Saudi oil policy seen through the prism of Aramco’s IPO

It is tempting to look at virtually every news announcement in the Saudi Arabian energy sector through the prism of the planned flotation of Saudi Aramco, arguably the biggest event in the Kingdom’s oil industry since the discovery of commercial reserves in the 1930s.
This week brought two further reminders of how the initial public offering (IPO) is determining policy not only for Aramco itself, but also for the Saudi energy sector as a whole: A government decision to reduce oil exports, and a big new refinery in India.
Aramco strategists have several concerns on their minds at the moment, including the status of independent reserves valuations being prepared in the US, and the decision on whether New York or London will be the main foreign venue for the biggest IPO in history.
But at the back of their minds are two other issues that will go a long way in determining investor appetite for the Aramco flotation: The price of oil, and the extent to which Aramco can be regarded as a diversified energy company, rather than just a pumper of crude.
The move into India is a prime example of the latter. Nothing could better illustrate Aramco’s ambitions than the so-called “mega investment” being considered, alongside Indian partners, on the country’s west coast.
Such a move would be a sound strategy. A giant refining and petrochemicals plant in India would leave Aramco well placed to exploit the industrial potential of the fastest-growing big economy in the world. Reversing the country’s “infrastructure deficit” will create enormous demand for the basic industrial ingredients the new plant will be able to produce in staggering amounts.
At the same time, it will also help lock in a valuable oil-consuming market, just as US oil threatens to make inroads into the Indian energy market. India took possession of its first US oil imports earlier this month.
If Aramco’s India plan comes off, it would complement the big new refining and petrochemicals plant being planned in China in partnership with the Norinco conglomerate. Between them, China and India will account for most of the growth in global oil demand over the next decade.
Aramco already has the biggest refinery in the western hemisphere, at the Motiva plant in Texas, so adding refining capacity in Asia completes the global strategy.
A move to limit oil exports from the Kingdom, announced this week, should also be seen as part of the Aramco IPO preparation. Meeting the $2 trillion valuation officially put on the company would be less challenging if oil were to be priced above the $56.31 per barrel for Brent achieved on Tuesday afternoon.
Ever since the turn of the year, when Saudi Arabia led OPEC to agree to production caps among its members, oil has struggled to get through the $60 barrier.
Analysts have been looking for the “game changer” that would lead to a sustained recovery in the oil price, but not even production limits, international agreements (Saudi-Russia being the most recent) and the threat of regional conflict have had that effect. Global inventories have shown little sign of significant reduction.
Maybe the plan to remove large amounts of oil from the export market will have some further impact. The Kingdom’s oil authorities have implemented the deepest of the production cuts, and been most rigorous in enforcing them, when some other producers have carried on pumping almost regardless of the OPEC deal. Now they are aiming to further reduce global stockpiles by cutting exports.
Saudi policymakers are hoping that, at some stage, all these measures will begin to pay off and crude prices will start to rise again. If that can be timed toward the end of next year, when the Aramco IPO will be in full swing, so much the better for the valuation.