December 28, 2016 / 4:25 PM / 7 months ago

Saudi's IPO gusher will lay dormant

3 Min Read

Oil tanks seen at the Saudi Aramco headquarters during a media tour at Damam city November 11, 2007.Ali Jarekji/File Photo

LONDON (Reuters Breakingviews) - Saudi Arabia's oil producer, Aramco, is its crown jewel. And jewels ought not to be given away too freely. The company's initial public offering was meant to be the centrepiece of a new economic strategy designed to wean the country off its dependence on crude oil exports. But rising oil prices could make that financially less necessary, especially since Aramco is fraught with political sensitivity.

    At the moment, Saudi needs all the money it can lay its hands on to replenish drained coffers. The kingdom posted a budget deficit of $79 billion in 2016, despite making deep cuts to public spending and pushing ahead with unpopular measures to reduce state subsidies. A quick sale of an oil giant would appear to help. Using the kingdom's own claims of a $2 trillion valuation, just a 5 percent stake might raise $100 billion.

    Yet Saudi's painful austerity drive may not last. Oil surged after the Organization of the Petroleum Exporting Countries decided on Nov. 30 to make its first collective output cuts in eight years, raising expectations of a prolonged recovery. A sustained 20 percent year-on-year increase in average oil prices could be worth at least $23 billion in additional export revenue for Saudi, according to a Breakingviews calculation.

    Selling a stake in Aramco could dilute some of the benefits of higher prices because the kingdom would presumably share the proceeds with outside shareholders. But only some of the proceeds. The vast majority of Aramco's income from operating the world's largest onshore oilfield is siphoned off through a mixture of royalties and taxes enshrined in an opaque concession agreement.

    That opacity is one reason why the kingdom might want to hold off on its IPO gusher. Aramco had originally planned to open its books for the first time in 2017 and provide an accurate updated figure on the kingdom's total crude reserves as preparation for floating. Yet it's the mystery behind that undisclosed number that enables Saudi to sway prices in the oil market so effectively. If rising oil prices make it less vital that the kingdom shares its secrets with the world, Aramco's feted listing is unlikely to see the light of day.

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