The Saudi royal family controls the world’s biggest oil reserves in Saudi Arabia. The riches from the black gold is the basis of the royal families’ power, influence, and legitimacy. The family is considering to take Saudi Arabia’s Oil Company (ARAMCO), which is a state owned enterprise, public. ARAMCO is one of the world’s most secretive oil companies which reveals almost no information on revenues and offers only limited information on its hydrocarbon reserves.
According to media speculation, Crown Prince Salman, who is the son of the current King and often considered the power behind the throne, made public statements about the sale of ARAMCO shares. The Prince claims that the IPO is being initiated to confront corruption and usher in transparency. In a monarchical autocracy, which is renowned for lack of democratic freedom and beholden to absolute power, it remains unclear how he intends to deliver on his promise.
So the billion-dollar question is why consider an initial public offering (IPO) at all and then why now when the oil prices are rock bottom?
The value of ARAMCO is derived from its massive reserves of crude oil, which the company claims to be around 265 billion barrels. The cost of oil extraction is around $4 per barrel, which happens to be the cheapest exploration cost compared to the extraction cost anywhere else in the world. In the United States, lifting that same barrel of oil could cost anywhere from $25 to $80 per barrel. The efficiency with which the Saudi company can extract oil is faster than any of its rivals. According to Forbes, ARAMCO can mine as much as 13.5 million barrels of oil a day, which equals 15% of the world’s daily oil needs.
If ARAMCO goes public, it is estimated to have a market capitalization as high as $10 trillion, which easily exceeds the market value of the world’s largest publicly traded energy company ExxonMobil. If ARAMCO were to float just 5% of its shares in an IPO, it would raise somewhere around $500 billion. Any IPO by ARAMCO would make history as the largest IPO in the world.
The investment banking industry must be doing the belly dance in anticipation. The standard IPO fee for an investment bank is 7%. Even for a 5% IPO of the oil company, an investment bank would collect around $35 billion.
The Economist writes that when they asked whether Saudi Arabia was undergoing a “Thatcherite revolution”, Prince Salman replied “Most certainly.” However, it certainly does not make obvious financial sense. Why cash-in on your hidden treasures and then do it when the price of that treasure is at a historic low.
Is there some rational reason for the colossal decision? Considering how deftly the royal family has managed to retain power for the longest period in the world’s most volatile region, the answer most definitely is yes.
So what is that hidden reason? Is the explanation for the IPO a financial, political or geo-political one? Only time shall tell the hidden story …… Until the story unfolds, we can only keep guessing.
New York, April 29, 2016; 10.07Pby