Will the Aramco IPO ever happen?

The talk this week has been about a battle between New York and London over who will get this prized listing. Yet, as oil plunges again, does the initial public offering (IPO) of Aramco look more or less likely? If the price stays below $50, and falls further, it may decide to press ahead with the sale, with the overall firm valued at $2 trillion. If oil recovers, the rationale starts to disappear.

Why should Saudi Arabia look to share even a small part of oil proceeds with shareholders, especially given the kingdom’s financial difficulties? The country has jealously guarded its oil secrets, including its reserves, but the IPO would mean allowing international investors, some possibly from countries that are geopolitical rivals of Riyadh, a close look at Aramco’s books. This might not be particularly prudent.

The national deficit is projected to narrow, after a 12.3% figure for 2016, While oil prices are not heading back to the $100 a barrel level any time soon, if indeed ever, the higher prices mean that total revenues for the 2017 are expected to be 31% higher. As a result, Riyadh has less need to sell state assets that might be fairly termed ‘the family silver.’

Saudi Arabia has essentially used Aramco like a piggy bank, utilising it for spending of all kinds, including the lavish funding of the armed forces, which, as a result, pushed Saudi defence spending to almost 14% of GDP, the second highest in the world on this measure, and on the kingdom’s civil service. If Aramco goes public, it will have to reveal this and provide a rationale. Such transparency would not go down well with the Saudi government.

A lesson for Saudi Arabia can be found in Petrobras, the Brazilian oil giant. Despite vast oil reserves, the shares have performed abysmally, and are down 40% over the past five years, versus a drop of around 4% for Royal Dutch Shell, and a flat performance by BP. Tales of corruption caused investors to sell Petrobras shares, destroying the value of the Brazilian firm. Aramco’s IPO would also complicate the OPEC picture, since as nominally independent company, it would be expected to act in its own best interests, and not those of Riyadh.

From a culture thriving with intrigue and other sharp practices, Aramco may struggle in the big world of international investment. If oil falls all the way back to $20, an IPO could be on the cards again, despite the problems outlined above. However, if it holds at current levels, or recovers, Riyadh’s need to sell state assets may disappear.