Ask almost any Saudi citizen which institution works best in his country and the answer will be Saudi Aramco, the state-owned oil giant. Ask international oilmen what is the best-run national oil company in OPEC and the reply will be the same.

Given the company’s exemplary reputation, it is surprising that the Saudi kingdom’s Deputy Crown Prince Mohammad bin Salman mentioned his interest in selling off parts of Aramco to private investors in an interview with the Economist published on Jan. 6. The prince’s words carry weight, as he has become the kingdom’s de facto leader in economic and, to an important extent, foreign and security policy.

Even the public mentioning of a potential share sale reflects a fundamental shift in the way policy is made in Saudi Arabia: from the cautious, collective and consensual rule of a previous generation of princes who governed the kingdom for more than 70 years, to a daring, quick-fire policy style driven by the dominant personality of one young prince, Mohammad bin Salman.

Backed up by economic advisers from the private sector, he has spoken about the introduction of new taxes, the privatisation of health and education services, and the trimming of the public payroll — all of which had been political no-go areas for the last five decades. He is also widely seen as the driving force behind Saudi Arabia’s intervention in Yemen.

Aramco produces more than 70 percent of the Saudi government’s revenue and has been a near-sacred entity ever since the Saudi state gradually bought out its original American owners in the 1970s. The process differed from the forced nationalisations of Western oil assets in other OPEC countries: Instead of letting the kingdom’s national oil company Petromin take over Aramco, the princes decided to preserve the company’s American managerial structures and gradually “Saudiise” its ranks. Petromin, riddled by corruption like many national oil companies in OPEC, was allowed to quietly wither away.

The result has been a state within a state with its own Americanised corporate culture and social rules. Aramco compounds are the only places in the kingdom where genders mix in the workplace and women are allowed to drive. The company, whose working language is English, operates its own residential cities, hospitals, and schools. It has a unique reputation for efficiency among Saudi institutions and is the number one employer for bright young Saudis.

To preserve this exceptional status, however, Aramco has been governed like a fortress. Although leading Western executives serve on its board, the company publishes very little information about its operations, let alone finances. Royal protection has kept the rest of the Saudi technocracy, and even senior Al Saud family members, at arm’s length from the company, which enjoys a high level of operational autonomy. Company employees — known as “Aramcons” — typically see this separation from the public and the rest of government as a key ingredient to their company’s success.

The shape of a potential Aramco IPO is unclear; the government might well end up listing just some downstream assets in refining instead of the core company that guards the kingdom’s oil assets. Many Aramco executives, aghast at the prospect of losing their autonomy, certainly hope and lobby for such an outcome.

Yet the company’s top leadership has confirmed that it is also considering listing core upstream assets. Going by the value of the oil reserves it controls, Aramco could easily be the world’s most valuable company. An IPO could attract large inflows of international capital at a time when the kingdom has been suffering from flight of private capital. It would add depth to the Saudi stock market in which millions of small Saudi investors are active. Mohammad bin Salman himself has mentioned that an IPO would increase transparency and reduce the risk of corruption. Foreign institutional shareholders could improve corporate discipline, and Aramco’s semi-private status could allow it to turn itself into more of an international oil company along the lines of Norway’s Statoil, competing with oil multinationals in overseas markets.

And yet, taking Aramco out of its shell even for a minority listing would create operational and political risks for the Saudi state’s most critical asset. Given capacity constraints in the rest of the Saudi administration, the company has increasingly been used as the government’s de facto project management office for high priority infrastructure, building a $10 billion science and technology university, sports stadiums, and an industrial city in the kingdom’s underdeveloped South. Such non-core activities would be hard to reconcile with the commercial mandate of a listed company.

An IPO would also likely require the publication of updated oil reserve estimates, which have not been restated since the late 1980s, when Aramco ceased being incorporated in Delaware and become an entity under Saudi law. It would need to publish a profit and loss statement, giving detailed insights into the kingdom’s main source of revenue and thereby indirectly enforcing more transparency in the country’s national budget, about which little information is shared publicly. This could, among other things, affect the administration of allowances for the Al Saud family’s thousands of princes, which as far as we know are deducted before the (hitherto unknown) Aramco revenue reaches the official budget. All this would constitute a radical departure from the traditional secrecy around Aramco and its revenues.

Some of Aramco’s shares would likely be reserved for Saudi retail investors. This would give millions of individuals a stake in the company and engender public and not necessarily well-informed debate about its strategy. Investor behaviour in Saudi Arabia tends to be volatile and herd-driven. As stock prices fluctuate, the government could face recriminations for either selling Aramco too cheaply — flogging the family silver for peanuts — or too dearly — exploiting retail investors. Finally, the valuation of Aramco would be strongly affected by the government’s oil revenue regime, which is currently unpublished: If the government taxes most of the company’s profits, dividends for shareholders will become low, pushing the stock’s value and revenue from the IPO down. If taxes are modest, the stock could be very valuable, but the government would have sold off part of its most important revenue source.

Keeping Aramco’s core assets in a separate, secretive fortress might be the prudent option. It is likely that many of the older technocrats counsel this course in Riyadh right now. In the old days, their counsel would have prevailed. But if there is one thing that old Saudi hands can agree on, it is that life in the kingdom has become less predictable — even for Saudi Aramco.



SteffenHertogSteffen Hertog is an associate professor of comparative politics at LSE. His book about Saudi state-building, “Princes, Brokers and Bureaucrats: Oil and State in Saudi Arabia” was published by Cornell University Press in 2011 and a book about political radicalism and higher education co-authored with Diego Gambetta, “Engineers of Jihad,” is forthcoming in 2016 with Princeton University Press.