Oil Stock Markets
With Mohammad bin Salman (MBS) now firmly in power in Saudi Arabia,
Aramco’s IPO and fundraising to diversify the kingdom’s economy away
from oil will surely become a cornerstone of Saudi policy. This carries a
unique set of risks, and it’s not unreasonable to assume that the
kingdom’s future heavily depends on the IPO’s success.
The relationship between Saudi Arabia, its oil company and regional geopolitics brings up some interesting questions regarding the exchange where Saudi Aramco will be listed.
This waning influence in oil markets brings up several interesting questions, especially when you consider the possibility of Aramco floating on the NYSE. What will happen to the country’s sovereignty if it is listed on the New York Stock Exchange?
Recently, oil imports to the U.S. fell to their lowest level since the 1990’s, dropping to just 1.77 million barrels. The imports peaked in November, 2005 to almost 14 million barrels. In their World Energy Outlook 2017, the IEA mentioned that the U.S. will overtake Saudi Arabia as the largest oil producer in the world by 2020. U.S. shale production recently hit a high of 9.68 million barrels per day. All of these are signs of a stronger U.S. and an increasingly vulnerable KSA. Russia is also likely to gain influence in the space, after proving resilient in the face of falling oil prices and economic sanctions.
The Saudi government has already slashed its tax rate from 85 percent to 50 percent in order to lure investors. The corruption crackdown seems to be another way of ensuring investors of a more transparent and open country. After the listing, Aramco will be exposed to all the rules and regulations that any other multinational encounters. One of the laws that may threaten Saudi Arabia after a U.S. listing is JASTA (Justice Against Sponsors of Terrorism Act). The act allows U.S. citizens to file lawsuits against nations that may have harmed them, opening Saudi Arabia up to lawsuits for its role in 9/11.
Another issue is how much oil Aramco can actually claim control over. In other privatizations, such as Norway’s Statoil, the state allowed foreign competitors to operate fields in the country. “International oil companies even had ownership in the Norwegian continental shelf,” a Financial Times article quotes Hans Aasmund Frisak, Statoil’s head of government relations.
Saudi officials claim that “production decisions are a sovereign matter that will remain with the government”. Observers are of the view that after the IPO Aramco, like any other oil company, will have to persuade investors before cutting production.
In November, Khalid Al-Falih said that “the government will make sovereign decisions on production and capacity even after a public offering of Saudi Aramco”, reported Anjli Ravli in a Financial Times article. Whether this will become a reality remains to be seen. KSA cannot retire from oil abruptly, as the kingdom’s plan to build a $20 billion plant for converting oil into chemicals shows. Saudi 2.0 will still be attached to oil, but the transition away from being a full oil state is full of dangers.
Saudi Arabia’s future depends on a smooth transition. It’s an ambitious bet from bin Salman—and one that Saudi Arabia can’t afford to lose. There’s no way of knowing if success awaits the Saudis. For now, we wait and watch.
The relationship between Saudi Arabia, its oil company and regional geopolitics brings up some interesting questions regarding the exchange where Saudi Aramco will be listed.
This waning influence in oil markets brings up several interesting questions, especially when you consider the possibility of Aramco floating on the NYSE. What will happen to the country’s sovereignty if it is listed on the New York Stock Exchange?
Recently, oil imports to the U.S. fell to their lowest level since the 1990’s, dropping to just 1.77 million barrels. The imports peaked in November, 2005 to almost 14 million barrels. In their World Energy Outlook 2017, the IEA mentioned that the U.S. will overtake Saudi Arabia as the largest oil producer in the world by 2020. U.S. shale production recently hit a high of 9.68 million barrels per day. All of these are signs of a stronger U.S. and an increasingly vulnerable KSA. Russia is also likely to gain influence in the space, after proving resilient in the face of falling oil prices and economic sanctions.
The Saudi government has already slashed its tax rate from 85 percent to 50 percent in order to lure investors. The corruption crackdown seems to be another way of ensuring investors of a more transparent and open country. After the listing, Aramco will be exposed to all the rules and regulations that any other multinational encounters. One of the laws that may threaten Saudi Arabia after a U.S. listing is JASTA (Justice Against Sponsors of Terrorism Act). The act allows U.S. citizens to file lawsuits against nations that may have harmed them, opening Saudi Arabia up to lawsuits for its role in 9/11.
Another issue is how much oil Aramco can actually claim control over. In other privatizations, such as Norway’s Statoil, the state allowed foreign competitors to operate fields in the country. “International oil companies even had ownership in the Norwegian continental shelf,” a Financial Times article quotes Hans Aasmund Frisak, Statoil’s head of government relations.
Saudi officials claim that “production decisions are a sovereign matter that will remain with the government”. Observers are of the view that after the IPO Aramco, like any other oil company, will have to persuade investors before cutting production.
In November, Khalid Al-Falih said that “the government will make sovereign decisions on production and capacity even after a public offering of Saudi Aramco”, reported Anjli Ravli in a Financial Times article. Whether this will become a reality remains to be seen. KSA cannot retire from oil abruptly, as the kingdom’s plan to build a $20 billion plant for converting oil into chemicals shows. Saudi 2.0 will still be attached to oil, but the transition away from being a full oil state is full of dangers.
Saudi Arabia’s future depends on a smooth transition. It’s an ambitious bet from bin Salman—and one that Saudi Arabia can’t afford to lose. There’s no way of knowing if success awaits the Saudis. For now, we wait and watch.
