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Despite reports, Saudi not abandoning Aramco IPO: Here’s why

The latest we hear is that the Saudi King himself canceled the Aramco IPO.

CNBC reported that Saudi King Salman tipped the scale against Aramco IPO plans, which for the past two years has prepared to place up to 5% of its shares on the stock market, quoting three sources with ties to government insiders telling Reuters.

“The king’s decision is final,” one source said, CNBC published.

“The king spoke, and a $2 trillion dream went up in smoke,” said CNBC, and this despite Khalid al-Falih, the Saudi oil minister, saying recently that the kingdom remained “committed to the IPO of Saudi Aramco at a time of its own choosing when conditions are optimum”, which is much closer to reality.

But before AMEinfo gets to why the IPO is still on, it’s helpful to speculate as to why it was put on hold.

Related / Aramco IPO: A done deal, or a pipe dream?

Not now but not never

The IPO of Aramco has, since Crown Prince Mohammed bin Salman’s announcement of it in January 2016, been a central piece of the kingdom’s Vision 2030, according to The New Arab.

But like any smart investor, perhaps the Saudi Crown Prince saw the investment climate not quite ripe to make that move, a huge undertaking that can’t be taken lightly, potentially involving up to $100bn in revenues from an economic powerhouse for the kingdom.

It’s not a question of whether Saudi needs the money or not, and proof of that is that Saudi’s Public Investment Fund (PIF), owner of Aramco shares, has recently raised the first commercial loan of $11 billion, and is attempting to sell its SABIC shares to Aramco for a reported $70bn.

No, not selling Aramco through an IPO has to do with issues like valuation, where a capital injection was expected to generate less today at oil prices in the $70’s per barrel, than what it would have at $100 or over. Saudi has always valued Aramco at $2trillion, and a 5% sale would yield $100bn, contrary to various media reports that the real value of Aramco was more in the range of $1trn – $1.5trn.

Oil prices are volatile, especially with an impending Nov.4 date for full implementation of US sanctions on Iran oil exports, but experts have spoken of oil reaching $150 or more if Iran decides in retaliation to attack the Strait of Hormuz, where nearly 20 million barrels bpd of crude oil – roughly 40% of global seaborne oil exports – would stop flowing from the Arab Gulf, according to Forbes.

Another reason is that Saudi nationals have not yet digested the idea that a national breadwinner like Aramco could be sold, albeit only partially.

“Selling it off, then, understandably provoked fears among many Saudis,” said the New Arab.

Read: Saudi Aramco raising billions to buy Sabic: Smart but will it work?

Why there is hope

A recent development was reported by the Financial Times (FT) as saying that Aramco’s concession agreement with the state has limited the amount of time in which the group can explore and develop resources to 40 years, from a previous contract that gave it access in perpetuity.

“The move, three people briefed on the matter said, came as part of the kingdom’s preparations for a stock market flotation of Saudi Aramco, which has been indefinitely delayed,” said FT.

As part of the IPO preparations, Riyadh reissued “a long-term exclusive concession” to the state-owned company, Al-Falih said.

Also since Aramco’s shareholder is the Government of Saudi, CNBC reported that King Salman has delegated management of the IPO to the Crown Prince, and a Committee which includes the Ministers for Energy, Finance and Economy, “Therefore, decisions around the nature and timing of the IPO, will be decided by the Committee for the Governments approval,” quoting an official close to the matter telling it.

Forbes points out that Aramco is aiming to increase its valuation by demonstrating its growth potential, which it announced in this year’s Annual Review’s.

Related: Saudi Aramco has a major ‘Ace in the hole’ to maximize value of its IPO

While other major International Oil Companies (IOCs) have been cutting investments in exploration and production and in research and development, with the sector has losing an estimated $1 trillion in planned investments since the market downturn, Al-Falih writes, “Saudi Aramco is committed to playing its unique part in meeting the world’s energy needs today and tomorrow by continuing to invest wisely throughout the cycle and across the value chain

Similarly, Amin Nasser, Aramco’s CEO, writes in his letter about recently discovered oil fields, and new facilities set to come online in the near future. He highlights that Aramco, “sustained growth while maintaining strong cost discipline.”

Currently, Aramco has the world’s most profitable upstream (extracting hydrocarbons from the earth) operation with the most capacity, but it lags in downstream operation in comparison to the major IOCs, Forbes reported.

“The Annual Review details Aramco’s strategy to keep its resources available in the long run, including preserving mature reserves, committing to new exploration, improving efficiency through technology and using unconventional resources,” said Forbes.

For its downstream operations, Forbes said Aramco is creating a wholly owned subsidiary called Aramco Chemicals Company which would presumably have a role in Aramco’s new purchase of its European chemicals operation, ARLANXEO, its joint operation with DowDupont, Sadara, and even a rumored purchase of a major stake in the Saudi company, SABIC.