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Last week Okaz, a semi-official newspaper, said that Saudi Aramco is considering offering shares to Saudi citizens.

Sources ‘familiar with the matter’ say that Saudi Aramco internally has discussed on how to do the IPO structure so that Saudi retail investors can get in on the deal cheaper than through international exchanges. Traditionally, Saudi Arabia offers shares in government-owned companies, such as it did with Saudi Telecom (STC), Saudi Electricity (SEC), SABIC and others. Shares are sold at a set price of about $2.67 – in an effort to redistribute wealth among the local population. An Islamic charity mentality, or don’t ask me what I am doing with the money.

The Saudi Aramco IPO is facing some question marks on how exactly to structure the IPO. When plans for the IPO were first announced those questions were raised but were dealt with in the Saudi manner by not dealing with the issue head-on because there appears to be no clear plan.

Also, last week Reuters reported that Saudi officials were debating whether Saudi Aramco should be listed as an industrial conglomerate or as a specialized international oil company. An anonymous source told Reuters that the choice is between making Saudi Aramco a pure oil and gas company, or a conglomerate and thus expanding its role to petrochemicals and other sectors. As for investors, will this create a dilemma as to what they will actually be investing in?

The complexity of Saudi Aramco’s structure is deep and not really transparent to Saudis citizens. There are rumours that Saudi efforts to float the company’s shares are being delayed, with the new date being pushed back as far as 2019 being considered realistic. Yet, according to The Times, Saudi Aramco’s board is meeting this week to discuss how to bring the deal forward.

“There are two options being studied now. Either to make Saudi Aramco a pure oil and gas company, or a conglomerate and expand its role in petrochemicals and other sectors,” said a Saudi industry source, declining to be identified because the debate is being conducted in private.

When the initial plan was released in June last year, it pledged to “transform Saudi Aramco from an oil-producing company into a global industrial conglomerate”.

But now Saudi officials and their advisers are debating whether to make Saudi Aramco “a Korean chaebol”, as one source said, referring to sprawling South Korean conglomerates, or a specialized company focused purely on oil and gas.

The argument in favour of a specialized company is that it might be easier to value because of its simplicity and, since the risks in its business model would be clearer, achieve a higher price for its shares. Other than its core oil and gas production, exploration and refining businesses, Saudi Aramco – which employs more than 55,000 people – has plans to build solar and wind power facilities.

Saudi Aramco is the country’s biggest company by far, one of its most efficient, and a source of national pride. As part of the current economic transformation, it is being pressed into service to jump-start industrial projects that are too big or daunting for the private sector. So, for example, it is developing a $5 billion ship repair and building complex on the east coast, and working with General Electric on a $400 million forging and casting venture.

It has also often been tasked with executing government projects that have social goals, such as industrial cities, stadiums and cultural centers. For example, it was heavily involved in creating King Abdullah University of Science and Technology.

The fear is whether the domestic and international investors who might have an appetite to buy Saudi Aramco shares really want exposure to such a complicated array of assets. A banking source familiar with the IPO preparations said the government was studying a “clean-up exercise” to make Saudi Aramco’s structure neater.

One option under study is moving all businesses not related to oil into a separate entity before the IPO. A complex process. “It is going to be a legal nightmare for them. And the more they dig, the more they will find out issues they need to sort out,” an industry source said.

Complexity

Another point for consideration for investors is that Saudi Aramco currently pays a 20 percent royalty and 85 percent tax to the government.

These could lower its value in an IPO, and sources said talks were under way to move the tax rate as low as 50 percent. But this could hurt state revenues in the current time when Riyadh needs the revenue.

Regarding the upstream and downstream oil businesses of Saudi Aramco, they will remain part of the company when it is offered to the public. But the question is how to value Saudi Arabia’s oil reserves, over which Saudi Aramco has exclusive rights. This is still being finalised.

A third issue under discussion is how much of Saudi Aramco will be owned by the Public Investment Fund: all of the non-public stake, or something less?

This is related to another question which may influence investors’ attitude to the IPO, and remains unanswered: the company’s precise relationship to the government. For example, who will have the right to production-related decisions – the government or Saudi Aramco’s board?

Last May, Saudi Aramco’s Chief Executive Amin Nasser said production decisions were sovereign matters that would remain with the government. But one industry source noted that this would make Saudi Aramco something other than a profit-oriented international oil firm. “Why would an investor buy shares in a company if the board has no say on production decisions? If the Saudi government decides it wants to cut production, then Saudi Aramco will cut and lose market share to rivals,” he said.

 

The funds raised would flow into a “sovereign wealth fund,” which would then invest in foreign and national companies in the private sector. This is hoped to entice others to join in turning Saudi Arabia into more of a capitalist economy rather than a state-controlled one.

Saudi Aramco has been treated by the royal family as its private piggy bank for decades, as well as funding the cradle-to-grave welfare for its citizens. Saudi Aramco builds schools, hospitals, and sports stadiums, and sells its natural gas to the government-owned utilities well below cost. It funds the government’s incursion into Yemen and other military adventures. Unwinding the tangle of interests, demands, and commitments to make Saudi Aramco acceptable to foreign investors is a gargantuan undertaking. Admitting as much is Khalid al-Falih, the new Saudi energy minister: “Extensive rewiring of our financials and the relationship [of Saudi Aramco] with the government … would require a significant amount of time.”

King Salman started of Asia today accompanied by an estimated 1,000 persons, including 10 ministers. The tour’s aim is to advertise for the IPO in the Asian market as well as enhancing participation of Asian companies in the diversification program of Saudi Arabia. The homework will be done that is for sure because Saudi Arabian government can’t afford failure. Whether they can handle the risks of all their projects remains the question. It is experience that matters here not only the will.