Oil attacks test Saudi Arabia’s commitment to transparency

MEED    30 September 2019 (Last Updated September 30th, 2019 15:49)

With a headline net income figure of $111.1bn in 2018 – making Aramco the most profitable company in the world – there's likely to be great interest in owning Aramco shares.

Oil attacks test Saudi Arabia’s commitment to transparency
With a headline net income figure of $111.1bn in 2018 – making Aramco the most profitable company in the world – there’s likely to be great interest in owning Aramco shares.

The 14 September attacks on Saudi Aramco’s oil production facilities at Abqaiq and Khurais are a key test for Riyadh’s commitment to transparency at a pivotal time for both the oil company and the Saudi economy.

The initial public offering (IPO) of Saudi Aramco – arguably the most profitable business in the world – has accelerated since late August. Just a few days before the attacks, it was reported that the oil company was planning its local listing later this year. This will initially involve listing 1 per cent of the company, followed by another 1 per cent next year and then an international listing in 2020 or 2021.

Tokyo is considered to be the leading contender for the international listing over the other major global bourses of New York, London and Hong Kong.

Other recent signs of progress include the selection of international and local banks to handle the IPO and the replacement of the kingdom’s energy minister with Public Investment Fund (PIF) governor Yasser Othman al-Rumayyan as Aramco chairman.

Since it was first announced, one of the key issues for the IPO has been transparency. Crown Prince Mohammed bin Salman bin Abdulaziz al-Saud was still deputy crown prince when he first revealed plans to list Saudi Aramco in an interview with The Economist in January 2016. In the interview, he stated that one of the key motivations for the listing was transparency.

“I believe it [the IPO] is in the interest of the Saudi market, and it is in the interest of Aramco, and it is for the interest of more transparency, and to counter corruption, if any, that may be circling around Aramco,” he said.

Countering corruption has subsequently proved to be a key objective for Mohammed bin Salman. In late 2017, leading Saudi business leaders and government officials were arrested and detained in the Ritz Carlton hotel. More recently, in early September, directives to confront lower-level corruption at government bodies were issued.

Although there are concerns about the way corruption has been tackled, it is recognised as an issue that has to be dealt with if the Saudi economy is to modernise successfully.

First-ever disclosure

A more nuanced argument has been finding a level of disclosure that Aramco and the Saudi leadership consider comfortable. Traditionally the oil company has not been required to release details of its operations. However, having started to engage more actively with the global financial markets, it has now opened its books for the first time.
Although this would have been considered impossible just five years ago, in April this year the company revealed key financial and operations indicators ahead of its debut international bond sale.

While the release of good news stories such as a headline net income figure of $111.1bn for 2018 – making it the most profitable company in the world – is crucial for the bond issuance and the IPO, a more difficult task is releasing information when the news is bad.

Aramco has so far shown it is up to the task. On 14 September, it promptly released a statement on the Abqaiq and Khurais attacks with crucial information on the suspension of 5.7 million barrels of crude oil a day. CEO Amin Nasser said in the statement that work was underway to restore production and that a progress update would be provided in 48 hours.

If production is not restored promptly, then Aramco will have to release information that could spook potential IPO investors as it exposes a key vulnerability to the company’s operations.

A medium or long-term production suspension is also an issue for the broader Saudi economy as oil sales are its primary export and a key revenue earner for the government.

Perception is also important. In the past, Riyadh could have downplayed the seriousness of the incident, but the transparency Aramco now needs to maintain means terrorism in Saudi Arabia is firmly in the international news headlines.

Two other incidents in recent months have added to growing tensions. In August, a drone attack resulted in a fire at Aramco’s Shaybah natural gas liquids facility, and in July nine people were injured after a drone attack on Abha airport.

These two incidents were in remote areas and passed with little cause for widespread concern. The magnitude of the Abqaiq and Khurais attacks means security could become an issue for the broader economy, particularly when it comes to attracting foreign investment.

Reassuring investors

Like the Aramco IPO, the issue has emerged at a crucial time. Since 2014, Riyadh has been restructuring the Saudi economy, and the kingdom’s Vision 2030 goals involve the private sector, together with foreign investors, replacing the government to drive new projects forward.

Those projects include the $500bn Neom City development, as well as schemes such as The Red Sea Project, Qiddiya Entertainment City, Amala, Al-Ula, and the redevelopment of urban areas in Jeddah and Medina.

The Public Investment Fund is leading the projects in the early design and masterplan phase, but they are now approaching the stage where private sector investment is needed if they are to proceed as planned.

These potential investors, like those looking to invest in the Aramco IPO, will want transparency. They will want to be informed of risks when considering their investments.

Aramco has shown that disclosure is not something that Saudi Arabia should fear. The kingdom’s economy still offers great potential for investors and if it can prove that it is a steady dependable investment partner, even when times are tough, then its reputation could have a lot to gain.

MEED

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