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.
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Notes:
- This post was originally published by Reuters and is reposted here with permission. It is based on the author’s paper Petromin: the slow death of statist oil development in Saudi Arabia. Business History,(2008) , 50 (5). pp. 645-667. ISSN 0007-6791
- This post gives the views of its author, not the position of LSE Business Review or the London School of Economics.
- Featured image credit: Aramco Core Area, by Eagleamn, Wikimedia Commons
Steffen 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.
As we have said, in our opinion owning securities in Aramco would clearly be unlawful for any ERISA fiduciary, and in all likllihood unlawful for any legal fiduciary within the United States – owing to the tact there is no legal system as we know it in the jurisdiction of domicile, Saudi Arabia.
Matt Lechner
Chairman – WSSIG, the Wall Street Special Interest Group
“supporting and growing America’s interests in the global capital markets”
correction of typo —- owing to the “fact” there is no legal system as we know it in the jurisdiction of domicile, Saudi Arabia.
@MattLechner: No legal system? How do you reach that conclusion? There is even a streamlined court for banking disputes as well as capital markets issues. You won’t find that in federal court in the Southern District of New York, where civil cases take a back seat to the latest federal crime du jour.
There are some issues with the Aramco IPO, though. I wrote about them here: https://www.linkedin.com/pulse/five-stop-signs-along-saudi-aramcos-ipo-road-michael-okane?trk=pulse_spock-articles
You may refer to Sharia as a legal system if you wish, not here to argue about that. However, that is not a legal system in any Western sense of the term, and ERISA requires a sound legal basis for any investments. Not passing judgment on how they do things there, but the plain fact is justice is under the King’s authority, and he assigns authority to certain princes, who in many cases hold court in a tent. It is their world over there, and that is how they do things. And not to be picky or anything, but if you are a Jew or have travelled to Israel (they check for Israeli passport stamps, and those having visited Israel are sent home)….. if you are a Jew, you are not getting anywhere near the tent of the Prince who is assigned as having judiciary authority, because you’re not even getting in the country. This is not a new issue with Saudi Arabia. Read the corporate history of Waste Management, and you will see the lengths they had to go to, in order to comply with the “no Jews” rule, and after you read that – and confirm for yourself that judicial hearings of any consequence are often heard in a Prince’s tent, you tell me if that is a legal system that meets the requirements for ERISA investment, or even general fiduciary trust standards in America. The plain fact is that their legal system, without gettting into the pro’s or con’s of it, does not meet the standards for ERISA investment or general fiduciary investment standards for for American ERISA investors, or even general purpose trustee/fiduciaries. Not even close, not even a judgment call.
You might consider spending some time learning about Saudi Arabia’s legal system, a system which has nothing to do with princes in tents. Does the Islamic shari’a affect the decisions of the Negotiable Instruments committee? Only to the extent that contracts are respected. Or the Banking Disputes Committee awarding a penalty for late payment based on LIBOR? Have you ever even seen a Saudi courtroom?
What do Saudi prejudices against Jews have to do with the existence of a legal system? But even there, you have your facts wrong. Traveling to Israel does not bar subsequent travel to the Kingdom. Jewish Americans are not barred entry due to their faith. All prejudices are founded on ignorance and Saudi Arabia has made strides-though so much work needs to be done-towards eliminating hate. But this has nothing to do with the existence of a functioning commercial legal system in Saudi Arabia. That system works. Could it be better? Sure. Could the American court system be better as well? Absolutely.
Does the concept of “fiduciary” exist under Saudi law? Of course. Any other questions?
and furthermore, along the lines of the legal problems presented by the “no Jews” policy, their stance toward women also strikes any possibility of compliance with ERISA and American fiduciary/trust legal requirements in general – because, let’s it is a woman beneficiary of the trust, or a dispute with a company headed by a woman —– by their laws and customs, they will hear no such legal case. They do what they do, and it is their world over there —- but as a jurisdiction for investment of American pension and trust monies ? …. forget it. Legally, it is a ludicrous proposition – and no responsible investment bank would endorse it. Owning those securities would be patently unlawful for an ERISA fiduciary.
Women have been permitted to own property in their own names since the 7th century. Women control 1/3rd of Saudi Arabia’s wealth. Women inherit in their own names as well. Women property owners can vote their interests in condominium associations. Women who own shares may vote their interests as well.
Saudi Arabia has a long way to go to equalize the status of women. But you might take some time to educate yourself about the rights, especially property rights, that women already have before condemning the country.
The issue is not my view or their country – the issue is whether their legal system constitutes a “legal system” as required for a securities and/or investment jurisdiction for ERISA investment, or more broadly, for American trust and fiduciary standards in general. Judicial hears are, to this day, often held in the tent of the Prince who rules over the geographic district. There is no jury. The Prince decides the matter. That is how they do things, and in the context of this discussion we are not taking issue with that. However, there are laws relating to ERISA investments having to be rooted in a legal basis, and a religious monarch just does not cut the mustard. Not even close. They will not hear a case from a woman, or on behalf of a woman, or by a company headed by a woman; ditto for Jews – who can not even enter the country. You want to know the reality – read the corporate of Waste Management —- they have had extensive dealings of a service nature within Saudi Arabia, and you will learn from the book how they really handle business matters involving Western firms. No Jews. No women executives. No women in any situations “over” men, or “taking issue” with men. Again, it’s their world. But as a jurisdiction for ERISA investment, or any kind of American trustee or ficuciary investment ? forget it. It is not even a judgment call. The securities would be patently unlawful for an ERISA account, or any kind of American trust/fiduciary account. Patently unlawful.
Matt Lechner
Chartered Retirement Plans Specialist // Certified Financial Risk Manager
And as to women not owning companies? Nonsense. You’re obviously not familiar with the Olayan Group, a billion dollar company. Women as trust beneficiaries? Why not?