The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™

Ratings update: Saudi Aramco, Saudi Arabia

Saudi Crown Prince Mohammad bin Salman (MBS) is pursuing plans to partially privatise national oil company Saudi Aramco as part of a broader plan to modernise Saudi Arabia. However, investors will need to get comfortable with growing political risks.

Key Developments

  • The Saudi government aims to list around 5% of state-owned oil company Aramco by the end of 2018 in an IPO. It plans to list the company – which provides up to 90% of government revenues – on both the Riyadh stock exchange and one or more international markets, with London, New York and Hong Kong reportedly in the running. Saudi Crown Prince Mohammad bin Salman, colloquially known as MBS, has claimed Aramco is worth a minimum of $2 trillion, though some commentators have cast doubt on that valuation.
  • The IPO is the centrepiece of Vision 2030, an ambitious economic and social reform programme promoted by MBS. The programme is aimed at diversifying the Saudi economy beyond oil, implementing market-friendly reforms and opening up the conservative kingdom to new social freedoms. Proceeds from the Aramco sale would go to a sovereign wealth fund aimed at economic diversification, a goal that has gained urgency since the fall of crude prices.

 

Evaluation

  • Aramco is, in theory, an attractive investment. It has large, low-cost reserves and a reputation for professionalism and in-house expertise. The low cost of Aramco’s production and its sizeable market share mean the company is unlikely to be significantly affected (for some years at least) by shifts in the global energy matrix driven by climate change concerns and will likely remain the world’s major oil supplier.
  • However, investors in the proposed IPO will need to get comfortable with a complex set of potential political and other ‘above-ground’ issues. Hence our provisional rating of a potential investment in the IPO sits squarely in the ‘Vigilance grade’ of the LicenseSecure scale, rather than higher (see above).
  • For a start, Saudi Arabia is seemingly on the brink of a political transition. MBS’s recent corruption purge, which led to the arrest of a significant number of princes and officials, has further disrupted the kingdom’s staid internal politics. The purge has been viewed as an attempt by MBS to constrain influential political figures and consolidate his power to pursue a reform agenda unopposed.
  • The implications of the purge – and the trajectory of MBS’s reform agenda more broadly – remain unclear. Some argue it is a corollary of political and economic reform that will improve accountability and transparency and boost the kingdom’s attractiveness to foreign investors. Others, however, caution that MBS’s unilateral, top-down reforms may not prove sustainable, and have questioned his ability to maintain stability if an internal challenge to his authority were to emerge, which could throw the country into political chaos.
  • Broader geopolitical uncertainty also poses a threat to Saudi stability – and in a very worse-case scenario could interrupt oil production if tension between Riyadh and Tehran were to escalate into open conflict. While unlikely, this could happen if the situation in Lebanon were to develop into a full-blown proxy conflict against Iranian-backed Hezbollah forces, or if the ongoing conflict in Yemen between Saudi-backed President Hadi and Iranian-backed Houthi rebels were to intensify. Such conflict would expose Aramco’s oil fields and installations to attack and constrain the company’s ability to invest in new production. Moreover, given Aramco’s use of expatriate labour from other parts of the Middle East, the US, and Europe, if a serious geopolitical crisis were to spark a foreign exodus from Saudi Arabia it could impede – at least to a degree – the company’s ability to operate.
  • It is also currently difficult to access reliable information about Aramco, and this lack of transparency, if it continues, may dampen investor interest. The government has formalised a 50% tax rate on the company in advance of the IPO, on top of a 20% royalty on production. However, there is so far relatively little information about the company’s finances and reserves or its investments in potentially a myriad of other sectors. The government is anticipated to release financial information ahead of any IPO, but has yet to do so. Its reluctance so far to release information about Aramco may make it better suited to a private placement with a strategic investor, as opposed to an IPO.
  • Shifts in Saudi oil policy could also negatively impact shareholders. Last year, the government lobbied fellow oil producers to reduce production in a bid to push up oil prices, which in turn effectively drove up the valuation of Aramco – a sudden departure from its previous strategy of maintaining high levels of production to maximise market share. Aramco has often been used as a tool in the country’s OPEC policies to reduce or increase production, and Saudi officials have maintained that production decisions are a sovereign matter that will remain with the government.
  • Notwithstanding political risk and any transparency concerns, an investment in Aramco does stand to offer potentially attractive returns in the long term. Despite the determination of MBS to diversify the economy, the government remains committed to defending its share of the global crude oil market.

 

This article uses Critical Resource’s LicenseSecure™ model to assess the likely level of political and stakeholder risk. Our updates provide a rapid overview of new or updated ratings in our database, with a focus on projects in the news. Please note that these ratings updates are provisional, based in part on open source analysis and are not from client projects. Full LicenseSecure analyses are in-depth, involve extensive intelligence gathering and are confidential.

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