One of the most important aspects of development in Saudi Arabia, and in the Gulf more broadly, is the fact that it often doesn’t happen. The Gulf countries are mostly run by monarchs, and they all have pharaonic ambitions. They want to build monuments, cities, and other great works that illustrate their magnificence. If it’s something as simple as a museum or giving a foreign university a local campus it happens. But the great ambitions that mix local development, innovation, or anything else that requires real buy-in from the people of the country, either never happen, or happen in such a small way as to make the initial announcements look ridiculous.
When NEOM, the 500 billion USD sustainable city was announced, I couldn’t help but think of the UAE’s Masdar city. It was announced with similar fanfare back in 2006. It was going to be green, it was going to be amazing, there were going to be tons of people there! Parts of Masdar did end up being built, but most of the plan was scrapped, and the Guardian now describes it as in danger of becoming a ghost town. Masdar isn’t the only hi-tech wonderland city that never was. Saudi Arabia has one too. Anybody remember King Abdullah Technology City? It was the last king’s NEOM. It was still moving along, or at least reported to be so back in 2015.
And that’s the important bit here. All of this constant churn of projects seems to be done more for a foreign press audience than to create real change in Saudi Arabia. I don’t doubt the sincerity of any of the Saudi Royal reformers, I just doubt their ability. The world press gives them a free pass on all of this. Almost none of the articles reporting on NEOM mentioned King Abdullah city or Masdar. Actually, now that Abdullah is dead, his city seems to have disappeared from the news completely. It’s clear that it’s now longer a public relations priority, and I’d guess that the 100 billion that is supposed to build that city is now quickly moving on to MBS’s NEOM. This is not a good way to run anything. But the Saudis get a pass from the world press. Today’s video, on the ridiculousness of the Saudi Aramco IPO is an attempt to push back on that a bit.
Video Transcript after the jump…
Hey there. Today I am going to tell you a tale of moon beams and unicorn farts, otherwise known as the Saudi Aramco IPO. This business deal is one of the the most geopolitically important factors out there, and it might not ever happen. Today I am going to do what nobody else will and talk about this honestly.
The Saudi Arabian Oil Company popularly known as Aramco, after an old name, is almost certainly the most valuable company in the world. The country is running out of money, so selling off a chunk of the state oil company is an entirely rational thing for the Saudis to do at this point. This whole IPO business, however, is just ridiculous. It’s probably just a very long and convoluted way to take 75 billion dollars from the Chinese.
Today, for the first time in four years, I am going to put on my corporate lawyer costume to explain why this is so ridiculous. Nobody really knows how much Aramco is worth. Back when people believed in peak oil folks would throw figures like 10 trillion dollars around. Today the best guesses seem to be between one to two trillion dollars. The Aramco IPO is the reason why Saudi Arabia has been so willing to cut oil production. The higher the oil price is, the more money they can get for the oil company.
An initial public offering or IPO is not what you use to sell a small slice of your state oil company. It’s clear to me that some Saudi princes read a few too many articles on tech IPOs and thought the concept was sexy. In an IPO a business sells a significant amount of shares in their company in return for money to grow the business.
Ah forget it!
Founders and executives often get a pay day out of an IPO, but that’s not the main point. The owners sell some control of their company so that it has more money to grow. Neither of these things are true for the Aramco IPO. The Saudis only want to sell 5% of the company, keeping most of the control, and they aren’t even pretending that the money will be used for Aramco’s benefit.
Almost every month Saudi Arabia pops up and announces A ginormous new project somewhere. There’s NEOM the 500 billion dollar city, and the un priced but similarly massive red sea tourist project that were announced last year. Over the past few weeks alone they announced that they are building a 200 billion dollar solar field with Japan’s Softbank, and that they want to accelerate plans to build 80 billion worth of nuclear plants.
Just those four projects would exceed Saudi Arabia’s foreign currency reserves and the total amount of money in their less liquid public investment fund. The Saudis simply don’t have the money for a fraction of the stuff they are promising. Very little financial journalism is honest enough to point this out. The little that does just points in the direction of the Aramco IPO and moves on.
This is despite the fact that the best estimates of the company’s value now state that the IPO will likely only win Saudi Arabia another 75 billion dollars. That amount of money barely makes a dent in the projects proposed over the past two weeks alone.
For two years now the Saudi government has been surrounded by tens of millions of dollars worth of wall street consultants telling them all kinds of fairy tales about New York and London listings, and new respect and legitimacy for Saudi business. I suppose it’s still just possible that a desperate post Brexit city of London will lower its standards enough to do the IPO but this was never likely.
Aramco is, by all accounts, the best run sector of the Saudi economy. That doesn’t mean it’s good enough for a public listing in the non petro state world with its emphasis on shareholder value. It would require levels of transparency that the Saudi government will never be ready for. Also, the government is very very unlikely to change its treatment of the company. Aramco will remain a tool of Saudi government policy regardless of what the investors think.
Investing in and with a petro state like Russia is something that only the biggest and meanest oil companies can do. In Russia low level lawyers and business people get brutalized by the state. In Saudi Arabia even the oligarchs get that treatment. Why would anybody without an air force want to throw money down that hole? Once again, maybe it would have worked in the peak oil days but 5% of Aramco just isn’t a good investment in 2018.
I think reality is beginning to sink in. The Saudi government is now changing the laws to make it possible to sell the Aramco stake on their small local stock market. The IPO is now unlikely to happen before 2019. If it does happen then, it won’t bring in anywhere near the fabulous sums of money imagined by the international press. The local rich folks I expected to be forced to buy in a year go have already been dispossessed. The only likely buyer I can see is China, for strategic reasons, and the United States wont like that at all. The Saudi Aramco IPO will not save Saudi Arabia.
Thanks for watching, please subscribe, and if you want to know why I am looking forward to the fall of Saudi Arabia I suggest you read my essay Everybody’s Lying About Islam, available now in paperback and on the Amazon Kindle.