Many more questions than answers have been raised by last week’s sale of an additional US$11.2 billion of shares in Saudi Arabia’s flagship company Aramco. Much has been made by Aramco sources that the issuance attracted many more international investors than the original initial public offering (IPO) in December 2019 but as virtually none in the Western investment community took part back then, this appears as a largely redundant comparison. More apposite observations prompted by this latest stock sale are whether this will further damage the company to function competitively in the current oil and gas market, if it will boost its ability to help Saudi Arabia to create more liquidity for its financial system, and whether it will reignite calls for far-reaching anti-trust legislation to brought against the firm and Saudi Arabia, given the inextricable link between the two in the world oil market.
It is vital in all these contexts to recall that one of the key purposes of the original IPO was to plug the huge hole left in Saudi Arabia’s finances after the 2014-2016 Oil Price War that it had instigated to destroy or significantly delay the expansion of the U.S.’s then-nascent shale oil industry, as analysed in full in my new book on the new global oil market order. That War had swung Saudi Arabia from a budget surplus to a then-record-high deficit of US$98 billion at the end of 2015. It had also spent at least US$250 billion of its precious foreign exchange reserves over that period that even senior Saudis said was lost forever.
So bad was Saudi Arabia’s economic and political situation back towards the end of that Oil Price War that even the country’s then-Deputy Economic Minister, Mohamed Al Tuwaijri, stated unequivocally (and unprecedentedly for a senior Saudi) in October 2016 that: “If we [Saudi Arabia] don’t take any reform measures, and if the global economy stays the same, then we’re doomed to bankruptcy in three to four years.” At that point, the ambitious then-Deputy Crown Prince, Mohammed bin Salman, came up with the idea of selling part of Aramco. One advantage of this would be that it could raise a lot of money to plug the budget deficit in the first instance.
An additional purpose of the 2019 IPO was to use any extra funds from the then-intended 5 percent stake sale to bolster Saudi’s ‘Vision 2030’ development plan aimed at diversifying the Kingdom’s economy away from its reliance on oil exports. Another positive factor was that if it was successful, the Aramco IPO would boost Saudi Arabia’s reputation in the international capital markets, allowing it to more easily conduct similar IPOs in the future, and to the same end as the Aramco sale.
For multiple reasons also analysed in full in my latest book, Western investors largely avoided the IPO, resulting in a significant reduction of the size of the offering from 5 percent to just 1.5 percent, and it failing to find a major international listing destination as had been intended. Another consequence of this lack of interest was that the Saudi Arabian government had to offer a guarantee of massive dividend payments alongside the IPO to ensure that it could sell even the 1.5 percent stake. Although the percentage amount of dividend returns (just less than 4 percent) at that time was not huge by the standards of comparable Western firms (some of which offered dividend yields of 6 percent or more), in absolute terms the amount of money to be paid would be a major strain on the company for years, given the much smaller free cashflow it generated. More specifically, the Saudi Arabian government had to guarantee a US$75 billion dividend payment in 2020, split equally into payments of US$18.75 billion every quarter. Staggeringly, this rose in 2023 to US$97.8 billion for the year, boosted by additional performance-linked dividends intended to keep up with the higher dividend payments offered by some major Western oil and gas firms.
These added dividends are de
