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Saudi Vision 2030 and the flotation of Saudi Aramco

The Saudi Arabian government has recently released their agenda for the future of the nation, entitled “Saudi vision 2030” which looks at refurbishing the whole structure of its economy and most notably it’s reducing its reliance on revenue from oil. It’s clear that the declining oil price has threatened the long-term economic sustainability of the government and has thus sparked a rethink of future strategy.

A major part of this plan is for the state owned oil company, Saudi Aramco to float a maximum of 5% on the stock market. It would make Saudi Aramco the most valuable listed company in the world, far exceeding the likes of Google or Apple. Estimates indicate it is likely to be worth over $1tn even on a conservative outlook, which would be worth more than Apple, ExxonMobil and Facebook put together. The offering would be the biggest the world has ever seen.

Saudi Aramco was formed in 1933 with the involvement of Standard Oil of California (itself formed when Standard Oil was split into 34 different companies). The Saudi group was part-nationalized in 1933 whilst its headquarters moved from New York to Saudi Arabia. 30 years later it was fully taken into state hands.

It currently oversees many large oil fields, including the largest onshore field, Ghawar. A staggering 1 in 8 barrels of crude oil across the world comes from underneath the sands of Saudi Arabia. The company also manages gas fields as well as refining, marketing and distribution operations, and employs around 60,000 people.

So what implications do Saudi Vision and the flotation of Saudi Aramco have for both Saudi Arabia and the rest of the world? Although it is impossible to see into the future, some possible outcomes are detailed below.

Reducing the reliance on oil - as previously mentioned, it will reduce Saudi’s dependence on revenues from oil. Although the Saudi government realise oil is still big business and is going nowhere soon (other cleaner energy sources are still in their infancy and even when matured will only account for a minority of global energy supply), they still realise they have an ‘addiction to oil’ – the words of Deputy Crown Prince Mohammed bin Salman leading the reforms.

The sovereign investment fund - the sale of Saudi Aramco will mean Saudi Arabia’s sovereign state fund will grow even bigger than it already is, and thus become an even more important player in global investments. This money will be reinvested in the country and abroad as well, and thus become an important income generator in itself (like a sovereign hedge fund). Plus, by offering a slice of the company to overseas investors it will encourage future foreign investment in other industries too.

Cultural & political changes - the Saudi Vision 2030 aims to increase private sector ownership from the current 40% to 65%. This will not only have an effect on the economics of the country and international trade relations (as below), but will also clearly have a spill-over effect on the culture of the country (as major privatization often does). The 5% sale of Saudi Aramco may lead the way for other state owned oil companies around the world to be sold if the IPO is seen as a success. This would have broad reaching implications for the whole Middle East region.

International relations - Related to the above, the prospect of having foreign ownership over Saudi Aramco (and possibly other assets in the future) means that other countries could have a strategic economic interest in keeping the area politically stable. Increasing the private sector’s contribution to GDP to 65% also means a different strategy would be employed towards international trade.

Transparency & scrutiny - the IPO process will set Saudi Aramco up for public scrutiny as selling to global investors involves rigorous accounting and legal standards, which is most likely to be a good thing. An IPO by its very nature will also mean Saudi Aramco will release a lot of previously undisclosed information about its operations and cash flows; something which has been previously closely guarded. If other nationalised oil companies follow the lead, they will also be under the same global public scrutiny.

Commenting on how the future strategy may affect professionals in the power and oil & gas sectors, Darren Grainger, Managing Director of NES Global Talent’s Middle East division, said:

“Saudi Arabia continues to provide opportunities for qualified industry professionals across the upstream and downstream sectors. The 2030 vision supports the growth of Saudisation and diversification within the hydrocarbons sector. The diversification move down the value chain to Basic Industries, Intermediates, and Plastics are a key contributor to the countries future GDP growth plans. The future projects list is one of the busiest within the region, and our history in the country and capability strength continues to provide opportunities for job seekers”