Desperate times in Saudi Arabia as oil minister fired, plan to privatize Aramco discussed

Saudi Arabia looks increasingly desperate, as the fall in oil prices has diminished the ability of the thousands-strong royal family to buy off potential opponents and subsidize the lifestyles of its subjects.  With an ailing king, a 31-year-old prince, Mohammed bin Salman officially the deputy crown prince but considered the de facto ruler is proposing dramatic plans to shake up the financial foundations of the kingdom.  At best, they are optimistic; at worst, foolish.

Over the weekend, veteran oil minister Ali al-Naimi was fired, a signal of big changes coming.  In the interim,  Aramco chief Khalid al-Falih replaces him.  No immediate changes in Saudi policy toward OPEC, the oil cartel that has lost control over the world’s oil supply, thanks largely to fracking, are anticipated.

But it is Aramco, which accounts for 11% of the world’s total oil production, that may be next for dramatic changes.

The UK Telegraph:

Saudi Arabia is planning a three-way foreign listing in London, Hong Kong, and New York for the record-smashing privatisation of its $2.5 trillion oil giant Aramco, anchored on a triad of interlocking ties with three foreign energy companies.

The Saudi authorities hope to entice ExxonMobil, China’s Sinopec, and potentially BP, into taking strategic stakes, offering them long-term access to upstream operations in return for cutting-edge technology or refinery deals, according to sources close to Saudi thinking.

The $2.5-trillion valuation is a phantom based on a plan to sell 5% of Aramco at $100 to 150 billion.  Because Saudi Arabia finances its government via extracting royalties and taxes from Aramco, and doesn’t use Western accounting standards, there is every reason to suspect that Aramco would never throw off sufficient cash to justify a valuation anywhere close to that figure.

Robin Mills from Qamar Energy said the market value of Aramco is probably just $250bn to $400bn, given that the state creams off a royalty rate of 20pc and tax of 85pc. Saudi officials insist that a fair deal could be found for shareholder dividends, even though the Saudi constitution stipulates that Aramco's 260bn barrels of estimated reserves belong to the kingdom.

In a sense, any purchase of Aramco is an option play on a future oil boom. At current prices there would be no money for dividends: the Saudi state is consuming all the revenue, and burning through more than $100bn a year in foreign exchange.

Then there is the little matter of sovereign risk, what with Aramco’s reserves concentrated in Shia-dominated Eastern Saudi, coveted by Iran and potentially rebellious against the Sunni monarchy.

Prince Mohammed seems like a brave modernizer, anxious to wean Saudi Arabia from its dependence on its oil reserves, which are steadily depleting at a rate of 2 to 4% a year, depending on whom you believe.

The vast IPO is the spearhead of his “2030 Vision” to break the country’s “addiction” to oil and diversify, using the proceeds for an investment spree covering everything from car plants to weapons production, petrochemicals, and tourism. “We will not allow our country ever to be at the mercy of commodity price volatility,” he says.

Based on every conversation I have ever had with expatriates who have worked in Saudi Arabia, this plan is a cruel fantasy.  Saudis simply do not have a work ethic, having grown up in a society where all difficult jobs are handed to foreigners.  The idea that Saudi workers would be capable of competing with South Korean, Chinese, and other automobile manufacturers seems highly improbable.  In many ways, fabulous oil wealth has spoiled Saudi Arabia.

The “Vision 2030” plan is said to be based on a consulting study by McKinsey & Company.  I wonder how diplomatically the high-priced consultants treated the matter of work ethic, education, and other issues relevant to the quality of the workforce and its ability to sustain itself minus oil wealth.

I am having a hard time coming up with a vision of a long-term future for the Saudi foyal family, unless it is based on residence in the South of France, Thailand, or some other pleasant foreign refuge, financed by billions or trillions appropriated from the treasury.  Unfortunately, the alternatives to the royals seem to be even worse: the mullahs of Iran or the Wahhabi clergy.   

I wish Prince Mohammed a lot of luck.  He’s got the right plan for a country that hasn’t been ruined by decades of easy wealth and adherence to a seventh-century comprehensive design of poltics, society, and religion.

Saudi Arabia looks increasingly desperate, as the fall in oil prices has diminished the ability of the thousands-strong royal family to buy off potential opponents and subsidize the lifestyles of its subjects.  With an ailing king, a 31-year-old prince, Mohammed bin Salman officially the deputy crown prince but considered the de facto ruler is proposing dramatic plans to shake up the financial foundations of the kingdom.  At best, they are optimistic; at worst, foolish.

Over the weekend, veteran oil minister Ali al-Naimi was fired, a signal of big changes coming.  In the interim,  Aramco chief Khalid al-Falih replaces him.  No immediate changes in Saudi policy toward OPEC, the oil cartel that has lost control over the world’s oil supply, thanks largely to fracking, are anticipated.

But it is Aramco, which accounts for 11% of the world’s total oil production, that may be next for dramatic changes.

The UK Telegraph:

Saudi Arabia is planning a three-way foreign listing in London, Hong Kong, and New York for the record-smashing privatisation of its $2.5 trillion oil giant Aramco, anchored on a triad of interlocking ties with three foreign energy companies.

The Saudi authorities hope to entice ExxonMobil, China’s Sinopec, and potentially BP, into taking strategic stakes, offering them long-term access to upstream operations in return for cutting-edge technology or refinery deals, according to sources close to Saudi thinking.

The $2.5-trillion valuation is a phantom based on a plan to sell 5% of Aramco at $100 to 150 billion.  Because Saudi Arabia finances its government via extracting royalties and taxes from Aramco, and doesn’t use Western accounting standards, there is every reason to suspect that Aramco would never throw off sufficient cash to justify a valuation anywhere close to that figure.

Robin Mills from Qamar Energy said the market value of Aramco is probably just $250bn to $400bn, given that the state creams off a royalty rate of 20pc and tax of 85pc. Saudi officials insist that a fair deal could be found for shareholder dividends, even though the Saudi constitution stipulates that Aramco's 260bn barrels of estimated reserves belong to the kingdom.

In a sense, any purchase of Aramco is an option play on a future oil boom. At current prices there would be no money for dividends: the Saudi state is consuming all the revenue, and burning through more than $100bn a year in foreign exchange.

Then there is the little matter of sovereign risk, what with Aramco’s reserves concentrated in Shia-dominated Eastern Saudi, coveted by Iran and potentially rebellious against the Sunni monarchy.

Prince Mohammed seems like a brave modernizer, anxious to wean Saudi Arabia from its dependence on its oil reserves, which are steadily depleting at a rate of 2 to 4% a year, depending on whom you believe.

The vast IPO is the spearhead of his “2030 Vision” to break the country’s “addiction” to oil and diversify, using the proceeds for an investment spree covering everything from car plants to weapons production, petrochemicals, and tourism. “We will not allow our country ever to be at the mercy of commodity price volatility,” he says.

Based on every conversation I have ever had with expatriates who have worked in Saudi Arabia, this plan is a cruel fantasy.  Saudis simply do not have a work ethic, having grown up in a society where all difficult jobs are handed to foreigners.  The idea that Saudi workers would be capable of competing with South Korean, Chinese, and other automobile manufacturers seems highly improbable.  In many ways, fabulous oil wealth has spoiled Saudi Arabia.

The “Vision 2030” plan is said to be based on a consulting study by McKinsey & Company.  I wonder how diplomatically the high-priced consultants treated the matter of work ethic, education, and other issues relevant to the quality of the workforce and its ability to sustain itself minus oil wealth.

I am having a hard time coming up with a vision of a long-term future for the Saudi foyal family, unless it is based on residence in the South of France, Thailand, or some other pleasant foreign refuge, financed by billions or trillions appropriated from the treasury.  Unfortunately, the alternatives to the royals seem to be even worse: the mullahs of Iran or the Wahhabi clergy.   

I wish Prince Mohammed a lot of luck.  He’s got the right plan for a country that hasn’t been ruined by decades of easy wealth and adherence to a seventh-century comprehensive design of poltics, society, and religion.