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How the Aramco IPO will make history and transform Saudi Arabia’s economy

How the Aramco IPO will make history and transform Saudi Arabia’s economy thumbnail

The US and Saudi Arabia have signed hundreds of billions of dollars worth of business deals following Donald Trump’s trip to the oil-rich state. The biggest deal was for nearly US$110 billion worth of weapons (extending to US$350 billion over ten years). But a number of smaller agreements were made between Saudi and US firms, as part of Riyadh’s goal to diversify its economy.

Saudi Arabia’s economy is almost entirely dependent on oil exports and the need to diversify has become increasingly evident in recent years. A global glut in oil has caused prices to fall dramatically since 2014 and countries are increasingly turning to renewable sources to meet their energy needs.

Ultimately, the issue of peak oil makes diversifying its economy crucial. Saudi Arabia’s oil reserves are not inexhaustible so it cannot rely on oil exports to prop up its economy forever. A move towards a productivity and an investment-led economy is therefore needed to serve the country’s long-term strategic goals.

Central to this are plans to partially float the country’s giant state oil company, Saudi Aramco. It is gearing up to sell shares in part of the company in what will be the biggest IPO in history. The market value of Aramco is estimated to be around US$2 trillion – significantly more than Alibaba Group’s US$25 billion, which shattered IPO records in 2014. Even with only 5% of the company up for grabs, it is still set to be the world’s biggest IPO and marks a significant shift for Saudi Arabia’s economy.

Saudi Arabia has almost a fifth of the world’s proven oil and gas reserves and is the largest producer of oil and gas in the world. This is entirely governed by Saudi Aramco and the ministry of energy and mineral resources. It is estimated that Aramco’s reserves are the largest an oil company has ever owned, at 266 billion barrels.

But Saudi officials have always avoided discussing issues related to peak oil. No clear data has been made known about the country’s exact oil reserves, so it is hard to predict at what point the country will hit peak oil production. Nonetheless, oil discoveries, exploration and production around the world seem to have peaked and it is no longer beneficial to deny this fact. Plus, the crash in crude oil prices since 2014 left Saudi Arabia with a big budget deficit.

A new vision

The 31-year-old deputy crown prince and son of the king, Mohammed bin Salman, set out a new vision to transform the country’s economy by 2030. Named Vision 2030, it is packed with targets for education, transport, fostering new private business and cutting the budget deficit. And central to the economic transformation is the proposal to raise money through selling just 5% of the US$2 trillion worth Aramco.

The IPO would allow Saudi Arabia a significant source of liquidity (a predicted US$100 billion) that can be used to plug the budget deficit and make new investments. If the expected funds are invested well into productive areas of the economy (as is intended), the country’s economy would be boosted and its GDP could be doubled. For example, investments in renewable energy, while sustaining the kingdom’s future energy security, would also enable it to conserve valuable oil for exports. Meanwhile, investing in the Islamic tourism sector could bring billions to the Saudi economy.


9 Comments on "How the Aramco IPO will make history and transform Saudi Arabia’s economy"

  1. rockman on Wed, 24th May 2017 8:35 am 

    “A global glut in oil has caused prices to fall dramatically since 2014.” And a global shortage of oil has caused prices to increase dramatically since 2004.

    “…through selling just 5% of the US$2 trillion worth Aramco.” No, they aren’t selling 5% of $2 trillion worth of oil. Aramco DOES NOT OWN 1 bbl of oil. It only has the right to sell Saudi oil and, in the past, the vast majority of those proceeds were delivered to the govt. They are selling 5% of the stock in a corporation that who value cannot be calculated until details of the IPO are released. And what that might be can easily be changed a year later by the 95% of the share holder, the KSA govt.

    “If the expected funds are invested well…the country’s economy would be boosted and its GDP could be doubled.” The KSA already has $600 billion invested in foreign assets. If it truly believed in such an effect of a $100 billion of local investments it could have done so long before now.

    The only was the KSA govt can replace revenue from selling oil to the rest of the world is to sell something else. Which means that have to produce something other then oil. And so far not much speculation about what that might be.

  2. Sissyfuss on Wed, 24th May 2017 12:35 pm 

    So Rockmonanoff, does this mean you won’t be investing any of your hard won trillions in the IPO of Allah?

  3. Cloggie on Wed, 24th May 2017 12:48 pm 

    More good news from the North Sea as the British commissioned a brand new wind farm to the tune of 402 MW:

    67 Siemens wind turbines of 6 MW each, build and owned by Norwegians.

  4. Kenz300 on Wed, 24th May 2017 12:56 pm 

    Even oil producers are going solar. OH my…

  5. rockman on Wed, 24th May 2017 1:39 pm 

    Sissy – “So Rockmonanoff, does this mean you won’t be investing any of your hard won trillions in the IPO of Allah?” If I had a few tens of $millions to invest I might take a piece of the original IPO subscription. I suspect this might be one of those IPO you can flip with in a day or two for a nice profit and then sit back and watch it drop over the next or so to what it’s actually worth.

    Hey, if it’s a good plan for the likes of Goldman Sackoshit it’s good enough for the Rockman. LOL.

  6. Bob on Wed, 24th May 2017 1:46 pm 

    No country in history has been able to make the transformation envisioned by the Saudis. They are currently wasting tons of $$$s in a futile war with Yemen. If they had invested that money in Solar they wouldn’t need an IPO. And they wouldn’t need to go buy another 100 billion in weapons from the US. These weapons will also end up in the hands of terrorists and come back to bite us. How can we all be so mad?

  7. onlooker on Wed, 24th May 2017 2:14 pm 

    How can we all be so mad? Precisely, Bob it is a Mad world continuing in its mad unsustainable trajectories of war and mass consumerism because our leaders could not and would not change and the masses were happy to go along and too ignorant to understand the negative consequences. Too late now to avert calamities even if we could change as a species

  8. Jerome Purtzer on Wed, 24th May 2017 4:39 pm 

    Maybe the Saudi’s will invest in something smart like a Dairy Farm run by Bedouins. Oh wait, they already tried that. Now that the Trumpster is in town maybe they can build another golf course? Or a ski resort or…

  9. Cloggie on Thu, 25th May 2017 5:22 am 

    How to speed up the energy transition? No need to wait for the government or mega-companies to fork billions. If you are not content with 10 panels on your own roof (with which you should start), you can set up a project with your neighbors and run your own small energy company:

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