Saudi plans to transform Aramco to energy /industrial company
on April 27, 2016

Salman Apr16Within 20 years, we will be an economy that doesn’t depend mainly on oil“.

With that one statement, deputy Crown Prince Mohammed bin Salman (pictured above), changed the outlook for oil and energy markets.  The world’s major oil producer, with the lowest cost, was signalling that the kingdom will no longer be supply-driven, focused on maximising oil revenue over the long term.  And as the Prince told Bloomberg:

“We don’t care about oil prices—$30 or $70, they are all the same to us. This battle is not my battle.”

Aramco IPO Apr16Thus the government’s new Vision statement is based on the assumption of a $30/bbl oil price in 2030 – in line with the long-term historical average.  And one key element of this policy is the flotation of 5% of Saudi Aramco, the world’s largest oil company.  Estimates suggest it is worth at least $2tn, meaning that 5% will be worth $100bn.  And as I suggested to the Wall Street Journal yesterday:

The process of listing will completely change the character of the company and demand a new openness from its senior management“.

Equally important is that the aim is to use the IPO to create the world’s largest sovereign wealth fund, which will not only include Aramco itself, but also real estate and other newly-privatised companies.  This Public Investment Fund will have a value of between $2tn – $3tn, as the chart shows – meaning it could potentially buy the 4 largest public companies in the USA – Apple, Alphabet (Google), Microsoft and Berkshire Hathaway.

And the aim of this Fund will be to:

“Invest half its holdings overseas, excluding the Aramco stake, in assets that will produce a steady stream of dividends unmoored from fossil fuels”.

Why is this happening?  Part of the answer, at least, is due to the financial crisis that engulfed Saudi this time last year.  As the Prince’s financial adviser, Mohammed Al-Sheik, has explained, the post-2009 period of $100/bbl oil prices meant Saudi spending went:

Beserk…with between 80 to 100 billion dollars of inefficient spending every year, about a quarter of the entire Saudi budget.At last April’s spending levels, Saudi would have gone completely broke by early 2017″.

It is clear from the Vision and the Prince’s interviews that this crisis was the catalyst for major change because:

An oil price of 30-40-50 dollars spurs reforms (and enables Saudi) …to focus on the non-oil economy”

And now this change is underway.  Saudi has already begun to boost its market share, selling on a spot basis (outside contract) to a Chinese refiner.  And as the Prince has explained, Aramco in the process of being:

“Transformed from an oil and gas company to an energy/industrial company…We’re targeting many projects. Most important is building the first solar energy plant in Saudi Arabia. Aramco is now the biggest company in the world and it has the capability of controlling the shape of energy in the future and we want to venture into that from today.

Also, we want to develop the petrochemicals market that depends on oil and the services provided by some of the oil derivatives as well as some of the industries that we might create given the size of Aramco. For example, we could create a huge construction company under Aramco that will also be offered to the public and that services projects other than Aramco’s projects in Saudi. So all these projects that we announce will be how we transform Aramco from an oil and gas company to an industrial and an energy company.”

In their own way, therefore, these new policy statements are likely to be as critical for the global economy as President Xi Jinping’s speech to China’s economic policy conference in November 2013, which effectively abandoned the previous stimulus policy and prepared the way for his New Normal economic direction.

As I wrote then, “we cannot know if he will succeed in moving the economy towards a more sustainable future“.  And the same is true, today, for Prince Mohammed’s new policies.  But what is clear, is that anyone who still believes that oil prices will “inevitably” return to $100/bbl are fooling themselves, just as were those who argued in 2013 that President Xi would “inevitably” continue with “business as usual” policies.

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