By Devanshee Dave
Having the capacity to produce 12 million barrels of oil every day along with the rights to at least 15% (260 billion barrels) of total worlds recoverable oil resources, Saudi Aramco is a state owned Saudi Arabian Oil Company. The 31-year-old crown prince of Saudi Arabia Muhammad bin Salman (MBS), diced the decision to sell 5 percent of companys worth in Initial Public Offering (IPO), which is estimated to worth around $2 trillion. The IPO now caters eyes on itself by the global oil investors.
The historical story of Saudi Aramco
The seed of the Saudi Aramco was sown as an American Oil Company. On 29th May 1933, an oil concession agreement was signed between Saudi Arabia and Standard Oil Company of California (SOCAL). To manage the concession from the King of Saudi Arabia, the company created a subsidiary company named as California Arabian Standard Oil Company (CASOC). CASOC discovered oil in 1938. In 1944, CASOC was transformed to Arabian American Oil Company (ARAMCO). In 1952, headquarter of Aramco was shifted to Dhahran from New York, which reflected the important role of Saudi Arabia in the company.
Till 1972, Aramco was co-owned by Standard Oil of California, Texaco, Standard Oil of New Jersey (now ExxonMobil) and Standard Oil of New York. To own the company, the Saudi Government started buying shares of Aramco and as a result in 1980, it had purchased all the shares. The company was handed over to Saudi Arabia in 1988 and was renamed as Saudi Aramco.
The big fat IPO
Saudi Aramco would be the biggest IPO in the world if it goes public. The last biggest recorded IPO was of Chinese company Alibaba in 2014. The Aramco is four times more this e-commerce company with a worth of $100 billion which will increase the companys worth to $2 trillion. As per Forbes and Reuters, J. P. Morgan and Michael Klein have been advising Aramco in the matter of financial restructuring for the IPO process. The investment firm Moelis & Co and Evercore have been selected as the independent advisors and J. P. Morgan, Morgan Stanley and HSBC are appointed as underwriters for this IPO, who will look after the smooth processing of the whole process.
It is likely to get listed in Saudi Arabias local stock market of Riyadh, known as Tadawul. Apart from that the race for the IPO is on between New York Stock Exchange (NYSE) and London Stock Exchange (LSE). However, the lawyers of Aramco are leaning towards LSE listing as NYSE requires to be met with certain criteria to list IPO, one of which risks Aramcos classified information. 5% of the Aramcos stake would be listed for IPO and the ownership of the remaining 95 percent would be transferred to Saudi Public Investment Fund (PIF), an organization established in 1971, with a view to make Saudi economy diversified and less dependent on oil and gas.
Vision 2030 and oil prices
Saudi crown prince has set a vision 2030 to diversify Saudi Arabias economy from oil and in that, Aramcos IPO will play a vital role in this movement. As per an article on CNBC, because of the slump in oil prices from $100 per barrel in mid-2014 to $50 per barrel (by 17 percent) in the beginning of 2017 , Saudi Arabia has lost $1 trillion investment. The main cause behind it is the imbalance between demand and supply and the expansion of U.S Shale. So, focusing on oil and gas will help Saudi Arabia to stabilize the economic growth.
The IPO is most probably going to occur in late 2018 or early 2019. As per Marketwatch.com, there are two kinds of relationships between IPO and oil prices. The higher the oil price, the higher the price of IPO and in many cases it can bring opposite reactions between price hike and IPO. But in this case, there are already precautions taken. The first one is that the underwriters are to take care of the financial nitty-gritty and the second one is the reduction of the tax rates on Aramco, from 85 percent to 50 percent, especially to appeal investors, as lower taxes say that the company can offer higher dividends. Saudi Arabia is the single most powerful country in the OPEC nations, so this giant IPO is likely to increase the oil prices.
This is how India will be affected
Saudi Arabia is the largest oil importer country for India. As per The Diplomat, India imports nearly 20 percent of its oil from Saudi Arabia and from total imports from Saudi Arabia, 90 percent accounts for oil. India is also associated with the Trans-Pacific Pipeline project, to transport oil from central Oman to Egypt, where Saudi Arabia plays an important role being a dictator of oil reserves. So, if the price hike happens in future, India being a great consumer of oil, may face oil price inflation.
Featured Image Source: Kremlin.ru