Saudi Arabian Oil Co., which is planning what could be the world’s biggest share sale, will publish annual financial statements before the offering set for 2018, Energy Minister Khalid Al-Falih said.
The state-owned company, known as Saudi Aramco, will disclose its 2017 annual statements prior to the listing, Al-Falih said Thursday at a seminar in Riyadh.
Saudi Arabia is trying to remake its oil-dependent economy into one that is more diversified, under a plan it callsVision 2030.
A higher oil price would help boost revenues at a time when it has been running deficits and borrowing.
“They need a decent oil price, and they need to maintain market share.
Part of the great irony of Vision 2030 is that in order to diversify the Saudi economy away from oil, they need to sell oil,” said IHS Markit Vice Chairman Daniel Yergin.
The kingdom steered OPEC on Wednesday to cut back on the oil spigot in order to boost prices.
All producers have been struggling with a bruising cycle that has strained budgets and hampered their ability to reinvest in energy infrastructure.
The Organization of the Petroleum Exporting Countries agreed to cut production by 1.2 million barrels a day, bringing output to 32.5 million barrels a day.
Additionally, OPEC said non-OPEC producers are also expected to contribute with a 600,000-barrels-per-day reduction, including a surprise 300,000 barrels a day cut by Russia.
Saudi Arabia would trim just 486,000 barrels a day, about 300,000 less than expected.
“The Saudis really pulled off a victory for themselves … I think that the most recent sell-off in crude oil scared them all into this.
I think they saw what lay ahead if they didn’t do this,” said John Kilduff, founder of investment firm Again Capital.
“They recognize that low prices are a big problem, but so are high prices — if you’re a long-term supplier — because it erodes demand and encourages alternatives.”
Higher oil prices should also be a plus for the expected initial public offering next year of state-owned oil company Saudi Aramco, a pillar of the kingdom’s plan to create a huge sovereign wealth fund.
The world’s largest oil exporter is hoping to diversify into areas such as technology, mining and tourism.
Saudi Arabia may have pushed for the current OPEC deal, but it was also the main force behind the cartel’s November 2014 decision to abandon OPEC’s long-running policy of using output as a lever to control prices.
It instead let the market set prices, in an effort to stem the growth of high-cost production, especially U.S. shale.
That strategy resulted in OPEC and other producers pumping record amounts of oil, which ultimately drove prices into the $20s per barrel this year.
Saudi officials have been vocal about their concerns that low oil prices make it difficult to reinvest in exploration and production, and that they ultimately could create a supply shortage when demand starts to rise.
“I think the Saudi minister has been very explicit now for over a year, warning that the underinvestment could lead to a fly up in prices before the end of the decade, and that is something they don’t want to see.
They recognize that low prices are a big problem, but so are high prices — if you’re a long-term supplier — because it erodes demand and encourages alternatives,” said Yergin.
Michael Cohen, head of energy commodities research at Barclays, said Saudi Oil Minister Khalid al-Falih mentioned the industry’s need to increase capital expenditures in his remarks in Vienna on Wednesday.
“At the end of the day, what Saudi Arabia is worried about is they wanted to get the engine started on investment.
They don’t see it starting when oil is at $35 to $45,” he said.
The agreement to cut production comes at the end of a year of failed efforts, and several days of high drama between producers, who quibbled over how much cutting each would contribute in order to rein in the global oil glut.
West Texas Intermediate oil futures plunged Tuesday, and then rallied 9 percent Wednesday in response to the accord.
Whether the proposed deal works remains to be seen, but even the semblance of an agreement is expected to be positive for prices.
“There was a lot of overnight diplomacy.
That was the turning point. The skeptics in the room needed to see the numbers. It looks like the Saudis drove the hardest bargain on specificity. They knew what the market needed, and they pushed it through,” said Helima Croft, head of global commodities strategy at RBC.
“I think even the requirement for non-OPEC (nations) is really about the Saudis looking for the most credible statement they could get. I think they understood there was so much skepticism in the market,” she said.
Saudi Arabia’s reform effort is being led by 31-year-old Deputy Crown Prince Mohammed bin Salman, the favorite son of King Salman.
“The problem is Saudi Arabia is really testing the elasticity of shale, and they’ve been testing the elasticity of shale for the last two years, the new source of supply. If their actions lead to an increase in the price to a band of $50 to $60, what kind of shale response would we get? Nobody knows the answer to that question.”
Croft said the OPEC oil deal should help the country’s reform program, as it could alleviate economic pressure and buy the young prince some time. The kingdom has cut back on entitlements, subsidies on things like fuel, and even on salaries.
“They risk popular backlash. This will be a popular decision in Saudi Arabia, and it gives Mohammed bin Salman some breathing room,” she said.
But stability in the market could bring back the very competitors OPEC was trying to stop. The U.S. industry in the last decade shocked the world when it used new shale-based technologies and horizontal drilling to suddenly boost oil production.
When OPEC unleashed its market-based strategy in 2014, the U.S. had added 4 million barrels a day of production in just six years. According to U.S. government data, the U.S. produced 8.7 million barrels a day last week, about a million barrels a day below its peak in spring of 2015.
“The problem is Saudi Arabia is really testing the elasticity of shale, and they’ve been testing the elasticity of shale for the last two years, the new source of supply.
If their actions lead to an increase in the price to a band of $50 to $60, what kind of shale response would we get? Nobody knows the answer to that question.
Their foreign exchange reserve continues to tick lower.
They have Vision 2030.
The war on Yemen is continuing, and they have the Aramco IPO, and higher prices are conceptually a better platform for all of those things — the Yemen war, Vision 2030 and the IPO,” said Cohen.
He said Saudi Arabia viewed U.S. shale growth of 1 million to 1.5 million barrels a day as disruptive.
“They weren’t comfortable with that level of growth, and who is to say they won’t be comfortable with 200,000 to 300,000?
That’s what we expect — 200,000 barrels a day of growth from the lower 48” states in 2017, Cohen said.
No single market can absorb an initial public offering of Aramco’s size, and the company is looking to sell shares on at least two or three stock exchanges, he said.
Khalid Al-Falih
Saudi Arabia, the world’s biggest crude exporter, plans to sell less than 5 percent of the company as part of plans by Deputy Crown Prince Mohammed bin Salman to set up the world’s biggest sovereign wealth fund and reduce the economy’s reliance on oil.
Saudis have estimated the entire company to be worth more the $2 trillion.
The kingdom pumped 10.48 million barrels a day of oil in December, data compiled by Bloomberg show.
Saudi Aramco plans to sell shares on the Saudi stock market, and company officials have mentioned also listing on bourses in the London, Hong Kong, Tokyo, New York and Canada.
“Even if we sold five percent, no market in the world can absorb an IPO of this size,” Al-Falih said at the seminar.
“Therefore, the intention is for there to be several markets, at least two or three.”
