Saudi Arabia’s plans to float state oil titan Aramco are prompting the country to think the unthinkable.
Late last year, Saudi Arabia tried to get fellow oil producers around the world to agree to reduce production. Before an OPEC meeting in Vienna in November, Saudi officials were armed with an unprecedented bargaining chip: if there was no deal, the kingdom would quit the exporter group altogether.
The strategy was approved at the highest level of the Saudi government, said sources familiar with the matter.
It was not only aimed at ensuring the smooth workings of the world’s energy supply. It was also driven by a desire to push up oil prices to maximize the valuation of Saudi Aramco ahead of the listing, said the sources who declined to be named as the information is confidential.
In the end, the world’s biggest oil exporter did not have to enact that option. OPEC members along with non-OPEC producers including Russia agreed a deal in December to cut output by about 1.8 million barrels per day.
But the fact such a move was considered shows how Aramco’s initial public offering (IPO) – expected to be the biggest in history – is forcing the kingdom to rethink its OPEC policies.
Riyadh’s stance represented a shift, OPEC sources said, from its decades-old role of advocating restraint and seeking to convince fellow members like Algeria, Venezuela and Iran that prices rising too fast benefited alternative energy providers.
“Saudi Arabia is now the main price hawk,” said a high-level OPEC source. He added he was surprised how quickly the kingdom shifted from its policy of prioritizing market share, by pumping oil at full tilt, to supporting production cuts following its decision to list Aramco.
The Saudi energy ministry and OPEC did not immediately respond to requests for comment.
The IPO also raises questions over Saudi Arabia’s future role in OPEC, as the kingdom would become the only member with a national oil firm listed abroad. That in turn raises questions over the future of OPEC itself given the kingdom has been the group’s driving force since its inception almost 60 years ago.
Until now, Aramco – which oversees Saudi Arabia’s vast reserves – has always been a tool in the country’s OPEC policies, to reduce or increase production.
Listing rules and anti-trust legislation, particularly in the United States, also preclude price-fixing, which Aramco could be accused of if it continued to follow Saudi Arabia’s OPEC policy of adjusting output to manage prices, the sources said.
“Aramco is the instrument used to manage the market even though its not involved in making the policy,” said Fareed Mohamedi, chief economist at U.S.-based Rapidan Group.
Saudi Aramco declined to comment on the potential risks of investors suing it post-IPO if it followed Saudi OPEC policies.
Saudi authorities aim to list around 5 percent of Aramco by the end of 2018 on both the Riyadh stock exchange and one or more international markets, with London, New York and Hong Kong in the running.
The IPO is the centerpiece of Vision 2030, an ambitious reform plan to diversify the Saudi economy beyond oil which is championed by Saudi Crown Prince Mohammad bin Salman.
The prince has said he expects the IPO to value Aramco at a minimum of $2 trillion, and Saudi officials and investors say the valuation will be directly impacted by oil prices.
Saudi officials have said they want to see $60 per barrel this year, with banking sources suggesting the IPO might be timed to happen with crude trading at $60-$70 per barrel. Prices have been around $50 for most of this year and were above $58 this week.
Listing its national oil firm represents unknown territory for Saudi Arabia and OPEC. But Norway, which has listed its state oil company Statoil, might offer some guide to the path ahead.
The Nordic nation, which still owns 67 percent of the oil firm, has refrained from joining any international steps in regulating oil output since 2002, months after listing in New York and Oslo in 2001.
Over the past year, Saudi officials have met officials from Norway and Statoil to discuss how best to restructure Aramco’s business operations ahead of the IPO, according to several industry sources familiar with the meetings.
The sources cited U.S. anti-trust laws as the main reason why Norway does not join accords on production, such as the deal agreed in December.
A Statoil spokesman said the company had not advised Saudi officials on the IPO in any official capacity. Its CEO Eldar Saetre also told Reuters in February that it was not officially advising Aramco, but said it was “sharing” its experience.
Statoil referred queries about Norway’s position regarding international output accords to the ministry of energy. The ministry said there was no link between Norway not joining OPEC cuts and the fact that Statoil is a U.S. listed company.
While Prince Mohammad, the likely future ruler of Saudi Arabia, is determined to proceed with the IPO, there are still concerns inside the government and Aramco about the wisdom of the move, according to Saudi and industry sources. Some conservatives oppose the idea of Riyadh relinquishing any control over its oil’s crown jewel.
Saudi officials have said that production decisions are a sovereign matter that will remain with the government – which will still own the bulk of Aramco post-IPO – but did not explain how this policy would be compatible with a listed company.
One Saudi-based industry source said Aramco would have to act like other listed oil company such as Chevron or ExxonMobil. If it wanted to cut production, it would have to demonstrate to the investors that they would financially benefit from the move.
Inside Aramco, some executives do not believe that Saudi Arabia’s OPEC policies in preparation for the IPO will benefit the company in the long term, according to several sources.
They point to the fact that OPEC’s output cuts have eaten into Aramco’s market share in Asia, the world’s biggest oil-consuming region.
Since January, Riyadh has cut production by more than it was required to help OPEC achieve a full compliance with cuts and boost prices as other members were slow to reduce output.
The kingdom, previously China’s biggest crude supplier, has been overtaken by Russia while Iraq has eclipsed it as India’s number one source.