the company’s obligations to the country pose a threat to its ability to act in the best interests of private shareholders.

Valérie Marcel, a national oil companies expert at Chatham House, a UK think-tank, says royalties and other payments to the government would have to be factored in to any earnings per barrel and valuation calculations. The company, she adds, hands over more than 90 per cent of its profits to the state, which can increase its dividend at will. “The higher these payments, the more the valuation will take a hit.”

Aramco has always been able to pursue long-term strategies over short-term cost effectiveness in exploiting its hydrocarbon reserves. “We develop our fields to last for centuries,” says Suha Kayum, a company analyst. “It is not just about generating revenues.”

Ms Marcel says private investors will be less forgiving and will question excess spending. The company plans to double domestic procurement of goods and services over the next decade as part of a broader government push; analysts say this will add to costs and raise eyebrows among potential investors.

Sadad al-Husseini, former head of exploration at Aramco, says national oil companies prioritise reaching the highest production at the lowest cost over the life of the resource. “Investors wanting a higher return in the short run will have a different point of view,” he says.

Production increase?

Saudi Arabia’s spare production capacity, traditionally used to leverage control over the Opec cartel and beyond, is a point of contention. The statistics are closely watched as they show to what extent the kingdom could help meet shortages — but these are investments in capital assets that are mostly left unused.

Mr Falih, who has defended Saudi Arabia’s decision not to unilaterally cut production in the face of lower prices, says policy will remain stable. Prince Mohammed’s manoeuvrings, however, have triggered concerns that his shift towards a post-oil economy suggest he is keen to exploit the kingdom’s oil resources sooner rather than later. So could Saudi Arabia increase output and production capacity? Officials say the country does not wish to flood the oil market but the prince issued a veiled threat last month that it could push up production should it wish.

Paddy Padmanathan, chief executive of Acwa Power, a Saudi electricity generation company, says Riyadh is ultimately trying to reduce Aramco’s status as a strategic asset as the relationship between the company, the state and its economy shifts.

“This is a hugely ambitious task,” he says. “While people are sceptical about the timescale, the economic team are damn serious this time. There is no alternative. There is a sense of urgency that hasn’t existed before.”

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