The IPO of Saudi Aramco: Some Fundamental Questions
In the last few months, there has been a flurry of articles about the Initial Public Offering (IPO) of Saudi Aramco. While such articles offer a fresh perspective on the complexities involved in the IPO of Saudi Aramco, key issues are still missing in the debate. This short paper tries to fill some of these gaps. First, it emphasizes that the IPO can’t be isolated from the range of recent reforms and adjustments taking place in Saudi Arabia and the pace of these reforms will be key in determining the valuation of Saudi Aramco. At the same time, the IPO will determine the pace and success of these reforms. So a bet on Saudi Aramco is a bet on how successfully one thinks that Saudi Arabia, in an era of lower oil prices will adjust its economy and diversify its economic base. Second, it raises the question as to the main underlying motivation behind the IPO. The answer to that question is often taken for granted: an effort ‘to wean the kingdom off oil through Vision 2030 which aims to diversify the Saudi economy and create jobs’. But the IPO is mainly about income diversification and boosting the resources of the Public Investment Fund. This is fundamentally different from ‘real’ economic diversification, which is often associated with expanding the economic base and job creation. As the experience of neighboring countries has shown, sovereign wealth funds predominantly diversify their assets by investing in foreign markets rather than in diversification of the domestic economy into employment creating sectors. Finally, this comment attempts to clarify some confusion regarding the IPO, particularly in relation to the ownership of the reserve base with some arguing that ‘there are reasons to be cautious about expecting much more transparency’ because ‘it is far from clear that any share sale would include ownership of the reserves in the ground’. As argued in this paper, the issue of ownership of reserves is not that relevant as Saudi Aramco, in which investors will have an ownership stake, has and will continue to have an exclusive concession to exploit the underground reserves including the right to monetize any potential growth in these reserves.