Sources have told Reuters that the Saudi drive to get OPEC on board with production cuts last year - threatening to quit the bloc if members disagreed - was in part meant to maximize Aramco’s valuation with higher oil prices ahead of its planned IPO.
An Aramco IPO changes everything for OPEC.
The Kingdom would be the only OPEC country with a national oil firm listed abroad, and listing abroad means listening to private investor sentiment. It also means adhering to listing rules, including anti-trust legislation, particularly in the United States, which frowns on “price fixing”—a practice Aramco could be accused of under the current production quota scenario.
“Once a stake in Aramco is floated, however, the company will have to take into account the interests of outside investors,” Reuters wrote, citing industry sources.
It’s no longer about market share for Saudi Arabia, which is why the Kingdom has become much less focused on keeping the pumps on high.
The newspaper quoted a high-level OPEC source as expressing surprise at how quickly the Kingdom became “the main price hawk” and “shifted from its policy of prioritizing market share, by pumping oil at full tilt, to supporting production cuts following its decision to list Aramco.”
Now it’s about making Aramco more attractive, and that’s a major challenge. The most obvious way to make Aramco more attractive is to see the price of oil jump, but—as the modest results of the OPEC production cuts showed—that’s easier said than done. The Saudis aren’t the swing producer they used to be, and it’s not as easy as it used to be to control the price of oil by turning up the pumps or shutting them down.
Now the market has U.S. shale, and they’re not just pumping out at full tilt with no thought for the supply glut or oil prices. U.S. shale producers are focusing on ROI (return on investment). When Nigerian and Libyan oil production clawed its way back to the world market after a revival of militant attacks in the former, and the post-Gaddafi chaos of the latter, U.S. shale responded by cutting capital expenditure, as Bloomberg notes. They’re thinking long-term ROI, not immediate crash and burn gains.
Revising the tax base and royalties set-up for Aramco are two other ways to make it more attractive. Corporate tax reductions have already been made, and a change to royalties is being discussed, along with cost-cutting measures.
The Saudi plan is to list some 5 percent of Aramco by the end of next year on the Riyadh stock exchange, and possibly also in London or New York, though the latter appears to be favored at present.
The Saudis are expecting the IPO to value Aramco at $2 trillion - at least. But it’s a price tag that will depend on oil prices, and talk is that they need $60 oil for the IPO to make sense for Aramco.
In the meantime, the Saudis have lost some of their market share, both to Russia and Iraq.