Saudi Aramco is facing an uphill battle with the company's valuation for its Initial Public Offering (IPO), according to Rauf Mammadov, an energy expert in Washington D.C.-based The Middle East Institute.
Mammadov told Anadolu Agency that the recent drone attack on oil facilities in Saudi Arabia has scared off potential investors exposing the vulnerability of the kingdom's oil infrastructure network.
The issue of the company's valuation is also challenging, as some energy experts believe the Saudi leadership valuation at $2 trillion is inflated.
Its choice of location to list the company has been impeded. The Saudi leadership has decided to hold the initial offer on the Saudi Stock Exchange, or Tadawul, as holding it outside of Saudi Arabia holds substantial risks. If the company is listed either on the New York or London exchanges, it could lead to an increased risk of lawsuits under two U.S. laws, he explained.
'One is the 'Justice Against Sponsors of Terrorism Act' (JASTA), which authorizes suits against Saudi Arabia on grounds that it helped plan the 9/11 attacks. Proposed legislation 'The No Oil Producing and Exporting Cartels Act' known as NOPEC would allow suits against countries that try to keep oil off the market to boost prices,' he said.
-Higher oil prices are not solution to raise firm's valuation
Mammadov said that given these constraints, it would be hard for even Saudi Aramco alone to push oil prices higher to increase Aramco's valuation for its IPO.
'First of all, any price increase will cause harsh criticism from the Trump administration which we have witnessed before OPEC + meetings. Furthermore, high oil prices will help Iran, it’s arch enemy, to reap maximum benefit from its exports,' he said.
Saudi Arabia also faced an oversupplied oil market in 2016 due to increasing non-OPEC production, namely from the United States, Russia and other non-OPEC countries. In response, Saudi Arabia kept production levels high to protect its market share, but this proved futile and the kingdom changed its strategy.
'Saudi Arabia partnered with Russia to create OPEC+. The new format of OPEC has given Saudi Arabia leverage to prevent the [oil] price from plummeting and preserved its role as a leader of the cartel. The current strategy of OPEC is based on this premise. OPEC, i.e. Saudi Arabia, is not expected to change its policy by the end of this year,' he said.
-Production cut suits Riyadh's interests
The current production cut levels are expected to remain unchanged because it suits Riyadh’s interests, Mammadov explained.
'The only challenge that production cuts create is losing the Asian market share to its main competitor Russia. For the last three years, Russia, namely Rosneft, has superseded Saudi Aramco as the largest supplier of oil to China. However, the situation is changing now and Saudi Aramco is expected to prevail again due to lack of output increase from Russia in the coming years,' he said.
- Aramco's IPO
Developments towards achieving a public offering have gradually gained momentum with Yasser Al-Rumayyan's appointment as chairman of Saudi Aramco on Sept. 8. It is hoped the appointment will help speed up the company's IPO under Al-Rumayyan's lead with his considerable experience in initial public offerings in the kingdom both in government and the private sector along with his banking experience. As an adviser to the Royal Court and former member of the board of directors of Tadawul, he is seen as an ideal candidate to push through the IPO.
Firstly, Riyadh announced the sale of up to a 5% stake by 2020-2021 to raise $100 billion, in line with Crown Prince Mohammed Bin Salman's Vision 2030 plan. But then the kingdom released it plans to list 1% of the company on the Tadawul at the end of this year and another 1% in 2020, instead of Tokyo as the preferred choice.
U.S.-based international banking giant JPMorgan is reportedly acting as underwriter for Aramco's IPO.
The Aramco IPO is a pillar of an ambitious economic diversification drive by the Crown Prince, who had put the firm's valuation at $2 trillion.
By Busranur Begcecanli