The Intrigue At The Heart Of The Beijing-Riyadh-Washington Triangle

Authored by Valentin Katasonov via The Strategic Culture Foundation,

Saudi Aramco (the Saudi Arabian Oil Company) is the world’s largest petroleum business. It owns more than 100 oil and gas fields in Saudi Arabia with reserves of at least 264 billion barrels of oil, which is estimated to be approximately one-fourth of the world’s known reserves of this raw material. The company’s production figures do not give the full picture, as data exists only for a few years. But as an example, in 2013 Saudi Aramco produced 3.4 billion barrels of crude oil. Analysts calculate that every year the Saudi company extracts about twice as much oil and gas, in terms of barrels of oil equivalent, as the largest US company ExxonMobil. Interestingly, Saudi Aramco never appears in the rankings of the world’s largest oil producers, since it does not publish financial information such as profit, sales, assets, or market capitalization. Therefore America’s ExxonMobil and Chevron, China’s Sinopec and PetroChina, the Anglo-Dutch company Royal Dutch Shell, Great Britain’s BP, and France’s Total top the rankings. But everyone knows perfectly well that these leaders in the global oil industry are mere dwarfs compared to Saudi Aramco.

Saudi Aramco’s management set off a real bomb in early 2016 when they announced their plans to privatize part of the company through a stock market IPO. The proposal was to sell shares in Saudi Aramco equal to about 5% of the company. But an estimate of the company’s potential market price is needed in order to understand how much this would be in absolute terms. Almost the next day after the announcement of the potential sale of part of the company (in January 2016), the global media published a stunning evaluation by the independent oil analyst Mohammad Al Sabban, a former senior adviser to the Saudi Arabian oil ministry. He estimated the company’s worth at $10,000,000,000,000 (ten trillion USD). For comparison I should add that in 2016 the largest US oil company, ExxonMobil, barely exceeded $350 billion in share capital. And yes, It’s true that later on some of the hype in the assessments died down and more rational numbers were cited, most often $2 trillion. This meant that Saudi Arabia would be able to rake in approximately $100 billion from the sale of 5% of the company. But the company’s biggest trump card isn’t even the current record levels of oil production, but rather the reserves of hydrocarbon raw materials at Saudi Aramco’s disposal. And that’s a number that none of the companies named in the rankings of the global oil industry can even begin to approach.

At present, Riyadh adjusts and verifies the data on the hydrocarbon reserves in the fields owned by Saudi Aramco. Financial reports are painstakingly drafted in the needed formats for a public offering of shares. The company is being restructured to optimize the way it is organized and managed. And finally, a crucial step was taken to lower the taxes on the company’s profits. The traditional tax rate has been 90%, but this year it was set at 50%, which roughly corresponds to the level at which the leading Western oil companies are taxed. Lowering the tax rate raises dividends and makes the company a more attractive target for investment.

But beginning in early 2017, the estimates of Saudi Aramco’s market value have unexpectedly begun to decline. Appraisals began to surface that claimed the company’s share capital was only worth $1.5 trillion, then $1 trillion. The consulting firm Wood Mackenzie estimated Saudi Aramco’s worth at $400 billion overall, bringing it closer to US-based ExxonMobil. And suddenly Western consultants began talking about the need to “discount” the value of the Saudi company, since it is state-owned, and in the securities markets all government issues are by convention sold “at a discount.” They point out that although Saudi Aramco currently pays 50% of its profits in taxes, since the government owns the company anyway it could restore the 90% tax rate tomorrow with a simple stroke of the pen. There is also the fear that oil prices could be low for the next few years, and Saudi Aramco might not be able to generate big profits. But none of that can remotely explain why the valuations of the Saudi company have dropped so precipitously in the past year.

Analysts blame this on the pressure Washington is putting on Riyadh, for reasons that have as much to do with the currency market as the oil market. And the pressure coming from Washington is, in turn, a response to the pressure also being exerted on Riyadh by China, which wants to buy oil from Saudi Aramco in renminbi instead of dollars. China is currently the world’s biggest oil importer, knocking the US out of its former first-place position. China is also the Saudi oil industry’s biggest customer, and Beijing does not want to pay extra for that black gold using American currency. A number of oil exporters that sell to China have already partially or entirely transitioned to settling their accounts in renminbi. Topping that list are Nigeria and Iran. Russia has also recently begun to sell some oil to China for renminbi (although only small percentage as yet).

Saudi Arabia, however, is heavily dependent on the US and has thus far refused to settle its accounts in renminbi. And that rebuff is costing the country dearly: Beijing is gradually finding other suppliers to take Riyadh’s place. The Saudis used to be China’s biggest foreign supplier of oil, but recently Russia has squeezed them out for that number-one spot. If this continues, Saudi Aramco might lose its Chinese market altogether.

Riyadh now finds itself caught between a rock and a hard place. It’s hard to imagine what Saudi Arabia could be hit with from across the Atlantic, should it sell even one barrel of oil for Chinese currency. After all, that would be a direct challenge to the petrodollar, which was born right there in Saudi Arabia in the 1970s, midwifed by the negotiations between Henry Kissinger and King Faisal.

Washington has sternly warned Riyadh to refrain from any ill-considered move to replace the dollar with the renminbi in its transactions with China, lest other players in the oil market follow suit (oil might then be traded for rubles, rupees, rials, etc.) And tomorrow that epidemic of transitioning to national currencies could infect other commodity markets. Incidentally, this year Beijing will begin to trade oil futures priced in renminbi on its commodity exchanges and claims that this is only the first step.

Voices have already been heard within the US president’s entourage that suggest blocking the listing of Saudi Aramco shares on the New York Stock Exchange. Signs have emerged of an organized campaign to short-sell the Saudi oil company. In light of that development, Riyadh has announced that it will put off its share listing until a later date. But its problem isn’t going to go away - Saudi Arabia will still have to make a choice between the dollar and the renminbi.

Although Beijing is upping its pressure on Riyadh, it is also simultaneously offering to directly buy out 5% of Saudi Aramco, while allowing the Saudis to forgo the usual ritual of listing shares on Western stock markets. And China is prepared to shell out a “fair” price (about $100 billion). The Chinese government has already announced that it is forming a consortium of energy and finance companies, plus China’s sovereign wealth fund, in order to purchase a “chunk” of the Saudi company. The Chinese media reports that that consortium is ready to become a cornerstone investor in Saudi Aramco.

Beijing’s winning move in its chess game against Washington has neutralized the US threat to disrupt the sale of Saudi Aramco, while simultaneously pushing Riyadh toward a decision to transition Saudi oil sales to the renminbi.

And so the plot thickens inside the Beijing-Riyadh-Washington triangle of intrigue.

Is The Aramco IPO On The Brink Of Collapse?

Authored by Nick Cunningham via OilPrice.com,

In what could be a humiliating decision, Saudi Aramco is considering not staging an IPO next year as planned, due to the difficulty of pulling off an international listing.

On Friday, the Financial Times reported that Aramco is weighing a different strategy: selling stakes in the company to private investors and sovereign wealth funds. No final decision has been made yet, but there are several potential paths forward, including a public listing on Saudi Arabia’s domestic stock exchange plus a private sale. Or a private sale followed by an international listing, but maybe not until 2019.

Aramco officials tried to beat back the report, insisting that everything is moving forward as planned. “A range of options, for the public listing of Saudi Aramco, continue to be held under active review. No decision has been made and the IPO process remains on track,” Saudi Aramco said in a statement, according to the FT.

However, Reuters echoed the FT, reporting on Friday that Aramco was in talks with a Chinese investor.

Saudi officials, according to the FT, are concerned about the legal risks involved in taking the company public. The powerful crown prince has favored a New York listing, due to the political alliance with the U.S., while some Aramco officials and financial advisors prefer a less risky listing in London. A New York listing could expose Aramco to legal action stemming from Saudi Arabia’s alleged role in the 9/11 attacks—legislation passed by the U.S. Congress in late 2016 authorizes lawsuits from 9/11 victims against Saudi Arabia.

But a London listing is apparently not that much more attractive. Saudi sources told the FT that Aramco would face tough legal scrutiny there as well.

Those roadblocks have led to second thoughts on the IPO altogether, with Saudi officials reportedly now considering a private sale.

After hyping the IPO for more than a year, shelving the plans would amount to a significant climb down for the state-owned oil company.

On the other hand, as Bloomberg Gadfly points out, there are also upsides to a private sale that go beyond the difficulties of listing in New York or London. For instance, if Aramco attracts a disappointingly low sale figure, that figure could remain undisclosed if the sale was private. Also, Saudi Arabia could deepen its ties to Asia if it makes a private sale to major investors in China or India. Finally, Aramco would not have to publish estimates on its oil reserves – a long held state secret.

In addition, Saudi Arabia might have troubles engaging in coordinated production cuts within OPEC if it listed in New York, a practice that might be considered price fixing, and thus illegal.

But, even with all of that said, scrapping the IPO would amount to a defeat. It would also raise deeper questions about the country’s finances and its long-term fiscal health. The IPO has been billed as the largest ever public offering, with Saudi officials boasting that Aramco is worth some $2 trillion, which would translate into around $100 billion for 5 percent of the company. Independent analysts dispute those figures, estimating the company could be worth maybe only half of that.

While the precise figure is up for debate, few doubt it will be large, playing a crucial role in the country’s plan to diversify the economy. Saudi Arabia’s National Transformation Program (NTP) consists of a series of economic reforms aimed at accelerating growth, cutting spending on wasteful subsidies, while also raising tax revenue from non-oil sources. There is a bit more urgency to stimulate the economy because of Saudi Arabia’s sizable budget deficit and the fact that the economy entered a recession this year, in part because of the government’s own austerity measures.

The IPO of Aramco is considered a pivotal move that could address a lot of these problems all at once.  But Saudi officials have been hoping to time an IPO with oil prices trading at least as high as $60 per barrel. However, rebalancing the oil market and lifting prices has taken much longer than expected. In that context, it is no surprise that the Saudi King made his first visit to Russia earlier this month, desperate to make the OPEC deal work, not only for higher oil prices in the near-term, but to set the state for the country’s highly-anticipated IPO.

A decision not to take Aramco public would be a major setback.

UK PMs Push Back As Regulators "Bend The Rules" To Accommodate Saudi Aramco IPO

All IPO’d up and no place to go? UK portfolio managers with $6.9 trillion resist rule bending by regulator to achieve Aramco London listing

Another potential problem for the world’s biggest ever (potential) IPO…

A lobby group representing UK portfolio managers with $6.9 trillion AUM has warned the UK financial regulator that bending the rules to accommodate Aramco’s IPO will damage London’s status as a global financial centre.

In a letter to the head of the Financial Conduct Authority (FCA), the embattled Andrew Bailey, the Investment Association (IA) argued that it threatened the “high standards” of London’s listing regime.

In “Funds fire broadside over Saudi oil float”, the Sunday Times noted that “Britain’s largest investors have turned up the heat on the City watchdog over its controversial plans to allow Saudi Arabia’s oil giant to float in London.”

Besides the tricky issue of its oil and gas reserves (especially the Ghawar field), the IA argued in the letter that “For the premium segment of the UK main market, investors must have confidence that a company is run for all shareholders, not just the major or controlling shareholder.”  

Selling only 5% of the share capital, rather than the prescribed 25%, is one of the major stumbling blocks in terms of the listing regulations.

According to the London Stock Exchange, a premium listing meets “the UK’s highest standards of regulatory and corporate governance.”

However, regulations are made to be broken…not just by banks and funds…but (when it suits) by the regulator itself, it seems. The FCA’s Bailey has proposed a new category of premium listing which would be tailor-made for government-controlled companies, like Aramco.

According to Bailey, investor safeguards would not be “weakened.”

It turns out that Bailey proposed the new category of premium listing after meeting and having conversations with Aramco and its advisers. As the Sunday Times reports, Bailey “emphasised during those conversations that we (FCA) were reviewing the listing regime.”

Perfect timing.

Clicking on the “About Us” tab on the FCA’s website, the regulator champions its wish that “consumers can place their trust in transparent and open markets” under the heading “Enhancing Market Integrity”.

Having said that, there is an option to click “No” after the question “Was this page helpful?”

In Bailey’s defence, it is possible that he’s being lent on by the British government to find a way to accommodate the high-profile Aramco IPO.

After all, Theresa May travelled to Saudi Arabia in April with the CEO of the London Stock Exchange, Xavier Rolet.

Here is Mrs May making the introductions in Riyadh on 5 May 2017.

Given the stringent anti-trust laws in the US and Aramco’s pivotal role in the Opec cartel, a US listing is also looking problematic. So, it’s no wonder that chatter about delays to the IPO or a private sale to China, or a consortium of sovereign wealth funds, has gathered pace.

Aramco denied such reports on Twitter over the weekend “All listing venues under review for optimal decision, IPO process is on track for 2018.”

If three denials are forthcoming, maybe we’ll know what’s really happening.

In the meantime, it’s embarrassing to the Saudi regime and not good news for improving its short/medium term cash flow problem.

Saudi Aramco Reportedly Shelves IPO In "Face-Saving" Move

We noted a month ago that the long-awaited Saudi Aramco IPO, scheduled for mid-2018, could be delayed to 2019, but now, according to The FT, Aramco is considering shelving plans for an IPO altogether in favor of a private share sale to the world’s biggest sovereign wealth funds.

The FT notes that talks about a private sale to foreign governments - including China - and other investors have gathered pace in recent weeks, according to five people familiar with the IPO preparations, amid growing concerns about the feasibility of an international listing.

The Saudi state oil company has struggled to select a suitable international venue for its shares, as New York and London have vied for what has been billed as the largest ever flotation.

The company would still aim to list shares on the kingdom’s Tadawul exchange next year if they pursue the private sale, the people said.

The latest proposal by the company’s financial advisers was described by one of the people as a “face-saving” option for Saudi Aramco, which has worked on plans to list its shares internationally for more than a year.

Desk chatter included comments that the Saudis were anxious about the level of due diligence and transparency involved in a public offering.

A Saudi Aramco spokesperson said:

“A range of options, for the public listing of Saudi Aramco, continue to be held under active review. No decision has been made and the IPO process remains on track.”

The planned listing of a 5 per cent stake in Saudi Aramco is the centrepiece of an economic reform programme led by Saudi Arabia’s powerful crown prince Mohammed bin Salman, who is keen for a 2018 IPO. He has said the company could be worth $2tn although a Financial Times analysis put the valuation figure at around $1tn.

An economic recession in the kingdom is piling pressure on the prince, the king’s son and next in line for the throne, amid calls for the government to increase investment and ease austerity. As we noted previously, there could be more at play here...

Some analysts view the possible IPO delay as a sign of the problems Aramco and the Saudi government currently face. A lack of transparency, issues with its oil and gas reserves, and the role of the Saudi government as the main stakeholder have all been suggested as the reason for this possible delay. Most of these suggestions, however, are based purely on issues surrounding the IPO itself. The true reason for this delay, however, likely hides among the intricate societal and economic problems in the Kingdom.

One obvious reason for a delay is the still-fledgling global oil price. A higher price setting—above $60 per barrel—would surely drive up the overall interest in the IPO. As long as OPEC and non-OPEC members, such as Russia, are still struggling to get a grip on the oil market, the potential for disaster looms. Needless to say, an oil price slump would have a detrimental effect on the expected revenues of the IPO.

The analysts, it seems, feel no need to look any further than this simple oil price explanation, but several other key factors should be addressed…

The impact of an influx of $1-2 trillion into the current Saudi economy is bound to have a significant impact. The implementation of Saudi Vision 2030 is broad and ambitiously planned. A full diversification of the economy is needed to guarantee work and salaries for future young Saudis, with the end of government subsidies or handouts.

A multitrillion investment scheme in a rather small local economy will likely result in total disorder, inflation and possibly ineffective investment schemes. The attractiveness of investing the total amount could lead to staggering inflation, higher costs and superfluous projects being realized.

A delay of such an influx of cash seems to be more and more attractive, giving the Saudi government and local industries more time to adjust and put in place the right steps for a sustainable and commercially attractive economic future.

We previously indicated that China could step in as a financial savior. With around 8.5 million bpd of crude oil imports, which is 2.5 million bdp more than in 2014, the attractiveness of having a stake in Saudi Aramco is huge. Even though an energy diversification program is in place, China’s imports from Saudi Arabia are going to increase. For Beijing, a stake in one of its main suppliers is a very attractive proposition. It will not only lock in Saudi crude oil and petroleum product exports to China but it will also provide some additional political and strategic clout in the heart of the Middle East.

There will, of course, be a few big bankers who will be upset as their billion dollar fee/commission just went up in smoke, but this may give MBS some breathing room - without the undue attention of an IPO -  as he deals with the nation"s economic slowdown. However, coming just a few days after the Saudi king"s trip to Moscow, the timing of this leaked information seems interesting at the least.

Oil Giants At Odds As Saudi-Russian Ties Improve

Authored by Nicholas Trickett via OilPrice.com,

Oil Royalties

Saudi King Salman bin Abdulaziz Al Saud visited Moscow last Wednesday, the first such visit by a Saudi monarch since the Soviet Union collapsed. Two topics dominated the agenda: Syria and oil. Saudi Arabia has likely found itself in the uncomfortable position of accepting Assad’s grip on power into the future in hopes of drawing Russia further away from Tehran in trying to resolve the Syrian Civil War. To that end, Saudi Arabia is reportedly buying Russia’s S-400 missile system and signed a Memorandum of Understanding (MoU) on industrial cooperation in the defense sector. Saudi Arabia is trying to use its leverage – financial resources – to influence Russia on other priority areas, namely Iran. As expected, energy played a big role during the visit and deals associated with it.

Reports say that $3 billion in projects have been agreed to between the two countries, including a $1.1 billion petrochemical plant to be constructed in Saudi Arabia by Russia’s Sibur and an agreement between Saudi Aramco and Gazprom Neft on drilling technology. A $1 billion investment fund for energy and technology was also announced. Russia and Saudi Arabia have worked together to try and raise crude prices by lowering production 1.8 million bpd with other producers. But these cuts have disproportionately affected Saudi Arabia’s standing on Asian markets and Russia’s state oil major Rosneft has jumped at the chance to grab market share and assets in Asia. As is so often the case, today’s solutions laid the seeds of tomorrow’s conflict. Saudi Aramco and Rosneft are positioning for a post-cut market, and Saudi Arabia may be offering cooperation to spite Qatar as well as temper the risks of its increasingly active foreign policy and proxy wars with Iran.  

China Syndrome

China has understandably played the leading role in Russia’s attempts to broaden its role as an energy supplier in Asia. Rosneft recently sold 14.16 percent of its shares to CEFC China Energy for about $9 billion by way of the Qatar Investment Authority and Glencore. The move reflected the challenges financial sanctions have created for the firm as well as China’s growing clout as an importer. Chinese demand hit 11.67 million barrels per day (bpd) and had risen 6 percent year-on-year in July. Rosneft was smart to finalize supply agreements with PetroChina set to boost its daily exports to China from 400,000 bpd to 600,000 bpd next year. Rosneft also signed an agreement with CEFC to jointly explore for Eastern Siberian reserves and increase direct deliveries to China.

These deals play into Russian-Saudi competition for the Chinese market. China’s oil imports are up 12.3 percent year-on-year, but cuts haven’t hit Russian exports. Saudi oil exports to China hovered at 1.03 million bpd so far this year, a 1.7 percent drop. Russia’s stood at 1.16 million bpd, a 13.2 percent increase. After closing the CEFC deal, Rosneft announced it expected to deliver 40 million tons of oil to China by year’s end, a 9 million ton increase on their expected deliveries. That would average out to around 800,000 bpd from Rosneft alone, assuring Rosneft’s dominant control over Russian supplies to the Chinese market. The increase in supplies has paralleled a long-standing project to develop a refinery in Tianjin. But the project, first announced in 2009, has no clear end date despite a press release concerning its implementation with CNPC in January.

Saudi Arabia has disproportionately lost share in China for several reasons. For one, it bears the burden of cut compliance. Angola overtook it because of China’s dominant position there and didn’t feel the need to comply. For another, Russian firms have built up new assets and export capacity in Eastern Siberia and the Far East. Russian blends have more physical access to Asia-Pacific markets, making them more competitive than they’ve historically been. Finally, spreads on the market between light and heavy crude have narrowed, making Russia’s lighter crudes more competitive against Saudi heavy crudes. But Saudi Arabia is not without a means of responding.

Saudi Aramco reached a refinery deal with state-owned China North Industries Group Corp. in May around the Belt and Road summit. Though the refinery is smaller than that proposed in Tianjin, Saudi Aramco has one considerable advantage over Rosneft: it lacks the same messy history Rosneft has with China’s state firms and it’s not sanctioned. CEFC was a logical partner for Rosneft in China because, unlike CNPC and state-owned players, it could more easily afford to take the sanctions risk. It can also dangle shares to China. Further, the refinery deal signals a willingness to work with China’s independent refiners. These so-called “teapot” refineries have driven demand growth and provide Aramco greater diversity in business opportunities longer-term than Rosneft’s relationships with CNPC and CEFC afford it.

Ever since the company started talking about an IPO of 5 percent of its shares, China has been a logical partner. A sale to Chinese firms in exchange for investments into China’s downstream would be huge win. The Kingdom also signed a similar agreement for an investment platform with China worth $20 billion in late August, just as it became clear CEFC would acquire stakes in Rosneft. That throws a fair bit of shade on Russia’s $1 billion fund agreed to this last visit. Topping it all off, King Salman and Aramco also signed deals reportedly worth $65 billion with China in March.

Judging Saudi Arabia’s position against Russia’s on daily barrel counts alone is misleading. But Rosneft has signaled intentions to buy some Sinopec assets in Argentina, a move presaging greater interest in China’s petrochemical market. To access that market, it will need Sinopec in particular, a state firm, to ignore sanctions risks. If Aramco can beef up its relationships with private firms and independent refiners, it can limit Rosneft’s room to develop synergies between upstream and downstream operations on the Chinese market.

The Kingdom and India

Rosneft made a major splash by acquiring 98.6 percent of India’s Essar Oil with partners Trafigura and United Capital Partners, gaining the company’s refinery in Vadinar, a port, and 3,500 filling stations. The Vadinar refinery has a daily capacity of 400,000 bpd and assures Rosneft access to India’s growing oil market. However, the sale was meant to deleverage 60 percent of the Essar Group’s debt. There remains the perception that Indian firms lost out on the country’s growing downstream sector. India’s Intelligence Bureau and Home Ministry also red-flagged the deal on security grounds, citing the port’s proximity to the border with Pakistan and nearby military installations. Whatever the reason, there’s clearly significant concerns in India about the sale.

Saudi Aramco was bidding for the Vadinar refinery but didn’t match Rosneft’s willingness to pay off billions in Essar’s debt. As King Salman was in Moscow on Wednesday, Aramco issued statements that it plans to open an Indian subsidiary in the coming weeks. Back in June, the company showed its interest in exclusive talks with Indian counterparts like Indian Oil Corp., Hindustan Petroleum Corp., and Bharat Petroleum Corp. for a stake of a proposed 1.2 million bpd refinery on India’s west coast. Prime Minister Modi is likely facing pressure from two directions on the country’s energy security needs: China has thrown considerable financial resources at Saudi Arabia and now owns shares of Rosneft and India’s firms would be better positioned on Asia-Pacific oil markets with a more diverse array of international partners.

Saudi Arabia’s exports to India dropped 8.4 percent in the first half of 2017 as Russia has begun exporting more. Rosneft already owns an asset, though the US Treasury Department did throw up roadblocks last year. That places it firmly ahead on India’s market. But Saudi Aramco is most likely taking a hit now in the name of driving up prices for its public listing, which will provide a cash infusion exponentially larger than that gained from Rosneft’s privatization of shares last December considering estimates for Aramco’s market valuation. India is also signing more supply deals for exports from the US. Aramco has much better relationships on the U.S. market, particularly evidenced by its complete ownership of the Port Arthur refinery and its 600,000 bpd capacity. The U.S. Senate is looking to scrutinize any potential Rosneft acquisition of Citgo by way of Venezuela. Needless to say that Rosneft has few friends in the United States these days.

The ASEAN+ way forward

Aramco has moved to secure its position in Southeast Asia ahead of its IPO even though production cuts have led it to cut Southeast Asian exports to protect market share on larger markets like Taiwan, South Korea, and Japan. Despite lower exports, Saudi Aramco bought a 50 percent stake of the PRPC Polymers project from Petronas Chemicals Group Berhad (PCG), signing a strategic partnership agreement. Aramco is investing $7 billion into the project, slated for completion in 2019, and will provide up to 70 percent of the petrochemical plant’s crude oil needs.

Last December, Aramco reached an agreement with Indonesia’s Pertamina for a $5 billion expansion and 45 percent stake of a refinery. The expansion, slated for completion in 2021, will put the refinery’s capacity at 400,000 bpd. Aramco sources most of the refinery’s crude supplies. Pertamina and Rosneft are reportedly expected to finalize a refinery deal at the end of this year for a new refinery at the same ownership split, but Pertamina is unlikely to get access to Russian upstream projects.

Russian crude blends have been more attractive to refiners in Northeast Asia but Saudi Arabia has defended its turf. Aramco held on to 40 percent of Japan’s imports in the first half of 2017 without any sustained gains for Russian crudes and agreed to add 1.9 million barrels of crude oil storage on Okinawa. The storage site on Okinawa is also used to deliver crude oil cargoes to South Korea and China. Rosneft has no such relationships, reportedly dangling shares before last year’s privatization in exchange for developing joint projects and creating joint ventures at different stages of production and marketing. But Japanese firms linked political concessions regarding the Northern Territories to any deal, a nonstarter.

Saudi Arabia is mulling the construction of 17.6 gigawatts worth of nuclear power plants by 2032 with the help of firms from China, South Korea, and France. South Korea is set to hold a ministerial visit on October 26 to discuss cooperation in several sectors, including nuclear power. As Saudi Arabia works out the tenders for nuclear projects, it has an opportunity to cement its energy security relationship with South Korea. Nuclear power will free up oil used for domestic power generation, possibly putting downward pressure on prices in Asia-Pacific markets as demand growth slows in the medium-term. Russia’s Rosatom has not gotten any attention for Saudi contracts.

The best laid plans of oil giants

Cooperation is set to deepen between the two countries’ energy sectors, but Rosneft and Aramco have different strategic outlooks that suggest that many of these moves are tactical on Saudi Arabia’s part and opportunistic on Russia’s part.

Most of the deals signed were MoUs, important symbols but relatively insubstantial commitments from either party unless more specifics emerge. Deals focused on Eurasia Drilling Co. and Novatek’s Arctic LNG 2. MoUs touched on Sibur, Gazprom, Gazprom Neft, and Lukoil’s trading arm Litasco. There was talk of cooperation between Rosneft and Aramco on crude oil trades, but there is a fundamental mismatch between the two countries’ intentions: Russia wants investment without political strings attached and Saudi Arabia wants Russia to back off of Iran.

Aramco targeted Rosneft’s competitors for memoranda and deals that would lead to projects for several reasons. Were Gazprom to gain access to Saudi fields or allow Aramco into Russia, it would gain considerable clout as a negotiator and lobby for policy pertaining to Saudi Arabia. Sibur is owned by Gennady Timchenko, a close friend of Putin’s who was named chair of the Russia-China Business Council. China has shown policy success by investing into projects owned by those close to Putin while balancing against drawing too much sanctions scrutiny. In short, Aramco wants to give other players in Russian policy circles a boost against their primary Russian competitor.

The U.S. Treasury Department revised its sanctions prohibitions on new debt on September 29, tightening the limits on Rosneft’s ability to finance major deals with U.S. partners. EU sanctions continue to target state oil firms like Rosneft rather than gas and remain an impediment. Rosneft’s debt to capital ratio has improved in the last year, a good sign for its fiscal health but not necessarily enough to avoid the byzantine dealing it went through for the privatization of shares last December. For its part, Aramco is set to benefit from up to $120 billion in debt Saudi Arabia is aiming to issue by 2020 as the country looks to increase its investments into renewables like solar. That debt alongside the IPO is likely to happen sometime late next year or early 2019 and will provide a dramatic infusion to state coffers to finance reform projects aimed at reducing Saudi Arabia’s oil dependency.

Aramco is set to take its trading operations further afield to begin trading non-Saudi crude oil with an eye towards feeding its growing range of refinery and petrochemical assets. The company is retreating to advance by targeting competitive moves into downstream projects and trading to minimize the effects of losses in market share. The issue remains that higher oil prices are needed for the IPO to maximize the money raised to finance projects like a $50 billion renewable energy initiative that would increase the amount of oil available for export.

Rosneft would also like higher prices, but has already sold all the shares it can while remaining a state-owned firm. CEO Igor Sechin is also fighting to undermine any institutional or informal constraints on his power in the country. Gazprom’s piped gas export monopoly, for example, is in his crosshairs. As a result, Rosneft has no time to waste. It’s going full bore, trying to acquire assets abroad to break out of the financial limitations of sanctions and grow and larger portfolio, expanding Russia’s foreign influence. There’s a reason the company has maneuvered in Venezuela, Kurdistan, and Libya in the last year.

Rather than count barrels, it would be best to consider how the two firms’ interests differ. Rosneft is feeding large amounts of military spending in Russia and is angling for greater power domestically. To a much greater extent, Aramco is the state in Saudi Arabia. It can afford a more measured approach given it always has the nuclear option: a radical break with production cuts and massive increase in production. As such, Aramco is preparing for an Asia-Pacific market where diversifying petrochemical assets will outweigh crude oil market share for profits. Rosneft is moving in the same direction, but may find that sanctions and domestic rivalry will hinder its attempts. Sechin has been on a winning streak for some time, but the elections may change things up. Aramco doesn’t have that problem looming on the horizon.

Could Lack Of Transparency Hurt Aramco's Trillion Dollar Valuation?

With officials calling Saudi deputy crown prince bin Salman"s $2 trillion estimate of Saudi Aramco valuation as "unrealistic and mind blowing," OilPrice.com"s Cyril Widdershoven notes the primary discussion taking place is the overall level of transparency offered by Aramco’s leadership, which is supported by the Saudi government.

Saudi Aramco’s IPO, slated to raise between $100 billion and $400 billion from a 5 percent stake in the company, will continue to make headlines until its launch. Lately, discussions on the valuation of Aramco have been intense, and the jury is still out regarding an exact price. Aramco’s IPO will be a game-changer, propelling the world’s largest National Oil Company (NOC) into a league of its own on the financial markets. The current market capitalization estimates of $1-2 trillion are based on valuations of Aramco’s hydrocarbon reserves carried out by independent consultants. These estimates put the giant oil company far ahead of any other publicly owned company. Two major questions remain to be answered however, one of which has been largely ignored by the mainstream media.

The primary discussion taking place is the overall level of transparency offered by Aramco’s leadership, which is supported by the Saudi government. After several days of attending the GCC Petroleum Media Forum (GCCPMF) in Abu Dhabi, attended by all GCC ministers of oil, including Saudi minister Khalid Al Falih, and a long list of government advisors, the issue of transparency has yet to be solved. Gulf oil ministers and CEOs still hold a very conservative idea about financial and operational transparency. There have been minor attempts by Aramco, ADNOC, and QP to open more data and insights to the financial world and media, but the world’s largest oil company remains far from transparent. When asked about the Aramco IPO and Saudi Vision 2030, the respective Saudi officials, including Khalid Al Falih, only produced basic media statements, already largely published in the Arab and global media outlets. Even the fact that the Forum was also meant to present a new OPEC-Abu Dhabi based data outlet, no real new information on reserves, production figures, or investment cycles were presented. Analysts still need to rely on figures presented by the existing outlets, OPEC-IEA-EIA-EIF.

Aramco’s IPO still falls short when it comes to accurately representing the level of reserves, operational figures, and income that we are used to when assessing international oil companies (IOCs) or independents. Yes, Aramco has increased its insights into what many consider the Holy Grail of the oil sector, aka Saudi Arabia’s oil and gas reserves (P1-P3-P5), but a lot still needs to be done to gain the same level of confidence as analysts can have with Exxon, Shell, BP, Apache, Tullow or Statoil. The lack of criticism by international media or analysts in regard to the Aramco IPO is startling. Most analysts have simply duplicated the assessments of Gaffney, Cline, and Associates, part of Baker Hughes and Dallas-based DeGolyer and MacNaughton, which have been published by Aramco itself.

Questions still remain on the real facts and figures. Ongoing criticism by the U.S. Securities Exchange Commission (SEC) on the reserves reporting of IOCs, such as Exxon, should be a cause for skepticism in the market related to the overall positive reporting currently in place. Until now, no real insights have been given on the depletion rate of Saudi Aramco’s fields, especially the Al Ghawar field. Taking unofficial assessments, such as a report by Simmons & Simmons years ago, decline on most Saudi producing fields could be above average. Without these insights and facts, it should be a major point of concern for investors assessing the IPO.

At the same time, there is an even more critical issue which is rarely addressed. Saudi Aramco, as an NOC, is fully integrated into the geopolitical and financial discussions of the Kingdom. At present, Aramco’s production and export strategies are 100 percent linked to the Kingdom’s overall geopolitical aspirations. As one analyst stated years ago, the Kingdom’s power in the world totally depends on its crude oil reserves and production figures. Even while Saudi deputy crown prince Mohammed bin Salman’s Saudi Vision 2030 is trying to diversify the nation’s economy for the era beyond oil, Riyadh’s geopolitical impact will depend on its crude oil potential through the next 40-50 years. The set-up of the Aramco IPO should be assessed against this backdrop. Offering 5 percent of Aramco doesn’t mean that the company will change into an (N)IOC. The majority shareholder is still the Kingdom itself, even though the ownership will officially be transferred to the Saudi Public Investment Fund - a 100 percent state-owned and regulated sovereign wealth fund (SWF).

Playing devil’s advocate; by offering a 5 percent stake in Aramco, Riyadh is not offering a say in the company, its operations, or an insight into its reserves potential. The only strategy currently in place is using the vast international interest for Aramco as leverage to access financial markets to counter the current use of Saudi’s vast international financial holdings. This strategy is working, and for this Mohammed bin Salman needs to receive full credit. The Saudis will not offer any real say in the operational and strategic decision-making process of Aramco, especially as it is the main geopolitical power instrument the Kingdom holds at present. In stark contrast to IOCs or independents, where minority shareholders can and will demand a say in the future of their investments, Aramco’s future will very much remain in the hands of Riyadh.

For shareholders used to investments in companies that are solely focused on setting up structures to increase ROI, shareholder value, or dividends, the Aramco IPO will be a difficult nut to crack. When assessing the value of your multibillion investment in the IPO, how are you going to assess future return on investments or dividends if your majority shareholder is not only interested in return on investments (financially) but also has a geopolitical interest? How are you going to deal with Saudi Aramco’s unilateral decision to play the oil market according to Riyadh’s unilateral political decisions? Investors will need to be fully intertwined with the inner-circle of the royals to predict and assess possible changes in Saudi strategy before it hits the market. At present, most of the investors showing an interest have an immense lack of knowledge of Saudi politics, power-structures, or even energy strategies. This situation doesn’t bode well. 

Saudi Aramco’s IPO will be a market shaker of unknown proportion. Its overall financial impact will be immense as, whatever the outcome of the specific IPO, the Kingdom is already using its leverage to gain access to new investments. The Asia trip by King Salman last month is one of the clearest results of the IPO’s leverage build up. Most deals in China, India, and Indonesia were linked to Aramco, aimed at building bridges between Asian investors and the Saudi NOC. More interesting, however, will be the decisions of international financial institutions, knowing that they will not have any say in the future of the company. The Kingdom will never allow Aramco’s strategy to be changed by ‘normal’ global financial indicators. Aramco’s IPO is already being used as a political instrument of the Kingdom. Increased investments in Aramco or the Kingdom will be strategically placed by Riyadh to mitigate perceived geopolitical and economic risks.

Investors should be aware that Aramco’s price settings or production volumes will not change from the pre-IPO era when entering the IPO market. Saudi oil is, at present, the only sword in the armament of the Kingdom, mainly to be used to support the country’s interests. ROI or dividends will hold little to no importance if the survival of the Kingdom’s ruling structure is being threatened.

A $500 Billion "Hitch" Emerges In The Saudi Aramco IPO

As Saudi Arabia"s deputy crown prince pushes his nation"s Vision 2030 economic overhaul and crows of the $2 trillion Saudi Aramco valuation (ahead of its potential IPO), WSJ reports that officials at the state-owned oil company are using internal value estimates to $1.3 to $1.5 trillion, calling bin Salman"s estimate "unrealistic and mind blowing."

Since deputy crown prince Mohammed bin Salman announced the stock-offering plan and his $2 trillion estimate early last year, insiders and outsiders have questioned how he arrived at that number.

Source

About two dozen employees have been working since last year to try and figure how to take Aramco public, and have been working with Western consultants to explore ways to restructure Aramco to maximize its value, say people familiar with the process. The team has determined several variables - or what some call “levers” - likely to affect the price investors will pay for shares of the world’s largest oil producer, according to internal documents reviewed by The Wall Street Journal and people familiar with the process.

But, as The Wall Street Journal reports, no matter how they pull those levers, which include the price of oil and Saudi tax policy, Aramco’s projected value tops out at about $1.5 trillion, these people say.

One such lever was a major tax reduction (but even then it didn"t add up to bin Salman"s $2 trillion guess...

The Saudi government last month said it is reducing Aramco’s tax rate to 50% from 85%, bringing its tax rate closer to the level of the world’s biggest oil companies such as Exxon Mobil and Royal Dutch Shell.

That move would result in higher dividends for potential shareholders, and it brought Aramco’s internal value estimates to $1.3 trillion to $1.5 trillion from about half a trillion dollars, say people involved in the process.

By selling up to 5% of shares in an initial public offering targeted for next year, the government plans to raise billions of dollars that it can use to invest in other industries as part of a plan to reduce its heavy dependence on oil. The valuation discrepancy raises new challenges for a deal that is already fraught with complexity and facing opposition within the ranks of the kingdom’s government bureaucracy, according to people familiar with the matter.

One Aramco official called the figure “unrealistic and mind blowing.”

Questions about Aramco’s valuation surfaced earlier this year when a report for potential investors prepared by oil-industry consultant Wood Mackenzie Ltd. put Aramco’s value at around $400 billion, according to a client who attended a private Wood Mackenzie briefing. Saudi government officials say Aramco’s high reserves and low costs should make the company attractive to investors.

“Our profitability is higher than others and the interest we have received so far is huge,” said one official who defended the $2 trillion number.

Some officials inside the company and in government have privately suggested reevaluating the listing, say people familiar with the matter, and perhaps reducing its size or delaying it. So far,  Prince Mohammed and his staff seem unlikely to do so, say people familiar with the matter.

“This IPO will happen regardless of the valuation they may receive,” according to the government official who called the $2-trillion-dollar number “mind-blowing.”

Moelis Wins Saudi Aramco Advisory Mandate: World's Biggest IPO

In what will be the biggest victory in the brief history of Ken Moelis" relatively new New York-based independent investment bank, Moelis & Co., moments ago the FT has reported that Moelis has won the advisory mandate for the planned IPO of Saudi Aramco. 

As the FT notes, "winning the hotly contested mandate represents a coup for the boutique investment bank, which was founded by Ken Moelis in the midst of the financial crisis in 2007." As for the potential for advisory fees, they are - in a word - huge: the Saudis hope to turn the state-owned oil group into the world’s biggest, most valuable publicly traded company, with a valuation of about $2tn. As the FT also adds, citing people close to the IPO planning process, the sale of a 5% stake should happen next year, although the number of shares sold could increase, although depending on the price of oil, the timing could slip.

A quick recap on the strategy behind the Saudi plan to take the company public:

Saudi Aramco’s IPO is part of a transformation plan, envisaged by Saudi Arabia’s power broker deputy crown prince, Mohammed bin Salman, which seeks broad-based privatisation to boost employment and diversify the kingdom away from oil. Prince Mohammed believes the privatisation could value Saudi Aramco at $2tn.

A successful flotation aims to use the IPO proceeds for investments in non-oil industries in order to wean the country off its most precious resource.

Banks, advisory firms and consultancies have scrambled to secure work on the IPO since Saudi officials announced their intention a year ago. JPMorgan, which has been Saudi Aramco’s commercial banker for years, and Michael Klein, a former star Citigroup banker, are working with the Saudi authorities on a broad range of matters including the IPO.

It was not immediately clear was the fee structure granted to Moelis will be, but even a sizable haircut on traditional advisory fee assignments will be a huge windfall for the investment bank.