More evidence is mounting that Saudi Arabia’s multi-decades long run as the world’s top oil markets shaker and mover are coming to an end. Yesterday, a report indicated that several of the kingdom’s wealthy Gulf state neighbors had stepped in to help state-run Aramco’s initial public offering (IPO), which will comprise 1.5% ownership in the company.
The state-run oil company’s IPO has been postponed several times over the last three years and is now beset by ongoing low oil prices. Lower oil prices translate into a lower valuation for Aramco, which Saudi Crown Prince Mohammed bin Salman wanted valued at around $2 trillion but is now valued at $1.7 trillion. Bank of America had put its low case valuation for Aramco at $1.22 trillion – a figure that likely stirred consternation among Riyadh’s inner circle.
The listing of the oil firm is supposed to help generate funds to help Saudi Arabia pivot away from over reliance on oil import revenue and also reduce its budget deficit. However, the kingdom has had trouble securing an anchor investor for the IPO which will likely beat the record $25 billion raised by China’s e-commerce firm Alibaba when it debuted in New York in 2014.
According to a Reuters report on Wednesday, Abu Dhabi Investment Authority (ADIA) was considering investing at least $1 billion, while Kuwait Investment Authority (KIA) also planned to invest an undisclosed amount in the IPO.
Reuters reported that Jason Tuvey, senior emerging markets economist at Capital Economics, said that any Gulf state investment in the IPO would be “purely a political decision rather than anything (else).”
Saudi Arabia has simply had a hard time securing major investors in the upcoming offering. Earlier this month, Malaysian state run oil and gas major Petronas said it was approached by Aramco to participate in the Saudi oil giant’s listing, but stated last week it would not participate
“Petronas would like to confirm that after due consideration, the company has decided not to participate in Saudi Aramco’s initial public offering exercise,” the company said in an emailed statement.
Others have also declined to take part. The head of JXTG Nippon Oil & Energy, the biggest refiner in Japan and a major importer of Saudi oil, said Japanese firms were unlikely to invest because of difficulties in valuing the Saudi firm. Adding another layer of concern for the Saudis, two weeks ago JXTG said it was looking to reduce term crude oil imports from the Middle East in 2020. Russian oil firms also said they would not invest in the Aramco IPO.
On November 3, the sale process for listing Aramco on Riyadh’s Tadawul exchange kicked off. The offering to institutional investors, expected to raise about two thirds of the offering, closes on December 4.
Aramco’s difficulties in drumming up a major investor is indicative of the power the kingdom has lost and is still losing in oil markets over the past few years, mostly due to the ramp-up in U.S. crude oil production. The U.S. is already the largest crude producer, ahead of Russia and then Saudi Arabia, and is also stepping up oil exports.
While Saudi Arabia remains the largest crude oil exporter and will likely remain at the top spot for years, the introduction of more U.S. crude barrels, mostly from shale production, has tilted the balance of oil market power away from a Saudi-led OPEC to a Saudi and Russian led OPEC+ group of producers, and now has even eroded the power wielded by that expanded group.
Even though OPEC+ has decided to keep its oil production cut agreement in place, global oil prices are still trading in the mid $50s to mid $60s range, an anemic level for major oil producing countries, like Saudi Arabia, Russia and others that derive a large percentage of their state revenue from crude oil sales.
The other fly in the ointment for the Saudis, albeit for global oil markets, is the ongoing trade war between the U.S. and China which has hurt global economic growth thus global oil demand, which is also putting downward pressure on oil prices.
A ramp up in U.S. crude production and weakening global economic growth from the ongoing trade war are both factors that Saudi Arabia is powerless to influence. At this point, the kingdom’s energy planners can only try to keep OPEC+ production levels in check, but at the end of the day, that is no longer enough to help support prices as before and in lock step help Aramco’s once heralded IPO.
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