Tweet This
Saudi Arabia is preparing to unveil what may be the greatest changes the country has undergone since the discovery of oil in 1938. This is coming against the backdrop of a controversial visit by President Obama to the Kingdom of Saudi Arabia, rising tensions with Iran, and ongoing violence in neighboring Yemen. On Monday, the Kingdom will introduce its plan for an economic and financial restructuring of its sovereign wealth fund.
On the scale of $2 trillion, this new Public Investment Fund (PIF) would be the largest in the world and would include a compelling IPO of a small portion of Saudi Arabia’s national oil company, Saudi Aramco. The country relies almost exclusively on oil profits to fund the government. No one outside of the government knows the exact numbers, but some estimates say 90% of the Kingdom’s budget comes from Aramco. Therefore, the shift towards funding the government through an investment company raises vital questions and concerns. Monday’s “Vision for the Kingdom of Saudi Arabia” announcement may answer them.
1) How will the new Public Investment Fund manage to endow the country’s budget if it strays significantly from the traditional oil business? According to Deputy Crown Prince Mohammad bin Salman, the fund will eventually invest in assets overseas where they must abide by foreign law. Dividends from these investments will never be enough to fund even a significant portion of government operations. It is possible that the fund may purchase entire companies or majority stakes (as Berkshire Hathaway sometimes does) and funnel those profits, after taxes, to its own coffers, though that would be to the detriment of the companies. Actually funding the country through non-oil investments would require the Saudis to redeem significant amounts from their own fund every year. Imagine a giant, $2 trillion hedge fund that faces annual redemptions of $200 billion or 10%. The fund would need consistent growth in excess of 10% to break even, and even more growth to make it a good idea.
2) Where does an Aramco IPO fit into the upcoming Public Investment Fund? This is one possible model.
3) What part of Aramco will the Kingdom include in its first public offering? Although Mohammad bin Salman has mentioned including upstream assets (the actual oil resources themselves) in an IPO, this sounds more like a long-term aspiration than a concrete plan. Aramco does not believe that the Kingdom would introduce such risk into its most lucrative treasure. Selling shares in upstream assets would necessitate opening information about the location and volume of oil resources. A likely scenario would be inclusion of upstream resources in the PIF as private holdings.
In that case, what parts of Aramco—which is really more of an energy conglomerate than a national oil company—is the Kingdom prepared to offer to the public? Perhaps they will offer shares in refineries like the Yasref refinery in Saudi Arabia, the S-Oil refinery in South Korea, Fujian Refinery and Petrochemical in China, Sadara Chemical Company in Saudi Arabia or SATORP petrochemical company also in Saudi Arabia. All of these are co-owned with companies like Dow Chemical, Sinopec, Total and ExxonMobil. The Motiva refinery, a wholly Saudi owned refinery in Texas, is an unlikely option since Aramco generally prefers to keep quiet about its ownership of major United States energy assets.
4) What kind of shares will the Aramco IPO offer and will the dividends be lucrative enough to attract investors? Saudi Arabia needs to use the dividends from the publicly traded portion of Aramco to fund its PIF. However, it by offering shareholders a lower class of shares, it can keep only its own dividends high. The Kingdom may offer the public a lower class of stock with limited or no dividends, or the Kingdom could offer a similar class of stock with similar or equal dividends. If the Saudis choose the first option, the value of the IPO would be significantly lower, because investors would miss out on Aramco’s tremendous profit. If the Saudis chose the second, the IPO could be huge, because the Kingdom has to ensure that the very large dividends keep coming.
5) Can Muhammad bin Salman’s vision be trusted as the will of the Saudi royal family? Much of the news about Saudi Arabia’s financial plans are currently sourced to Muhammad bin Salman, but is he the authority? Change in Saudi Arabia is a tricky and slow process. The 30 year old Mohammad bin Salman’s proposals are not radical, but they do restructure the Saudi government and reorient its relationship with Aramco. Traditionally, the Saudi royal family has allowed the technocrats to run the oil business, a relationship that has served them well over the years. The word in Saudi Arabia is that if you want something done, get Aramco to do it. This is one reason why former Aramco CEO and current chairman Khalid al-Falih was tapped to run the health ministry in the wake of the MERS scandal. The new plan appears to bring the company under stronger royal oversight, a move which could threaten Aramco’s world-class efficiency.
Yet, Mohammad bin Salman is only 30 years old. His youth presents dual problems. First, he has essentially jumped the line over all of his older cousins but one. Second, in a Kingdom where the decision-makers are traditionally in their 70s and 80s, it may be difficult for many to entrust in someone so young so much responsibility for defense policy, economic policy, and now oil policy. In some respects, the young prince resembles his uncle, King Feisal bin Saud, who prematurely replaced his older brother and led the Kingdom through difficult periods in the 1950s and 1960s to reach great prosperity. Both share a strong work ethic, logging sixteen hour days in the office, and a commitment to improving women’s rights in the Kingdom. Feisal was a quiet champion of female education and built the country’s first schools for girls. Mohammad bin Salman has publicly declared his commitment to changing the laws that prohibit women from driving in the Kingdom.
The two royals differ, however, in personality and temperament. Feisal was stern, quiet, and humble; whereas Mohammad bin Salman is outgoing, affable, and wildly ambitious. Feisal used guarded strategy and his guile and determination to outmaneuver business allies and foes alike. Mohammad bin Salman may be using his friendliness and openness to direct a new strategy in a new time. The younger prince’s character, along with the changes he seems intent on introducing, may land him in trouble with elder family members who still wield considerable influence. On the other hand, he might be just what the Kingdom needs to flourish in the 21st century.
