Aramco strives to curb its state role before IPO

More than 60,000 fans packed into Saudi Arabia’s Shining Jewel sports arena at its opening ceremony in May 2014, before the final of the country’s main football tournament. The inauguration featured a stunning fireworks display in honour of the late King Abdullah bin Abdulaziz Al Saud, who had commissioned the stadium in Jeddah to showcase Saudi’s place as a leading Arab nation.

The arena was built swiftly and to a high quality. But the work was not managed by a specialist contractor — it was the endeavour of the state-owned energy behemoth Saudi Aramco. Amin Nasser, chief executive, said on accepting an award for architectural excellence last year that the company “continues to support the progress of the nation”.

Projects such as the Shining Jewel reflect how Saudi Aramco’s role stretches far beyond its status as the world’s largest oil company and the source of 70 per cent of the Saudi government’s revenue. Saudi Aramco has been responsible for a significant chunk of the modern kingdom’s vital infrastructure by building schools, hospitals and roads — the company has even worked with the government on a programme to eradicate malaria.

Now, however, Saudi must decide whether Saudi Aramco should retain its role as state enabler as the country prepares to float the company next year on domestic and international stock exchanges, in a move the government hopes will raise large sums to help diversify the economy — and thereby wean the nation off its reliance on oil.

Some Saudi officials believe Saudi Aramco’s initial public offering could break records by valuing it at as much as $2tn, although the Financial Times has put the figure at between $880bn and $1.1tn. Against this backdrop, advisers to the government and the company are warning that unless Saudi Aramco broadly resembles an orthodox oil and gas producer at the IPO, by jettisoning its role as state enabler, it risks being unattractive for international investors.

Shareholders in energy groups such as ExxonMobil and Royal Dutch Shell — which are tightly focused on oil and gas production, refining and chemicals manufacturing — set great store by the ability of these companies to generate large volumes of cash and pay hefty dividends.

As it eyes an appropriate dividend policy, Saudi Aramco is engaged in a frenetic exercise to separate the company’s core oil and gas business from the expensive and time consuming work it has undertaken for the state.

“Aramco is part oil and gas company, part government welfare fund, part sovereign investment fund,” says Aswath Damodaran, a professor at New York University. “At the same time it’s a symbol of Saudi Arabia to the world. It’s all of these things. How much can you truly separate these functions?”

Mr Nasser said infrastructure projects for the kingdom would no longer be Saudi Aramco’s responsibility. “We have constructed universities, stadiums, we worked in [fixing] Jeddah’s sewage [system]. This is not any more,” he told the Financial Times in April. “Aramco is not involved.”

The key question is how far this process of disentangling Saudi Aramco’s energy operations from its other activities can realistically go.

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When Saudi’s powerful deputy crown prince Mohammed bin Salman made his shock announcement in January 2016 about a Saudi Aramco IPO, it surprised even the highest ranks inside the company, say two former employees.

Saudi deputy crown prince Mohammed bin Salman © Getty

They, like other oil industry insiders, highlight the myriad difficulties of executing the flotation of a company so bound up with the Saudi national interest and so woven into the fabric of society.

To make it fit for new investors, Saudi Aramco executives and advisers working on the IPO preparations have pushed to list a company that looks as close as possible to an international energy group.

Some steps have been taken in this direction — Mr Nasser said the government was creating a new organisation that would take responsibility for state infrastructure projects.

However, he also said Saudi Aramco would be “selective” and get involved in certain future infrastructure projects “if something makes commercial sense”.

In May the company created a project management joint venture with Jacobs Engineering of the US to focus on social infrastructure.

Projects that support the development of the kingdom are “in the long-term commercial interests of Saudi Aramco”, says a company spokesperson. The company is “reimbursed for the costs” of these projects, therefore they have “no material impact” on its results, he adds.

This highlights how there appear to be limits to how far the streamlining of Saudi Aramco will go. Only two weeks ago, the company announced it would establish a centre to train workers in the tourism industry.

“Saudi is trying to create a new Aramco while asking it to do things that represent the old Aramco,” says an adviser to the government. “There is a conflict.”

Nansen Saleri, a former manager at Saudi Aramco, says the government historically regarded the company as a “can-do organisation” for state projects. “But in this new era, the relationship has to evolve [to maximise the IPO valuation]. You cannot burden Aramco with so many responsibilities,” he adds.

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With the Saudi Aramco IPO earmarked for next year, the broad shape of the company that will be floated has been decided, say three people with knowledge of the plans.

It will span core upstream and downstream energy businesses, plus oilfield services activities such as drilling, and the manufacturing of relevant equipment.

Mr Nasser indicated the company had no intention of selling out of its large array of joint ventures ahead of the IPO. “When we talk about listing, [this means] listing the whole of Aramco with our JVs,” he said.

The company’s most important partnerships include refining joint ventures with China’s Sinochem and France’s Total. There is also a chemicals partnership with Dow Chemical of the US.

These joint ventures clearly fall with the remit of an oil and gas producer, but there are other partnerships that some investors may regard as unnecessary — and a possible drag on Saudi Aramco’s performance.

Joint ventures potentially falling into this less attractive category include plans for a shipyard involving Saudi Aramco and South Korea’s Hyundai Heavy Industries that will make crude tankers and offshore drilling rigs.

Then there are joint ventures that seem firmly outside the purview of an oil company — such as Saudi Aramco’s partnership with US hospital operator John Hopkins Medicine to provide healthcare for company employees.

“We are confident that all elements of [Saudi Aramco] will be seen as intergral to its core purpose,” the company says.

While the intention is for Saudi Aramco to ultimately spin off certain non-core businesses after the IPO, according to three people with knowledge of the matter, some industry insiders say Saudi Aramco should exit such areas sooner.

These issues go the heart of the question of how to maximise the company’s IPO valuation.

Advisers to Saudi Aramco have warned that the company could be worth far less than the $2tn officials have mooted. A $1.5tn valuation could be more realistic, says one person briefed on the matter.

The kingdom is in a bind. Saudi Aramco executives working on the IPO appear to recognise the need to maximise its attractiveness to investors by narrowing its focus to its core energy activities.

But the government seems reluctant to completely free the company from its state enabler role.

“It’s not clear to me that you can privatise Aramco and treat it like an Exxon,” says Mr Damodaran. “Aramco is not a company, it is the Saudi Arabian budget to run the country.”

A drilling rig operated by the Arabian American Oil Company in 1955 © Evans/Three Lions/Getty

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