Saudi Arabia’s state oil company is going public. What’s the big deal?

The country is expected to offer a five percent stake in its national oil company, Saudi Aramco, in 2018. The multi-billion dollar sale is predicted to be the world's biggest.

Photo by: AFP
Photo by: AFP

Selling Saudi Aramco’s shares is one of several wide-ranging economic reform efforts being pushed by Riyadh to diversify its oil-dependent economy.

Saudi Arabia's King Salman bin Abdul Aziz al-Saud is on a month-long Asia tour to Malaysia, Indonesia, Japan and China with a large delegation that includes princes and ministers. While the trip aims to cement Riyadh’s ties with the Asia Pacific nations, analysts say it is also meant to promote investment opportunities, including the upcoming public listing of state-owned oil company Saudi Aramco.

It's just five percent, why should we care?
Market analysts say Saudi Aramco is the largest company in the world in terms of its revenue.

A five percent stake will probably bring in $125 billion, putting the company’s total worth at around $2 trillion. 

The company produces 10.2 million barrels of crude oil a day - the most by any major oil producer in the world. 

Industry players are following the listing closely since the announcement of the initial public offering (IPO). For the first time, Saudi Aramco will make its financial statements available and the company’s worth will be known.

Courtesy of Financial Times

What is an IPO, and how does it work?

As the name suggests, it's when a company offers ownership or partial ownership of its stock to the public for the first time. This is done in the shape of company stocks that individual or institutional investors can buy. 

IPOs are usually used by young companies that need money to expand operation, but large companies like Saudi Aramco also sell shares to raise additional funding. 

Proceeds from the Saudi Aramco IPO will go into government funds that will invest it in other industries, projects, and companies. 

Although Saudi Arabia announced privatisation in other industries such healthcare, education, and airports, including services in 13 ministries, the sheer size of Saudi Aramco sets it apart from any other company.

Why do this when Saudi Arabia is already so rich?

Plunging oil prices have dented the revenues of Saudi Arabia. 

It is the largest exporter of oil in the world and relies heavily on its proceeds to finance its budget.

Courtesy of Financial Times

Selling Saudi Aramco’s shares is one of several wide-ranging economic reform efforts being pushed by Riyadh to diversify its oil-dependent economy.

Called Vision 2030, the strategy calls for the development of non-oil industries, small and medium enterprises, and a broader investment base. It also calls for increasing the participation of women in the workforce. 

What good would it do for the company?

Selling shares to outside investors helps bring transparency in how the company is run. It also brings greater oversight over management as industry experts get an opportunity to sit on the company’s board of directors. 

“I believe it is in the interest of the Saudi market, and it is in the interest of Aramco, and it is for the interest of more transparency, and to counter corruption, if any, that may be circling around Aramco,” said Crown Prince Muhammed bin Salman in an interview with The Economist.

Even though analysts don’t fear any impact on demand for oil in the short term, technological advancements pose challenges for the company. 

It is generally believed that foreign investors help in the transfer of knowledge and encourage innovation in public-sector companies.

TRTWorld and agencies