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Aramco IPO part of a bigger plan

The Saudi state-owned producer is aiming for a formidable network of midstream and downstream assets

Saudi Aramco’s IPO is an integral part of the country’s Vision 2030, which is designed to channel the kingdom’s oil wealth into building a higher value-added economy. Engineering and petrochemicals development are key target areas of the masterplan, which includes dozens of large infrastructural and industrial projects worth hundreds of billions of dollars.

“The success of Aramco's planned IPO is contingent on the company's ability to convince investors that it can generate value across the full product cycle,” says George Voloshin, a senior analyst at Aperio Intelligence, a UK-based strategic intelligence company. 

“For now, there is too little to show for Saudi Aramco's diversification strategy, but the strategic direction is well set. Last year, the company pledged close to $500bn for natural gas and petrochemical projects over the next decade, accentuating its gradual but decisive shift from oil exploration and production.”

A $69bn merger with Riyadh-based petrochemicals heavyweight Sabic, announced in March, will give Aramco access to the assets and operations of the world’s fourth-largest chemicals firm, with a global reach across 50 countries. This is just the tip of the iceberg: in recent years, Aramco has dotted the globe with new JVs and has set its sights on targets as diverse as LNG in the Russian Arctic, building the world’s largest refinery in India and shipbuilding at the King Salman International Complex, currently under construction at Ras al-Khair in Saudi Arabia. 

$2tn — Saudi Aramco IPO target

Over the past few months, the company has also announced plans to buy a 20pc stake in the downstream arm of India’s Reliance Industries and pledged downstream investments in China’s Zhejiang Free Trade Zone, as well as in a dozen projects in South Korea including a $6bn expansion of S-Oil’s Ulsan refinery. It reaffirmed its commitment to the $44bn Ratnagiri refinery and petrochemicals complex in India, slated to become the world’s biggest, and is reportedly eyeing the Indian government’s 53pc stake in refiner Bharat Petroleum.

“The company has easy access to debt which should in principle support these ventures,” says Ayham Kamel, practice head for the Mena region at Eurasia Group, a UK-based consultancy. “It is a long-term plan and we have seen parts of that unfolding in South Korea […] as well as Indian plans and expansion in China.”

Litmus test

The IPO is both a litmus test for those plans and a potential source of funds. The initial phase of the public offering, geared towards the domestic market, appears aimed at boosting Aramco’s valuation by tapping the wealth of Saudi investors. Subsequently, the oil giant may seek to leverage its newly-forged relations abroad in order to bring investments back home: Russian and Chinese entities, alongside several sovereign wealth funds including Abu Dhabi, have been linked with potential interest in buying into a non-domestic listing.

There remain potential bumps in the road ahead, and, correspondingly, independent estimates of firm’s worth vary widely, from around $1tn to around $2.5tn, with Saudi Arabia’s own target at $2tn.

“The success of Aramco's planned IPO is contingent on the company's ability to convince investors that it can generate value across the full product cycle” — Voloshin, Aperio Intelligence

“The test will be whether [the money raised from a listing] of about $1.5tn will be allocated to job-generating investments which must be a top priority—and whether this will catalyse similar investments from other sources,” says Jan Kalicki, an energy security expert at the Wilson Center, a Washington-based think tank.  

The volatility of regional geopolitics also pose a threat to Aramco’s future ambitions, after missile attacks attributed to Iran briefly halved Saudi Arabia’s oil output in September. But renewed Saudi diplomacy in Yemen has sparked tentative hopes for regional peace.

“Saudi Arabia is interested in lasting peace in the region in order for its economy to grow amid an improving investment climate,” says Voloshin. “This will not be possible without the resolution of the Yemeni crisis and the redoubling of efforts to soothe tensions with Iran.”

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