« Potential unexpected consequences of the expected failure of the Saudi Aramco IPO”
Since its announcement in early 2016, the prospect of Saudi Aramco’s IPO has emerged as an evidence for most observers and analysts. Only the issue of valuation was the subject of disagreement and debate, from the US $ 100 billion target set by the Saudi authorities to industry estimates of up to 50% lower.
This question remains decisive for several reasons because of what it would reveal, both explicitly and implicitly. On the one hand, technical-economic and political factors relating to market fundamentals: real potential of Saudi Arabian oil reserves, anticipation by investors of the structural state of the world oil market and pricing of the barrel, perception and integration by the same investors of the consequences of the deployment and strengthening of energy transition policies in the world and, especially in the current major oil-importing countries. On the other hand, the factors specific to the Saudi context: reconstitution of the flexibility in structural and cyclical economic policy, measure of country risk in all its components, in particular demographic, but also geo-strategic risks related to engagement and international influence policies implemented by Saudi Arabia.
However, contrary to this broad consensus, we immediately identified the risks and uncertainties that fuel doubt regarding the completion of this transaction, at least in the terms originally envisaged. We discussed this in January 2016 as part of two Insights (http://portal.beyond-ratings.com/2016/01/saudi-aramco-ipo-potential-implications-part-1-breaking-the-taboo/ and http://portal.beyond-ratings.com/2016/01/saudi-aramco-ipo-implications-part-2-the-cost-of-accessing-the-corridors-of-power/ ). Press releases during the month of October 2017 (Financial Times, Wall Street Journal, Reuters) are consistent with Beyond Ratings’ analysis: Saudi Aramco’s IPO is an unusual case, not so much by the valuation of its assets as by the range and magnitude of the associated risks. It seems that all the constraints of different kinds, including the capacity of the financial centers to host the operation, will now pose a significant threat and lead at least to the postponement of its date from 2018 to 2019. But the proponents and outcomes of the evolution of the Saudi Aramco IPO project are not limited to the conditions of execution. For if the postponement or the pure and simple cancellation would constitute, as the case may be, a damaging or even frankly disastrous scenario for the credit of Saudi Arabia as a leading international actor, the privileged information quoted in the press announce a possible alternative which carries its own seeds of consequences of considerable magnitude and certainly underestimated by many actors.
The transaction, originally planned in the form of an IPO, could thus be reduced to a private sale to Asian sovereign investors. The current dominant perception of this option is that it would primarily allow the Saudis to retain their credit. But this is not the most decisive aspect. If, as mentioned, Asian interests, a fortiori only Chinese, are the sole buyers of a fraction of Saudi Aramco assets, this would accelerate the recomposition of the international scene in progress since the mid-2000s. In essence, the Asian block would gain autonomy without significantly weakening the position of Russia. The question which would follow for Europe would then appear in its formidable simplicity: to yield to the pressures aimed at breaking its ties with Russia or on the contrary to take part in the consolidation of a Eurasian block? In front of the possible tight link between Saudi Aramco and China, are the United States in a situation of strategic and peaceful withdrawal from Middle East, whereas their oil autonomy so frequently announced since 2010 is rather slow to come? Whatever the path, the Saudi initiative is simultaneously a symptom and cause of a mutation in the world order, inevitably leading to a general increase in risk.