The big float

THE centrepiece of Saudi Arabia’s plans to transform its economy is the blockbuster sale of a stake in Saudi Aramco, reckoned to be the world’s most valuable company. The government hopes it will put a value on Aramco of about $2 trillion. The proceeds will be central to the country’s plans to create a war-chest to buy non-oil assets from around the world and complement volatile oil revenues with, it hopes, steadier investment income.

But in an interview with The Economist on April 26th, Aramco’s chairman, Khalid al-Falih, noted that potential complications in the sale of the shares mean its final form is not yet decided. An initial public offering (IPO) would offer to investors reliable dividends, from a country that produces one in every eight of the world’s barrels of oil, and the chance to take a share in a company transforming itself into a “global conglomerate”. But the size of the potential stake is unprecedented—$100 billion, or four times the size of the biggest IPO anywhere in the world to date, that of the Chinese e-commerce firm Alibaba in 2014. Only the largest stockmarkets, like New York and London, could handle the sale (some shares would also be offered in Saudi Arabia). That throws up potential legal problems that could have “unintended consequences”, Mr Falih says.

A listing in New York, for example, would raise the possibility of “frivolous lawsuits” against the kingdom, he says. Analysts have already noted the Saudi government’s anger over a bipartisan bill before America’s Congress, which the White House has threatened to block (though a veto might then be overridden), which would let families sue the kingdom over the terrorist attacks of September 11th 2001. Among the 19 hijackers were 15 Saudi nationals. The Saudi government has always denied involvement. The bill could weaken sovereign-immunity defences, leading to a possibility that a listed Aramco could be exposed to legal action. A London listing, meanwhile, might lead to awkward questions about the reach of British authorities into a company’s global revenues and assets.

The IPO would enable investors to buy shares in the Aramco parent company. That whets their appetites, because it includes access to the world’s most lucrative oilfields. Though Mr Falih notes that the reserves are constitutionally the property of the kingdom, he says that a concession and an appropriate fiscal regime would enable the company to promise a steady stream of forward income to shareholders.

The company is also likely to grow. In its oil and gas business it seeks a global stage rather than a domestic one, Mr Falih says. The company is giving serious consideration to investments in liquefied natural gas and other gas-related projects abroad.

At the downstream end of the business, Aramco plans to expand in Saudi Arabia and beyond. The chairman says it plans to build up domestic businesses in chemicals, power and renewable energy. It will also create subsidiaries that will build oil rigs and offshore platforms, and maintain and repair supertankers. Some of these could later be spun off. Elsewhere, it aims to broaden its presence in fast-growing emerging markets by refining oil, marketing it and turning it into petrochemicals.

In the long term, the success of the strategy will depend on the future level of demand for hydrocarbons. Mr Falih says that many policymakers in Saudi Arabia think that because of climate change, rising fuel efficiency and other factors, oil demand will probably peak before the supply starts to run out. The timing of peak demand is unclear, but whether it is 15 or 40 years away, he says the pressure is on to transform the Saudi economy: “If we end up being too anxious and calling it sooner than it really happens, it’s going to be for our betterment, because we will be ready sooner than others.” But he adds that barring “a game-changing technology breakthrough”, oil will be in demand for decades to come as a transport fuel and as a feedstock for advanced materials, petrochemicals and plastics.

The hazy future should not deter investors from buying Aramco shares, Mr Falih says. Demography, mobility trends and urbanisation all require copious amounts of fuel. And oil, he says, is still the most convenient source of energy.