Saudi Arabia’s dream of securing a $100bn windfall from the IPO of Aramco may be clouding its judgement.
The kingdom needs higher Oil Prices to entice international investors to buy a stake in the state-owned company, which supplies almost all its crude.
Using its OPEC clout to restrict global supplies and pump up the cost of its barrels makes the mega offering look more appealing but the move has also revived the kingdom’s biggest enemy in the form of US shale oil.
Oil prices have climbed 33pc to trade around $70 per barrel since the Organisation of the Petroleum Exporting Countries (OPEC), with the help of Russia, agreed in late 2016 to shave 1.8m barrels per day (bpd) of crude from world supplies.
That deal — brokered primarily by Riyadh — has now been extended for another year.
The new timeline is conveniently synced with the scheme to offload up to 5pc in Aramco by the end of 2018.
The IPO is the pet project of Crown Prince Mohammed bin Salman. The heir to the Saudi throne — who is also known as MBS — seized control of all economic power levers in the kingdom last year when he ousted his cousin to become first in line to succeed his ageing father, King Salman.
Described by western diplomats as headstrong and demanding, the 30-something royal has embarked on a radical shakeup.
His reforms have included ordering the detention of hundreds of Al-Saud family members in an anti-corruption probe and reining in the powers of the Muslim country’s ultra-conservative religious police.
Of course, there is more at play than just Aramco. The International Monetary Fund argues that Saudi Arabia needs oil prices at their current levels to function efficiently without having to burn any more of its foreign reserves, which have dropped by about a third from their peak in August 2014 at $737 bn to compensate for the loss of revenues.
The slump also forced Riyadh to slash state benefits and subsidies, many of which have been reinstalled since oil prices recovered.
Selling a stake in Aramco is the centrepiece of his grand vision to modernise the oil-rich kingdom. Politically, its success depends on achieving the prince’s own valuation of around $2 trillion.
However, few bankers or industry experts believe such a lofty figure is attainable, even in the current buoyant environment.
They argue that, although it controls the Middle East’s largest proven reserves of crude, most of its revenues will continue to be syphoned off into the national coffers through direct taxes and royalties payments instead of shareholder dividends, regardless of how oil prices perform.
“It’s not just about Aramco,” said Helima Croft, head of commodity strategy at RBC Capital Markets in an interview with S&P Global Platts. “It’s about the whole vision of MBS. You can’t underplay the revolution he has embarked on in the biggest Middle East country. Lower prices now could burst that bubble.”
Khalid al-Falih is the man who is primarily charged with turning the crown prince’s mega IPO dream into reality. The former chief executive of Aramco was handpicked by MBS to replace Ali al-Naimi as energy minister in 2016.
Almost immediately, he reversed the kingdom’s long-standing strategy of defending its market share. Under Al-Falih’s tenure, Saudi Arabia with the help of its new ally Russia, has focused its efforts on bumping up prices, which have fallen below $30 per barrel.
Restrictions on supply, which limit OPEC’s output to around 32.5m bpd and call on Russia to restrict output by a further 300,000 bpd, could now even be extended into next year, despite global stockpiles nearing a level deemed to balance supply with demand.
The concern is that the judgement of Saudi policymakers is being distorted by the need to buy more time for advisers to structure Aramco to achieve the best price and pick either London, New York or Hong Kong as a home of the international listing.
“From what I’ve seen, everybody is focused on staying the course in 2018,” Al-Falih told a high-level energy panel at the World Economic Forum in Davos.
The danger with this strategy is that in emboldens US shale. The US Department of Energy predicts that America’s drillers will increase output by 1m bpd this year to average 10.3m bpd, rivalling Saudi Arabia and Russia in output terms.
Despite these increases and the promise that US drillers could open their taps further, Riyadh remains unfazed.
Rather than peaking anytime soon, it argues that global oil demand could grow a further 20% in the next 25 years, hitting 120 million b/d, with declines in smaller producing countries creating enough room for booming shale.
“The market is looking for any sign that Saudi is going to back down and resume its market share strategy and the war on shale,” said Croft.
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