Saudi Aramco Goes Public: Oil and Transparency

November 27, 2019

Saudi Aramco’s historic IPO raises questions about valuation, governance, and its role in the future of global energy.

On November 24, 2019, the world’s largest oil company, Saudi Aramco, began its historic initial public offering (IPO), offering a rare glimpse into the financials of a company that has long been shrouded in secrecy. The company’s decision to go public has sent shockwaves through global financial markets, raising significant questions about the future of the oil industry, the valuation of Aramco itself, and the broader implications of the IPO for the Kingdom of Saudi Arabia’s economic strategy. Aramco’s listing is not just an economic event—it is also a political statement, signalling a shift towards greater openness and a more diversified economy, as the Kingdom seeks to reduce its reliance on oil revenues and prepare for a post-oil future.

The Saudi government, which owns 98% of Aramco, has long been hesitant to list the company, citing concerns about transparency, governance, and the impact on national security. However, the IPO is a crucial part of Crown Prince Mohammed bin Salman’s Vision 2030 initiative, which aims to reduce Saudi Arabia’s dependence on oil and diversify the economy into other sectors such as tourism, technology, and entertainment. By offering a stake in Aramco to the public, the government hopes to raise capital that can be reinvested in these non-oil sectors, helping to secure the long-term stability of the Kingdom’s economy.

The valuation of Saudi Aramco has been a topic of intense debate leading up to the IPO. For years, the company’s worth was a closely guarded secret, with estimates ranging widely from $1 trillion to as much as $2 trillion. The final valuation of $1.7 trillion, which was announced just before the IPO, positions Aramco as the most valuable publicly listed company in the world, surpassing the likes of Apple and Microsoft. This figure, however, has been met with scepticism, with some analysts arguing that it is overly optimistic, given the volatility of global oil markets and the increasing push for renewable energy sources.

In many ways, Aramco’s IPO represents the culmination of a long-standing strategy to modernise and open up the Kingdom’s economy. For decades, the Saudi government has relied heavily on oil revenues to fund its budget, and the country’s financial system has been built around the dominance of its state-owned oil company. By listing Aramco on the stock exchange, the Saudi government is attempting to send a message to the world that it is ready to embrace market forces, even if this means sacrificing some degree of control over its most valuable asset. It is a delicate balancing act, one that requires careful navigation of both economic and political pressures.

Yet, the decision to go public is not without risks. The oil market is facing significant challenges, with prices remaining volatile and the global push for greener energy sources gaining momentum. While Aramco’s vast reserves and low production costs make it a formidable player in the oil industry, the future of the company is not guaranteed. The global transition to renewable energy, combined with growing concerns over climate change, has raised questions about the long-term viability of oil as a major source of revenue. As demand for fossil fuels begins to decline, the company’s future profitability could be severely impacted.

In addition to these market risks, the IPO also raises important questions about governance and transparency. For years, Saudi Aramco operated as a black box, with little information available about its operations, finances, or management practices. The IPO represents a significant shift in this regard, as the company is now required to disclose detailed financial information to potential investors. While this move is seen as a positive step towards greater transparency, some critics have argued that it does not go far enough. Aramco’s governance structure remains tightly controlled by the Saudi government, and many believe that the company’s decision-making processes will continue to be heavily influenced by political considerations, rather than market forces.

The valuation of Aramco also raises concerns about the true worth of the company. The $1.7 trillion figure, while impressive, is based on an assumption that oil prices will remain stable or increase in the coming years. This is far from a certainty, as the global oil market has been increasingly subject to external shocks, including geopolitical tensions, supply chain disruptions, and shifts in demand. Furthermore, there is growing pressure on oil companies to reduce their carbon footprint and invest in renewable energy sources, which could limit Aramco’s ability to sustain its current level of profitability.

In many ways, Aramco’s IPO can be compared to the gradual opening of an impenetrable fortress, akin to the unveiling of the secrets of Dr. Jekyll and Mr. Hyde in Robert Louis Stevenson’s famous novel. Just as Dr. Jekyll’s hidden dual nature is revealed over time, so too is the inner workings of Aramco being exposed to the world in a public offering. For years, the company’s financial details were a mystery, known only to a select few within the Saudi government. Now, with the IPO, the company’s once-secretive nature has been laid bare, opening up a new chapter in the Kingdom’s economic story.

However, much like the tragic story of Dr. Jekyll, Aramco’s path to transparency is fraught with challenges and risks. The company’s future is not guaranteed, and the pressures of the global energy market and the growing demand for renewable energy could reshape the landscape in ways that are difficult to predict. Moreover, the Kingdom’s heavy reliance on Aramco for its economic stability creates an added layer of vulnerability, as any downturn in oil prices or mismanagement of the company could have far-reaching consequences for the entire nation.

Another comparison could be drawn to the famous story of Frankenstein by Mary Shelley, which also explores the theme of creation and unintended consequences. In the case of Saudi Aramco’s IPO, the Kingdom has created a powerful financial instrument, but the consequences of its actions remain to be seen. The IPO represents a bold step towards modernisation, but it also risks unleashing forces that may be difficult to control. Much like Frankenstein’s monster, Aramco’s newfound transparency could come with unintended consequences, both for the company itself and for the broader global energy market.

The importance of governance in Aramco’s future cannot be overstated. While the company has made strides in terms of transparency, its governance structure remains a point of contention. Critics argue that the company is still too closely tied to the Saudi government, and that this could create conflicts of interest or lead to inefficiencies in decision-making. As Aramco continues to grow and expand its global footprint, it will need to adopt more robust corporate governance practices in order to reassure investors and maintain its reputation as a leading player in the global energy market.

The long-term success of Aramco’s IPO will depend on its ability to adapt to a rapidly changing energy landscape. As the world shifts towards cleaner, more sustainable energy sources, oil companies like Aramco will face increasing pressure to diversify their operations and invest in renewable technologies. In this context, the Saudi government’s Vision 2030 initiative is critical, as it outlines a roadmap for the Kingdom’s transition away from oil dependence. Aramco, as the crown jewel of the Saudi economy, will play a central role in this transformation.

In conclusion, Saudi Aramco’s IPO is a momentous event that raises important questions about the future of the global energy market, the role of oil in the modern economy, and the Kingdom’s efforts to diversify its economy. While the IPO has garnered attention for its record-breaking valuation, it also signals a broader shift towards greater transparency and openness within Saudi Arabia’s economic and political landscape. As the company navigates the challenges of governance, market volatility, and the transition to renewable energy, its future will be closely watched by investors, policymakers, and environmentalists alike. The outcome of this historic IPO will undoubtedly have far-reaching implications, not only for Saudi Arabia but for the global energy industry as a whole.