Saudi Aramco and the Rules of Engagement in Financial Markets

28-8-2018

The implementation of the Crown Prince's Vision in Saudi Arabia..... 2030, requires enormous sums of money... estimated at hundreds of billions of dollars... Therefore, the Saudi government is raising funds from all sources, and the role has fallen to Saudi Aramco to privatize some of its divisions and offer a 5% subscription in the global financial markets..... It is a fierce competitive battle among all parties of investors, financial centers and experts, and some foreign governments, ..and the Saudi government,,,, to raise an amount estimated at about $100 billion... to be added to the $100 billion that were collected from Saudi businessmen last year. As is known

-        Aramco....the blessing of the desert... in Saudi Arabia... a company established in the Kingdom of Saudi Arabia in the last century.. in 1933 ..as an American company, until the first oil well was discovered in the Eastern Province of Saudi Arabia.. in "Dammam Well 7." Four years later, with an initial capacity of 1,500 barrels per day.. and in 1944 the company's name was changed... to "The Arabian-American Oil Company"... Saudi Aramco currently produces about 10 million barrels of oil per day.. aside from additional pumping that is subject to political considerations.. The company operates in the fields of oil, natural gas, petrochemicals, and related activities, from exploration and production to refining, distribution, shipping and marketing.. etc.

-        Two Saudis joined the Aramco Board of Directors in 1959 for the first time... and in 1973 the Kingdom of Saudi Arabia acquired a 25% stake in Aramco.. then increased its share to 60% in 1974... However, in 1980 the Saudi government managed to obtain a 100% stake in Aramco... As for 1988, the company's name was changed by royal decree to "The Arabian Oil Company" ..or Saudi Aramco...

- The number of the company's employees amounts to more than 65,000 employees, in addition to the roster of contracted employees, who number more than 100,000 contractors. It has many subsidiary companies whose headquarters are located in different parts of the world.

-        The company manages oil reserves estimated at 265 billion barrels... and gas reserves estimated at 288 trillion cubic feet... Annual revenues of Saudi Aramco were estimated at $185 billion ..(according to economist Steven Klamann.).. The Kingdom of Saudi Arabia estimated the market value of Saudi Aramco at nearly $2 trillion... while others dispute this high value, as some economic and financial advisers estimate it to be higher, on the basis that the company's assets and resources in the subsurface are included in the market value, but the Saudis rejected this valuation... and say that Saudi Aramco does not own the wells or the petroleum reserves in the subsurface, which are a governmental wealth... and the company explores and markets but does not own... This dispute had intensified between foreign investors and Saudi financial advisers... Exploration magazine estimated Aramco's market value in 2015 at $10 trillion.. based on the company's subsurface assets ...included in the market value...

-        The battle to offer Aramco's shares for subscription in the financial markets began since the Crown Prince announced his vision... Saudi Aramco invited global banks to submit bids to participate in managing and coordinating the anticipated share offering in the second half of 2018.. and to present participation plans to offer 5% of the company's shares for subscription.. The Saudis and their experts estimate that $100 billion will be raised... as a result.. Renowned financial advisers from around the world were invited ... to enter this financial battle ..to offer a 5% subscription of the company's shares in the financial markets ... The initial plan was to list on the Saudi local stock market "Tadawul" and the New York Stock Exchange ... and the London Stock Exchange .. and the Hong Kong Stock Exchange... and the competitions among all parties intensified.

- However, the Kingdom of Saudi Arabia, after research and consultations, saw that the New York Stock Exchange is risky because of the existence of the JASTA law, which could expose the company's shares to harm from individuals filing lawsuits against Saudi Arabia and its financial assets; in addition to the possibility of lawsuits being filed regarding the environment. As for the London Stock Exchange, and also the New York Stock Exchange, the listing of the giant company—Saudi Aramco—on international exchanges such as London and New York requires procedures at Aramco for disclosure of the company's financial data with full clarity, and some Saudi economists and politicians believe that revealing sensitive secrets related to Aramco's data, revenues and production in a clear manner exposes Saudi sovereignty and national security to danger. They thought that the listing on international exchanges should be overlooked, and they recommended offering the subscription on the Saudi local stock market "Tadawul" as a first stage, and considering the possibility of the Saudi "Tadawul" market's capacity to undertake this hosting of a 5% offering of the company's shares on the Saudi financial market. Some saw that the Saudi market is not capable of mobilizing sufficient capital to meet this offering, in addition to these people's fear of the emergence of destabilization of the Saudi financial market, whose market capitalization ...475 billion dollars, where it is expected that investors will sell the shares of companies they own and replace them with shares in Aramco in large financial volumes. This would affect the position of all other companies whose shares are traded in the Saudi market, and concentration in the Saudi market on Aramco's shares would conflict with the market's ongoing objectives.

-        It is worth noting that offering 5% of Saudi Aramco's shares for subscription requires, as we mentioned earlier.. changing the company's structure from government ownership to a joint stock company. This is what was done at the beginning of the current year... The newspaper "Umm al-Qura", the official Saudi newspaper... said that Saudi Aramco's capital is 60 billion Saudi riyals fully paid.. and divided into 200 billion ordinary shares.. with equal voting rights.. and without par value... and the formation of a new Board of Directors consisting of 11 members.. for a period of 3 years... the government will directly choose 6 nominees, who will be elected to the Board of Directors.. and no shareholder or group of shareholders other than the state owns more than 0.1% of the ordinary shares... Nominating a candidate for board membership.. to the Nominations Committee and the board will have the authority to list the company on local or international markets

- The offering of a 5% subscription of the company's shares has benefits from the point of view of financial and economic analysts, since it will increase transparency in global oil markets, given that Aramco is the largest oil company in the world. Disclosing the company's capacities and the size of its revenues will help remove the notion that Aramco does not enjoy sufficient transparency, and it will also consolidate the concept of disclosure and accountability, since it places the company before increased scrutiny by global markets. Therefore, the transparency resulting from this subscription will contribute to rationalizing Aramco's expenditures and confronting corruption if it exists—as the Saudi Crown Prince indicated in his interview with The Economist in 2015, as we noted earlier. In addition, this offering will increase the company's market value and will strengthen its capacity and efficiency in managing resources. Moreover, listing Aramco on the Saudi market could be a turning point for the Saudi stock market and a positive step in transforming the Saudi market from a local market to a global market. The offering will also be a reason for increasing foreign investors in the Saudi market and bringing in additional capital, which would help revive the Saudi economy and create jobs for Saudis. It is also possible to use the proceeds from the sale resulting from the offering and allocate them to the Public Investment Fund, which will use them to develop other industries such as mining. The Aramco subscription would be like a bank guarantee through which the Saudi state can obtain financing at lower cost. From a political perspective, this large offering will increase the Kingdom's global standing and its political weight in the region and the world.

-        As for the concerns about the offering, the most important of which was some Saudis' fear of the offering, because the offering means in their view selling the oil and gas under the ground... and they say that offering a 5% subscription of the company's shares is an offering of everything the company owns.. of assets and companies.. and manufacturing and refineries.. and oil exploration rights.. and others. In reality, the new internal and foundational regulations that the company follows after becoming a joint stock company at the beginning of this year confirm that the Kingdom does not wish to relinquish its dominance over the company, for the new regulations give it the right to choose 6 of the 11 members of the Board of Directors including the chairman and his deputy... and the remaining 5 are selected through a vote of shareholders owning more than 0.1%, and thus the Kingdom will have 95% majority voting after the subscription, and therefore no shareholder owner will have the right to object or interfere in the company's policy.. the Kingdom does not want to put power in the hands of investors

- As for those worried about the offering, they explain their fear that this offering will place constraints on the state's public finances. As is known, the determination of a company's market valuation depends on the expected tax rate to be applied to its production in the future, and the Saudi government reduced the tax rate that Aramco pays, the proceeds of which are used to provide public services to citizens, from 85% to 50%....with the aim of increasing the company's market value at the offering..and thereby an additional burden is imposed on the Kingdom's public finances, which were also negatively affected by the decline in global oil prices

- Determining the market valuation of Saudi Aramco requires timing to be balanced with oil prices in the market; there has been significant divergence among experts. While the Saudis estimate the company's market value at an amount approaching $2 trillion, the CEO of Total says that the company's net value does not exceed $419 billion. As for the timing of the offering, as planned, the second half of 2018 was proposed long ago...however the Saudi Minister of Energy said at the recent Davos conference that the Kingdom is ready to offer Aramco shares for subscription when it sees that the global market is ready for that. The offering may be postponed, and the timing is related to oil prices, since falling prices will affect and reduce the company's market value. It is worth noting that preparing the Saudi exchange for such an offering requires at least six months to prepare the market for all requirements; therefore, it does not appear that a decision has been made...to prepare the Saudi financial market...
In the decision taken by King Salman, King of Saudi Arabia, to stop looking into the offering of %5 of the shares of Saudi Aramco, it appears that there are reasons for it. As we have said, there are many factors that stood before the Saudis and prevented them from continuing. The Saudis preferred an offering on international exchanges because of the benefits that brings to the Kingdom and because it attracts foreign investor capital. However, the legal circumstances of the New York Stock Exchange, and the existence of the JASTA law, as we mentioned previously, deter the Saudis from taking this step...also the domestic offering is not guaranteed; in addition, the direct sale to the Chinese investor without a subscription offering, as was said, is understood to have political dimensions that the United States may not be pleased with.... In addition to all that, the company's valuation is linked to oil prices, which have fallen in global markets, and consequently the company's market value has decreased...in addition to legal concerns about the possibility of shareholders' claims extending to the company's subsurface oil and gas assets, and the war on Yemen requires enormous expenditures. Therefore, it is also expected that the building of cities according to the vision of the Saudi Crown Prince will be postponed, because oil in reality, and at times, is a political commodity as much as it is an economic one...for the Kingdom may be asked to increase output for the market if Iran exits it as a result of the ongoing American sanctions that seek to prevent the sale of Iranian oil in the international market; consequently, prices will fall...and thus all market value of Saudi assets will be affected, and with increased war expenditures on the aggression against Yemen, the Saudi budget deficit will increase, which exceeded $60 billion in the 2018 budget. Although oil prices are higher today compared with prices weeks earlier...that is variable..and no one can predict prices because politics is intertwined with the economy...in addition to the Saudis' original unwillingness to meet Aramco’s transparency requirements...they consider them sovereign secrets entrusted only to the Saudis......which global exchanges and even foreign investors require...and therefore the subscription offering file was closed...until another circumstance favorable to the Saudis comes....if it comes...!!!