Middle East NOCs under pressure
Moves to privatise state energy firms in the Middle East have begun, but progress will be slow and patchy
The details of exactly where and how it's to happen are still keenly awaited. But already the planned initial public offering (IPO) of 5% of Saudi Aramco, the kingdom's giant energy firm, is grabbing all the headlines. International banks and law firms are tripping over each other as they jostle to become part of the action.
The Aramco sale is an integral element in Vision 2030, the plan drawn up by Mohammed bin Salman, when he was deputy crown prince, to wean Saudi Arabia off its dependence on oil and boost the private sector. While unveiling the strategy in April 2016 he suggested that the company was worth $2 trillion to $3 trillion, meaning that the IPO could raise as much as $150bn. Although the Saudi government in March this year cut Aramco's income-tax rate from 85% to 50%, effectively boosting the value of the company, the final valuation will probably fall short of MbS's estimate.
Nevertheless, it will be a momentous affair, certain to break a string of records for public sales of all kinds. Most indications are that the IPO will take place before end-2018, but a delay into the following year isn't being ruled out. The crown prince (as he now is) may want to allow more time for the global oil price to rise. Plus, a number of practical issues must be resolved, including the need for potential investors to be given access to Aramco's data and accounts.
Another question is whether or not Aramco's very considerable and successful range of activities outside the energy sector need to be separated from the core company before the IPO. Potential investors will want to know if they're buying into an oil company or one with a much wider remit.
Over recent years, Aramco has been prominently involved in the establishment of education, health and sports projects. But this is nothing new. The company's role in the general development of economic and social life in the kingdom is deep-rooted. As far back as the late 1940s, an American visitor wrote that "the most valuable contribution Aramco has made is in the encouragement of local initiative and industry. Aramco's activities in Saudi Arabia have not been limited to those connected with oil."
Then there's the issue of where the IPO will be floated. The likelihood is that some shares will be allocated to Saudi Arabia's stock market, Tadawul, in Riyadh. As for the remainder, the kingdom has yet to decide which of the major international exchanges—London, New York, Hong Kong, Tokyo—should handle the sale.
Adnoc follows suit
The final decision on all outstanding matters relating to the Aramco IPO will be taken by the kingdom's young and ambitious crown prince. One of his closest allies in the Gulf is another young and dynamic crown prince: Mohammed bin Zaid of Abu Dhabi in the UAE. The latter is equally committed to economic modernisation. In this context, progress is being made towards breaking up the UAE's major state energy company, Abu Dhabi National Oil Company (Adnoc).
In April, it was reported that the Abu Dhabi government had contracted Moelis & Co, a private US investment bank, for guidance on IPOs, a role that it's already playing in Saudi Arabia. In July, the UAE announced that it was planning to put up for sale part of Adnoc Distribution, a subsidiary of the umbrella company that markets and distributes petroleum products. Four banks have been appointed to coordinate the sale: First Abu Dhabi Bank, Citigroup, HSBC and Merrill Lynch.
The fanfare accompanying the planned IPO in the two Arab Gulf oil giants, Saudi Arabia and the UAE, tends to distract from Qatar's progress in loosening state control of its national energy company, Qatar Petroleum (QP). In January 2014, Qatari citizens had the opportunity to buy shares in a QP subsidiary, Mesaieed Petrochemical Holding Company. The IPO raised $0.88bn. Plans for more sales of QP subsidiaries are under study.
National oil companies across the Middle East will be watching and learning from the experiences of the three Gulf states which have set out on the IPO route. While these three have recently decided to grasp the nettle, talk of privatisation has been in the air for many years. A Kuwaiti oil minister in the early 1990s said that plans were "well underway" for the partial sale of some Kuwait Petroleum Corporation (KPC) subsidiaries. Nothing happened. A decade later, Kuwait's Supreme Petroleum Council recommended that KPC should start selling its stakes in subsidiary companies. Again, the advice was ignored.
Most recently, in mid-2016, a senior official in the finance ministry told the Kuwait Times that the government would be copying the Aramco pattern by arranging a partial privatisation of KPC. But the idea wasn't well received by members of the National Assembly or media. Over the years strong opposition has greeted any suggestion that Kuwait's oil, and the institutions governing it, should pass out of state hands. Successive governments have even struggled to persuade politicians and the public of the benefit of bringing in IOCs on technical service contracts. There seems scant prospect, therefore, of parts of Kuwait's national oil company being sold off.
$2-3 trillion - Mohammed bin Salman's suggested valuation of Saudi Aramco
As for national oil companies in the other Gulf producers, plans to break up parts of the Bahrain Petroleum Company (Bapco), which operates under the National Oil and Gas Authority, are periodically discussed. But in Oman, 40% of Petroleum Development Oman is already in private hands (Shell, Total and Partex) with the government holding 60%.
Nioc looks secure
On the other side of the Gulf, Iran is another country that's been contemplating for many years selling off parts of its state oil giant, the National Iranian Oil Company (Nioc). Under plans announced in 2005, Nioc, which comes close behind Aramco in size and influence, was to privatise five subsidiaries. But opposition within conservative groups and the Islamic Revolutionary Guard Corps blocked progress.
The election to the presidency in 2013 of Hassan Rouhani, liberal in outlook and relatively well disposed to developing relations with the West, was followed by the nuclear deal. This and the opening up of the energy sector to IOCs have led to speculation that moves towards privatisation might resume. But while Rouhani favours the idea and enjoys the support of many within the energy sector, political opposition to the whole notion of allowing the national oil company to fall into private hands lingers. The chances are, then, that Nioc and its 24 subsidiaries will remain under the control of the state—at least for the time being.
Popular opposition to privatisation also exists in Iraq. The national oil company was scrapped by President Saddam Hussein in 1987, replaced by three state-controlled regional firms: North Oil Company, South Oil Company and Midland Oil Company. Oil is sold by the state marketing firm, Somo. Voices inside and outside the Iraqi energy sector can be heard advocating the handing of oil distribution to the private sector as a first step towards wider privatisation. But it's hard to imagine this happening soon. Aside from strong political opposition, the government has its hands full coping with a formidable range of security and economic crises.
Away from the Gulf region, Egypt is proceeding apace with energy-sector privatisation. The first in line is the IPO of the government-owned petroleum engineering company, Enppi—scheduled to take place before the end of this year. Others awaiting their turn include Misr Petroleum Company, the state oil marketer; Sidpec, a petrochemicals company; and the Alexandria Mineral Oils Company.
National oil companies in the Middle East are clearly no longer the immovable behemoths that they were five or 10 years ago. Privatisation is underway. But it looks like being a slow process. The likelihood is that in five or 10 years from now, state oil firms will still be a force in the land, but with a higher proportion than today of public-private joint ventures.
This article is part of an in-depth series on NOCs. Next article: Gazprom feels the heat