Tweet

In early 2017, Aramco, the world’s most profitable oil company, was planning an Initial Public Offer (IPO) with the desired valuation of 2 trillion USD. Aramco’s planned IPO has created anxiety for the oil importers and excitement for international financial markets. Mohammad bin Salman, the new Crown Prince of Saudi Arabia, has been pushing for Aramco to go public as it would had make it the most valuable company in the world to be traded in the financial markets.

In May, 2018 the United States of America (U.S.) decided to withdraw from the Joint Comprehensive Plan of Action (JCPoA) and imposed sanctions on Iran which will severely affect Iran’s oil exports. The looming IPO and the U.S. sanctions on Iran restrain India’s options to buy oil at a reasonable price while its needs grow. Major oil importers like India, China, Japan, and the Republic of Korea who have traditionally depended on Iran for oil supplies have to now look for alternatives. The alternatives are Organisation of the Petroleum Exporting Countries (OPEC) suppliers led by Saudi Arabia who is in the planning stages for the IPO and is looking to drive up oil prices for a successful IPO by reducing the oil output.

The U.S. President did show his displeasure on the rising oil prices by venting it on the social media platform, Twitter. Even President Putin who had been calling for production cuts did not endorse the plan and, in fact, did not want the price to go beyond 60 USD per barrel.¹ The Chinese government too is unhappy at the prospects of higher oil prices. The Chinese have also out rightly rejected the U.S. sanctions on Iran and have invoked a clause in their long-term supplies agreement that will help Chinese state-owned oil traders to secure oil supplies by using National Iranian Tanker Corporation’s oil vessels. The Chinese do not intend to replace Iran as their top oil supplier even when the sanctions are put in place. But this puts forward the question as to whether the Iranians can insure the purchases made by the Chinese which is around 1.5 billion USD per month. ²

Why the IPO?

The Kingdom of Saudi Arabia has adopted a roadmap for future economic developmental action that it calls ‘Saudi Arabia’s Vision 2030’. Under this plan, various bodies were established to make governance more fluid and to create, support, execute and evaluate the new programmes. The first step of this program is the ‘National Transformation Program 2020’ which is supposed to propel plans for reducing imports, job creation, sustainable housing, pushing towards renewable energy, a robust justice system, improving quality of healthcare, and diversifying from oil trade, amongst many other initiatives. Ministries, government organisations have been given a list of problems along with the strategic objectives. While this plan is seen as Mohammad bin Salman’s push towards reforms, but the funding of these programmes is still a big question.³

Various actors of financial markets like analysts, wealth managers, and banks have been preparing for this development, but they disagree with the valuation. While Mohammad bin Salman believes that the valuation should be pegged at 2 trillion USD, financial analysts assessed that it should be between 1 to 1.5 trillion USD.⁴ The IPO, if it goes the Saudi way, would create more than 100 billion USD for the sovereign wealth fund and would have helped the Crown Prince to push for social reforms along with others elements of the Vision-2030 plan.⁵ For the IPO to be successful, oil prices have to be minimum 70 USD per barrel.⁶

Where do U.S, China, and India Stand?

The three countries share a common interest as far as the oil markets are concerned as they are the top three oil consumers in the world with India and China not having significant reserves of their own. The present administration in the U.S. might have made some questionable moves as far as pulling out of the Iran deal and imposing tariffs on China are concerned. Both factors might be responsible for the Republicans to lose mid-term elections due in November 2018. Oil prices are already high, especially in the U.S. and India. President Trump’s reaction is cryptic as mentioned earlier, has shown his displeasure regarding increasing oil prices; at the same time, he looked enthusiastic on Twitter about the IPO.⁷ Domestically, Trump cannot afford to lose seats in mid-November elections as the case against his impeachment is growing and if the Democrats have enough numbers by the end of November, then the proceedings might begin regarding Trump’s alleged misconduct during the 2016 elections.

In October 2017, Chinese state-owned petroleum company did consider buying up five percent of the shares offered by Aramco.⁸ The reason stated at the time was that China was trying to secure its supplies for the future but effectively it also would have ended Aramco’s IPO. But by April 18, energy relations between Saudi Arabia and China had reached a low point. The Saudi’s wanted to have higher oil prices to back their valuation, but this led to China’s Sinopec, which runs Asia’s largest refinery, to reduce its imports by 40 percent in May 2018. The reduction of imports was a clear statement by China to the Saudi’s that they can and will get alternative suppliers, which led to imports from Russia and Angola increasing substantially.⁹

The Saudi Arabian ambassador to India, Saud bin Mohammed al-Sati, during an interaction with journalists in early August 2018, mentioned that Saudi Arabia would step up its oil supplies to India in light of renewed sanctions on Iran.¹⁰ He did specify that he wasn’t aware of any special request made by the Indian Government. India has considerably reduced oil imports from Iran to secure waivers relating to Countering America's Adversaries Through Sanctions Act, or CAATSA. The reduction might have played some role in obtaining those waivers through the National Defense Authorisation Act (NDAA).

What are India’s Options?

In early-2018, India’s Minister of Petroleum and Natural Gas, during his visit to Riyadh, argued that there should be ‘reasonable’ oil pricing. He mentioned during an interaction with the press that they were trying to devise a mechanism which is beneficial to both parties. While India has strategic reserves of five million tonnes out of a planned six, India intends to have the same deal with Aramco that it has with Abu Dhabi National Oil Company regarding storage facilities.¹¹

Soon after, Venezuela which is going through an economic crisis, tried to sell oil at a 30 percent discount provided that India uses the crypto-currency named ‘petro’ for transactions. This was rejected by the Ministry of External Affairs citing the ban imposed on the direction of the Reserve Bank of India. This generosity from Venezuela was a desperate attempt to circumvent U.S. sanctions on the country.¹²

In July 2018, Iran’s Deputy Ambassador, while addressing the media during a conference organised by All India Minorities Front, mentioned that India would stand to lose ‘special privileges’ if it looks towards Saudi Arabia, Iraq, U.S. and Russia to meet 10 percent of India’s oil needs currently supplied by Iran. Taking away the ‘special privileges’ means that India will have a higher current account deficit as a result of USD transaction.¹³ The threats by the Iranians, Saudi Arabia and OPEC wanting to increase crude prices and American sanctions have created major roadblocks as India looks for alternate suppliers. The oil import bill is set to go up by 26 billion USD this year even as the Indian Rupee has fallen to its lowest against the USD. In 2017-18, India imported oil worth 87.7 billion USD. The falling Rupee will be beneficial for India’s state-owned oil companies but not for its consumers and imports are likely to grow by 7 million tonnes in 2018-2019.¹⁴

Recent reports suggest that King Salman, the patriarch of the Al-Saud dynasty, has blocked the Aramco IPO, effectively ending the constant anxiousness about the oil prices in India and other crude importers. One of the reasons stated for blocking the IPO is that, as stated earlier, the company will have to show its financial logs which might create some unrest in the Kingdom. This will be a blow for Mohammad bin Salman’s long-term Vision-2030 framework as the funding for this particular plan was dependent on the IPO, though that will be a relief for the biggest crude buyers.¹⁵

The decision to make the company public would have meant that it would have to justify the stock valuation. It would have to show its financial books, which is not just the assets they own but also projected growth, prospects, and industry-specific factors. While Aramco prepared to sell five percent of its shares to the public, it would not benefit anyone much until the Saudis sell their shares. Mohammad bin Salman wants to transfer Aramco to Saudi Public Investment Fund so that it gets returns from investments rather than being dependent on oil sales.¹⁶ Further on, it would have to disclose shareholding structures, people who have shares in them, details and historical information about promoters, regulatory approvals and contracts of the company, which impacts its operations, impose onerous obligations and gives investors special rights. If and when Aramco is listed, its financial results, board meeting decisions, and related party agreements to the stock exchanges would become public information. Maybe this might be the reason why the Saudi King has reportedly stepped in to stop the IPO as the Saudis might not be prepared to bare it all in front of its citizens and clerics, the two foundations on which the Al-Saud family is resting on for decades, let alone the financial market.

India, due to lack of alternative policies regarding energy management, on paper is hugely dependent on oil. While the reported rollback of the Aramco IPO might be good news for India for a while, but the sanctions, the response from Iran, and Rupee’s depreciating value against the dollar would still have their effect. For the time being, India has struck deals to match its needs, but policy decisions regarding other alternative, especially renewable energy sources, have to be taken into consideration and formulated.

References:

1. Meyer, H., & Mathieson, R. (2018, May 25). Putin Says Oil at $60 Suits Russia With OPEC Weighing More Supply. Retrieved from https://www.bloomberg.com/news/articles/2018-05-25/putin-says-oil-at-60-suits-russia-as-opec-weighs-more-supply
2. Aizhu, C. (2018, August 20). Exclusive: China shifts to Iranian tankers to keep oil flowing amid... Retrieved from https://www.reuters.com/article/us-china-iran-oil-shipping/exclusive-china-shifts-to-iranian-tankers-to-keep-oil-flowing-amid-u-s-sanctions-sources-idUSKCN1L50RZ
3. National Transformation Program 2020. (n.d.). Kingdom of Saudi Arabia. http://vision2030.gov.sa/sites/default/files/NTP_En.pdf
4. Blas, J. (2018, July 09). Saudi Aramco's $2 Trillion Zombie IPO. Retrieved from https://www.bloombergquint.com/businessweek/2018/07/07/saudi-aramco-s-2-trillion-zombie-ipo
5. Algethami, S. (2017, December 23). How Saudi Arabia Is Building Its $2 Trillion Fund. Retrieved from https://www.bloomberg.com/news/articles/2017-10-22/how-saudi-arabia-is-building-its-2-trillion-fund-quicktake-q-a
6. Zhdannikov, D. (2018, February 19). For timing of Aramco IPO, watch forward oil price curve. Retrieved from https://in.reuters.com/article/saudi-aramco-listing/for-timing-of-aramco-ipo-watch-forward-oil-price-curve-idINKCN1G30CL
7. Blas, J., & Kennedy, W. (2018, July 16). Who's Still Waiting For the Aramco IPO? Bloomberg Businessweek, 22-24.
8. Gamal, R. E. (2017, October 17). Exclusive: China offers to buy 5 percent of Saudi Aramco directly -... Retrieved from https://www.reuters.com/article/us-saudi-aramco-ipo-china-exclusive/exclusive-china-offers-to-buy-5-percent-of-saudi-aramco-directly-sources-idUSKBN1CL1YJ
9. Russell, C. (2018, April 10). COLUMN-Saudi efforts to raise crude prices get Chinese slap: Russell. Retrieved from https://www.cnbc.com/2018/04/10/reuters-america-column-saudi-efforts-to-raise-crude-prices-get-chinese-slap-russell.html
10. Laskar, R. H. (2018, August 08). Will meet India's oil needs if US sanctions hit Iran imports: Saudi envoy. Retrieved from https://www.hindustantimes.com/india-news/will-meet-india-s-oil-needs-if-us-sanctions-hit-iran-imports-saudi-envoy/story-vrw3TxAldLbSjcLJrlpF9L.html
11. Verma, N. (2018, February 23). India seeks 'reasonable' oil price from Saudi Arabia - minister. Retrieved from https://in.reuters.com/article/india-oil-saudi/india-seeks-reasonable-oil-price-from-saudi-arabia-minister-idINKCN1G712X
12. Verma, N. (2018, May 28). India says no plans for oil trade with Venezuela using 'petro'... Retrieved from https://in.reuters.com/article/india-venezuela/india-says-no-plans-for-oil-trade-with-venezuela-using-petro-cryptocurrency-idINKCN1IT0ZV
13. Bhattacherjee, K. (2018, July 10). India will lose 'special privileges' if it buys crude from Saudi Arabia, U.S.: Iranian diplomat. Retrieved from https://www.thehindu.com/news/national/iranian-diplomat-warns-india-of-losing-oil-privileges/article24381075.ece
14. PTI. (2018, August 16). Fuel prices to increase as rupee falls to record low, oil import bill to go up $26 billion. Retrieved from https://www.hindustantimes.com/business-news/fuel-prices-to-increase-as-rupee-falls-to-record-low-oil-import-bill-to-go-up-26-billion/story-Adq48rq3nSz4rqycsdh4FI.html
15. Al Jazeera. (2018, August 27). Report: Saudis King Salman blocked public listing of Aramco. Retrieved from https://www.aljazeera.com/news/2018/08/report-saudi-king-salman-blocked-public-listing-aramco-180827180323085.html
16. Ibid II

Aayush Mohanty, Research Associate, VIF
25 September 2018

Tweet