Last Sunday, Saudi Arabia’s King Salman removed Energy Minister Khalid al-Falih and replaced him with Prince Abdulaziz Bin Salman. This marks the first time a royal family member has held this position, but Prince Abdulaziz is not taking over the position without knowledge or experience. He has been in the oil ministry since the 1980’s.
Rapid Decline of Khalid al-Falih
Falih had been Energy Minister since 2016. His position weakened last month when a part of the Energy Ministry was broken off to create the Ministry of Industry and Mineral Resources. And just days before his removal as Energy Minister, he was replaced as chairman of the massive state-owned Aramco, the largest oil company in the world, in an effort to separate the ministry from the company ahead of its initial public offering (IPO).
An Effort to Diversify Saudi Arabia’s Economy
It is Saudi Arabia’s plan to eventually place 5% of Aramco up for public sale in an effort to diversify their economy away from a complete budget dependence on oil, thus preparing them for an easier recovery in case of another market crash such as the one they experienced in 2014. The current plan is to place 1% of Aramco on the Riyadh stock exchange this year and another 1% next year before offering the larger 5%. It is estimated these sales will bring in around $100 billion for the country
The IPO has been postponed before, perhaps waiting for an increase in Aramco market value before going through with the sale. The most recent postponement could be due to the uncertainty caused by the U.S./China trade war. China, for the first time, has placed a 5% levy on U.S. crude oil, spurring fears of a global recession and bringing down Brent crude prices to around $60 per barrel.
Prince Abdulaziz is doing his best to show optimism and hope, saying that the trade dispute between America and China is not a trade war, but rather a “temptation for trade wars.” He further insists that OPEC’s deal with non-OPEC members (OPEC+) will remain intact. That deal was forged to curb the production of crude oil in order to lift sliding prices. In July, that deal was extended until March 2020. Convenient timing, as now the long looked for IPO is expected to take place either in 2020 or 2021.
World Banks to Lead the World’s Largest IPO Finally Named
Most recently, Aramco has selected JPMorgan, Morgan Stanley, Saudi Arabia’s National Commercial Bank, Bank of America Merrill Lynch, Goldman Sachs, Credit Suisse, Citi, HSBC and Saudi Arabia’s Samba to lead the IPO. In the light of disagreement over the true value of Aramco, the appointing of Prince Abdulaziz is perhaps an effort to assure investors and alleviate any doubts over the transaction. Prince Abdulaziz places Aramco’s true value at $2 trillion, while banking institutions around the world consider it to be $1.2 or $1.5 trillion. The discrepancy comes with the lack of transparency that has long followed Aramco. Once it hits the trading floor, however, we will see what we have been missing. It will be interesting to see what happens next as this story continues to unfold.