On November 9, the Kingdom of Saudi Arabia’s state-owned oil company, Saudi Aramco, released a prospectus for its initial public offering. Though the prospectus is as short on detail as a 600-page document can be, Aramco is reportedly selling between 1 and 5 percent of its equity with a target valuation between $1.3 trillion and $2 trillion. That wide range reflects both oil-price volatility and the political uncertainty involved with a state-owned oil company. But whatever the valuation, it will dwarf the market capitalization of Microsoft, the world’s largest public company, which is valued at $1.1 trillion.
In fact, Saudi Aramco generated more profits last year than Microsoft, Amazon, and Apple combined, and its proven oil reserves of 226.8 billion barrels are an order of magnitude larger than ExxonMobil’s. With per barrel costs of $2.80, Aramco produces oil more efficiently than any other oil company in the world — a stark contrast to the bloated, corrupt national oil companies of Russia, Venezuela, and Nigeria.
The proceeds of the offering will go toward Crown Prince Mohammad bin Salman’s National Transformation Program, which aims to diversify the oil-dependent Saudi economy and improve domestic infrastructure and health care. That the proceeds will be invested in the kingdom, as opposed to the company itself, underscores a tension in public offerings of state-owned enterprises.
The principle goal of public companies is to maximize values for shareholders, but national oil companies, as piggybanks for sovereigns, have different imperatives. Their strategy tends to focus on the needs of the state. This tension has led to hesitance on the part of Western investors. According to Jim Krane of Rice University’s Baker Institute, “Investors will find themselves at cross-purposes with Aramco’s decision-making on a fairly regular basis.”
For example, the company sells a third of its oil at a discounted rate domestically. For the kingdom, domestic subsidies are crucial to fostering internal stability, but they make the company significantly less valuable. Additionally, Aramco regularly invests in unused oil capacity in order to adjust output depending on its strategic goals. As the prospectus states, “The Government determines the Kingdom’s maximum level of crude oil production in the exercise of its sovereign prerogative.” According to Krane, investor-owned oil companies do not make such capital expenditures, which significantly reduce earnings.
The production-capacity buffer was useful in September, when Iranian proxies attacked two Saudi oil facilities, temporarily cutting the company’s oil output by more than half: Aramco was able to use its excess production capacity to make up for the loss. But the attack accentuates the geopolitical risk of an investment in the Saudi oil behemoth. As one of the kingdom’s most strategically important assets, the firm is a target for Saudi foes, which the company acknowledged in its prospectus. If Western investors buy equity in Aramco, regional foes could have an increased interest in disrupting the firm’s oil production.
Despite these risks, investors will have little say in the company’s decision-making, because the kingdom will retain the vast majority of voting shares. That means management can privilege the priorities of the state over the priorities of Aramco’s shareholders, even adjusting the company’s dividend-payout ratio as it sees fit. Though Saudi Arabia’s stock exchange, the Tadawul, contains some corporate-governance provisions, they are lenient by Western standards. If Aramco’s plans for an international listing next year go ahead, the company could face more onerous disclosure and regulatory requirements than it will on the Tadawul, depending on which foreign exchange it chooses.
Saudi Arabia’s role in OPEC adds another dimension to Aramco’s IPO. The Saudis’ ability to influence oil prices comes with geopolitical implications. In the 1970s, an OPEC oil embargo inflicted enormous damage on the American economy. In the unlikely event that OPEC significantly reduces supply, Western capital invested in Aramco could fuel economy-crippling, anticompetitive activity. Recently, Saudi Arabia has called on OPEC producers to decrease oil supply and drive up prices ahead of its IPO.
Hasnain Malik, the head of equity strategy at Tellimer, summed up these risks: “Apart from the oil price, of course, the main risks are the degree to which Aramco needs to shoulder the burden of OPEC Plus[-mandated] output restraint, allocation of capital into projects which maximize value for Saudi [Arabia] overall as opposed to Aramco minority shareholders, physical security risks, and the dividend-payout ratio in the long-term.”
Another geopolitical concern is the sale of Aramco equity to American foes such as China and Russia. According to Bloomberg News, China has expressed interest in buying a stake as large as $10 billion. As part of President Xi Jinping’s One Belt One Road initiative, China’s Silk Road Fund — as well as its sovereign wealth fund and state-owned oil producer — would finance the purchase.
China, which is one of the largest markets for Saudi oil, has an obvious strategic interest in Saudi oil production. But observers worry that Beijing could use its stake in Aramco to strengthen ties with Riyadh at the expense of the United States. In the case of hostilities, China could leverage the Saudis to cut off oil to the U.S. and other adversaries. It should come as no surprise that, in 2017, the U.S. and Japan intervened when Chinese state-owned entities expressed interest in the Aramco IPO, according to the Wall Street Journal.
Recently, Chinese state-owned enterprises listed on American exchanges have themselves been scrutinized by American regulators and politicians. Some policymakers argue that American capital should not fund companies that fuel Chinese expansionism, surveillance, and censorship. Saudi Arabia’s own authoritarianism has also raised alarm in the West. The murder of exiled Saudi dissident Jamal Khashoggi on bin Salman’s orders at the Saudi embassy in Istanbul was the biggest test that the close, decades-long U.S.–Saudi relationship had faced in years.
The discussions surrounding Aramco’s listing underscore a broader tension in the integration of “state capitalist” economies, such as China and Saudi Arabia, into the global economy. As they operate in anticompetitive, subsidized systems, such companies undermine free enterprise. If the Saudis sell equity to Westerners without becoming more receptive to shareholder concerns — and if the crown prince does not reform Saudi Arabia as promised — a strengthened Aramco could exacerbate those problems and embolden authoritarian governments the world over to foist their own state-owned companies onto overcapitalized Western investors.