Will Saudi Arabia privatise its oil company?
Will Saudi Arabia privatise its oil company?
Comment: Selling off the world's largest company would raise plenty of cash, but sever Riyadh's link between oil and geopolitics, writes Mohamed ElMeshad.
5 min read
19 Jan, 2016
Saudi Deputy Crown Prince said that parts of ARAMCO may be privatized [AFP]
The nationalisation of oil resources in Middle East countries collectively presents one of the most defining features of modern geopolitics.
When Saudi Arabia finally took full control over the country's oil producer, Aramco, renaming it Saudi Aramco, it did more than just acquire a company. It placed itself at the helm of every single oil-related decision within its borders.
The statement to The Economist by Saudi Deputy Crown Prince, Mohamed Bin Salman, that parts of the company may be privatised in a stock market flotation, raises many questions about how the country looks to manage its hydrocarbon resources in the future.
It also poses many potent questions about how the Saudi government would look to adjust in the event of changing the basis of its relationship with the country's only source of (immense) wealth.
These all suggest that the announcement was premature and not well thought-out, or it denotes years of high-level of strategic planning and preparation that managed to go completely under the radar this whole time.
There is also the possibility that no such plan exists, but that his statements were actually mis-statements, and the intention was to indicate the mere possibility of studying hypothetical proposals to privatise some aspects of ARAMCO's upstream or downstream operations.
Sitting on around 18 percent of some of the world's most easily accessible oil reserves, every decision made concerning its oil would prove to have an instantaneous, profound effect on global oil markets.
If Riyadh cuts oil production, the world's prices immediately go up, and vice versa.
Clearly, it is the main source of the kingdom's political stature, and the monarchy's complete control over all aspects pertaining to the country's black gold meant that it had a potent weapon firmly in its grip at all times for all kinds of economic and political leverage.
On the other hand, the country's over-reliance on oil to manage the country domestically could prove to be costly.
Having to depend on receiving around 85 percent of its fiscal revenue from hydrocarbon sales, significant changes in global oil prices directly affects government spending.
Over the past three years, the Saudi government has experienced budget deficits as global prices plummeted from $116/barrel in April 2011 to around $30/barrel today.
Along with this year's deficit came announcements of an end to some of the major subsidies that formed the bedrock of an unofficial social contract between the government and its people to provide services to cement the ruling family's power-bargain.
The country has not been able to encourage enough diversity in its economy to strengthen it in the face of the volatile global oil markets, as 45 percent of GDP is based on oil sales.
Despite attempts to develop some industries along with the financial sector, and despite holding $600 billion of assets in global investment, nearly all of the country's political and economic institutions have been centred one way or another around its control of ARAMCO - judged to be the world's largest company.
Privatisation may be a prudent business decision, making it a more efficient enterprise, and as Bin Salman mentioned, it might begin to curb any corrupt practices that may exist in its management.
However, the Saudi government structure clearly is not ready for such a move, since the proposed plans may further increase the country's exposure to the vicissitudes of the market.
An IPO would probably raise enough cash to fill the Saudi coffers for a few years to come and, of course, there would still remain a fair amount of annual revenue. However, it would bode for more uncertainty in the future.
Essentially a stock market flotation now would change the government's ability to invest in social and economic infrastructure with little hassle if it was in the process of building an economy to survive potential permanent downturns in the oil market.
Lately, the Saudi government has been enhancing its role as a regional and global power-power broker, interfering directly in conflicts such as in Yemen, using its financial clout to influence military and political outcomes in Syria, Egypt and elsewhere, as well as playing an active role in the US-Russia scramble for global influence.
Last month, the Saudi government promised to provide Egypt with five years' worth of its petroleum needs. Over the past two years, the kingdom has been able to keep the US on the ropes politically by maintaining low oil prices through increased production.
These political manoeuvres are the bread and butter of Saudi international relations. It would be drastically different if production decisions fall under the auspices of an ARAMCO board exclusively looking towards the best interest of the company.
In theory, such a board would pay more attention to protecting the long-term interests of the company rather than the domestic or foreign political promises made by the ruling family that may require oil production to sway one way or another.
As it stands, the line between politics and ARAMCO is blurry at best.
The privatisation of ARAMCO is a move that must follow credible institutional shifts in how the Saudi economy is run and on how power is negotiated internally.
For one, the private sector needs to significantly expand to ensure different sources of fiscal revenue and decrease the public sector wage bill in the government budget, which stands now at more than 50 percent.
Although changes have been afoot with ARAMCO since earlier last year, the hasty announcement regarding a potential IPO should be cause for concern in many Saudi circles, unless there are many unseen cards yet to be unveiled in this move.
Mohamed ElMeshad is a journalist and a PhD candidate at SOAS, focusing on the political economy of the media. He extensively worked in Egypt, Bahrain, West Africa, the UK and US. Recently, he contributed to the Committee to Protect Journalists' book, Attacks on the Press (2015).
When Saudi Arabia finally took full control over the country's oil producer, Aramco, renaming it Saudi Aramco, it did more than just acquire a company. It placed itself at the helm of every single oil-related decision within its borders.
The statement to The Economist by Saudi Deputy Crown Prince, Mohamed Bin Salman, that parts of the company may be privatised in a stock market flotation, raises many questions about how the country looks to manage its hydrocarbon resources in the future.
It also poses many potent questions about how the Saudi government would look to adjust in the event of changing the basis of its relationship with the country's only source of (immense) wealth.
These all suggest that the announcement was premature and not well thought-out, or it denotes years of high-level of strategic planning and preparation that managed to go completely under the radar this whole time.
There is also the possibility that no such plan exists, but that his statements were actually mis-statements, and the intention was to indicate the mere possibility of studying hypothetical proposals to privatise some aspects of ARAMCO's upstream or downstream operations.
Sitting on around 18 percent of some of the world's most easily accessible oil reserves, every decision made concerning its oil would prove to have an instantaneous, profound effect on global oil markets.
If Riyadh cuts oil production, the world's prices immediately go up, and vice versa.
Clearly, it is the main source of the kingdom's political stature, and the monarchy's complete control over all aspects pertaining to the country's black gold meant that it had a potent weapon firmly in its grip at all times for all kinds of economic and political leverage.
On the other hand, the country's over-reliance on oil to manage the country domestically could prove to be costly.
| Read more: Saudi Aramco could be privatised as oil prices dip |
Having to depend on receiving around 85 percent of its fiscal revenue from hydrocarbon sales, significant changes in global oil prices directly affects government spending.
Over the past three years, the Saudi government has experienced budget deficits as global prices plummeted from $116/barrel in April 2011 to around $30/barrel today.
Along with this year's deficit came announcements of an end to some of the major subsidies that formed the bedrock of an unofficial social contract between the government and its people to provide services to cement the ruling family's power-bargain.
The country has not been able to encourage enough diversity in its economy to strengthen it in the face of the volatile global oil markets, as 45 percent of GDP is based on oil sales.
Despite attempts to develop some industries along with the financial sector, and despite holding $600 billion of assets in global investment, nearly all of the country's political and economic institutions have been centred one way or another around its control of ARAMCO - judged to be the world's largest company.
Privatisation may be a prudent business decision, making it a more efficient enterprise, and as Bin Salman mentioned, it might begin to curb any corrupt practices that may exist in its management.
However, the Saudi government structure clearly is not ready for such a move, since the proposed plans may further increase the country's exposure to the vicissitudes of the market.
An IPO would probably raise enough cash to fill the Saudi coffers for a few years to come and, of course, there would still remain a fair amount of annual revenue. However, it would bode for more uncertainty in the future.
| Read more: Nine facts you never knew about oil giant Saudi Aramco |
Essentially a stock market flotation now would change the government's ability to invest in social and economic infrastructure with little hassle if it was in the process of building an economy to survive potential permanent downturns in the oil market.
Lately, the Saudi government has been enhancing its role as a regional and global power-power broker, interfering directly in conflicts such as in Yemen, using its financial clout to influence military and political outcomes in Syria, Egypt and elsewhere, as well as playing an active role in the US-Russia scramble for global influence.
Last month, the Saudi government promised to provide Egypt with five years' worth of its petroleum needs. Over the past two years, the kingdom has been able to keep the US on the ropes politically by maintaining low oil prices through increased production.
These political manoeuvres are the bread and butter of Saudi international relations. It would be drastically different if production decisions fall under the auspices of an ARAMCO board exclusively looking towards the best interest of the company.
In theory, such a board would pay more attention to protecting the long-term interests of the company rather than the domestic or foreign political promises made by the ruling family that may require oil production to sway one way or another.
| Comment: Salman fishing in the Yemen - read more here |
As it stands, the line between politics and ARAMCO is blurry at best.
The privatisation of ARAMCO is a move that must follow credible institutional shifts in how the Saudi economy is run and on how power is negotiated internally.
For one, the private sector needs to significantly expand to ensure different sources of fiscal revenue and decrease the public sector wage bill in the government budget, which stands now at more than 50 percent.
Although changes have been afoot with ARAMCO since earlier last year, the hasty announcement regarding a potential IPO should be cause for concern in many Saudi circles, unless there are many unseen cards yet to be unveiled in this move.
Mohamed ElMeshad is a journalist and a PhD candidate at SOAS, focusing on the political economy of the media. He extensively worked in Egypt, Bahrain, West Africa, the UK and US. Recently, he contributed to the Committee to Protect Journalists' book, Attacks on the Press (2015).
Opinions expressed in this article remain those of the author and do not necessarily represent those of The New Arab, its editorial board or staff.
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