A Desert Mirage: Saudi Aramco’s IPO and the 2030 Vision Update

                                                                                                                                     September 8, 2016

• Saudi Aramco plans to offer 5% of its stock on an undecided stock exchange (reports suggest jointly between the domestic Tadawul and a more prestigious international stock exchange), at a minimum expected valuation of $2 trillion.
   
• IPO options have been finalized, with Aramco hosting institutional and investment banks as potential investors since the end of June; the shares are expected to be listed in early 2018.
   
• Saudi Arabia has indicated that investors will have no say over output, production schedules, or contracts, as this is often a significant state lever in foreign diplomacy.
   
• Our sources indicate that the Saudi Vision 2030 is undergoing an overhaul based on creating more specific, quantifiable objectives to better manage and measure implementation.

The Saudi Vision 2030 is built on three fundamental themes: a vibrant society, a thriving economy, and an ambitious nation. The Council of Economic Development and Affairs has created specific programs to “achieve our vision for 2030.” These programs include the Saudi Aramco Strategic Transformation program, the Public Investment Fund Restructuring program, the industry and asset Privatization program, and the program for Strengthening Public Sector Governance. The Vision program is designed to privatize and modernize the Saudi economy while bolstering its social traditions and preparing the Kingdom for a post-hydrocarbon world. The Saudi government has allocated significant capital to improving the implementation and monitoring segments of its 2030 Vision plan. The original statement and subsequent plan contained few quantitative objectives, focusing too much on the narrative of development and not enough on assessing progress based on pre-defined criteria and quantitative checkpoints.

The Council of Economic and Development Affairs has since benchmarked the vision statements of 25 different countries and noted that those having the most success, like Jordan, the UAE, and South Africa, had set defined objectives based on economic output, growth, or World Bank country ratings. The new plan, while still relying on the three-tiered governance model, will integrate quantifiable goals and checkpoints into the plan by the end of 2016, according to Sidar sources close to the project. This should improve the Kingdom’s overall prospects in implementing its objectives and achieving its goals over the life of the project, and will also provide greater investment attractiveness and planning stability for foreign investors looking to participate in the Kingdom’s economic transformation. Ultimately, the government wants the private sector to account for two-thirds of the economy.

Saudi Arabian Oil Co., as it is formally known, is one of the largest enterprises on earth. Saudi Arabia has said the state-owned company could be worth $2 trillion to $3 trillion—roughly equal at its midpoint to the total market value of every other publicly traded oil and gas company in the world, according to S&P Global Market Intelligence. Saudi Arabia plans to raise about $100 billion by selling about 5 percent of Aramco as part of Deputy Crown Prince Mohammed bin Salman’s initiative to transform the kingdom’s economy for a post-hydrocarbon age. Saudi leadership has not yet decided upon which market it will list its shares. Some locations present drawbacks including in “terms of legal exposure and tax exposure,” Energy Minister Khalid Al-Falih said this past week. However, according to Al-Falih, Aramco is on track to list its shares early in 2018.

J.P. Morgan is widely expected to claim the lead underwriting role, people familiar with the matter said. It has been the primary lender or part of a team of banks on almost all of Aramco’s loans, according to Dealogic. It is known inside Saudi Arabia as “the kingdom’s bank,” and in recent months it played a lead role in assembling a $10 billion loan to the Saudi government. However, other banks have pitched Aramco, and have come away noting that Aramco officials have pointedly suggested that any banks involved in the sale would be expected to participate in large-scale infrastructural and industrial projects in the Kingdom in the years to come.

Aramco's continued investment in downstream industry constitutes a crucial element of economic diversification plans. One example of this is its plans to sign an agreement soon with Saudi Basic Industries Corp (Sabic), the state-run petrochemical and metals conglomerate, to jointly develop an oil-to-chemicals project, an official said in a briefing to reporters. The project, likely to cost up to $30 billion, fits with efforts to better integrate the kingdom's energy and industrial sectors. On Saturday a new Energy, Industry and Mineral Resources Ministry was created in place of the old oil ministry for just this reason.

Another example is its massive ship repair and shipbuilding complex that it is developing at Ras al-Khair on the kingdom's east coast to be fully operational by 2021. The first part of the naval complex will be ready by 2018, and it will eventually make oil rigs and tankers. A presentation by the company said the complex would create 80,000 jobs and enable Saudi Arabia to reduce its imports by $12 billion, while increasing the country's gross domestic product by $17 billion. It is these types of projects, where Saudi Arabia leverages its oil might introduce and develop mid-stage transitional industries, which will eventually provide the impetus and the growth that the company needs to grow competitive in other sectors and reduce its dependence on oil for economic growth.

The decision to diversify the economy and share revenues with private investors exposes tensions within the Saudi government, however. Reform efforts are being spearheaded by King Salman bin Abdulaziz Al Saud (‘King Salman’) and his son, Deputy Crown Prince Mohammed bin Salman (‘Prince Salman’) despite the dissatisfaction of a conservative elite that enjoyed the support of King Salman’s predecessor, King Abdullah. Nevertheless, our analyses indicate that the newly achieved balance between the new administration and vested interests will likely allow an unimpeded functioning of the current decision-making structure in Aramco.

Saudi Arabia’s Vision 2030 plan is broad and ambitious. After a start which featured vague, narrative planning, the Kingdom has pivoted towards a more feasible and manageable approach to implementation and management of its programs. Ultimately, the plan depends on the successful IPO of Saudi Aramco, and the economy’s ability to leverage its natural resources into mid-stage transitional industries to prepare itself for sustainable growth regardless of oil prices. Improved management and measurement will increase the Kingdom’s likelihood of successfully achieve its transformation, which many characterized at its announcement as a mere pipe dream.