The Year Ahead/Energy

Oil’s $1 Trillion Question

How much is Saudi Aramco, the world’s largest energy company, actually worth?

A worker leaves Aramco’s Natural Gas Liquids plant in Saudi Arabia’s remote Empty Quarter, near the United Arab Emirates, on May 10, 2016. 

Photographer: Ian Timberlake/AFP/Getty Images
Photographer: Ian Timberlake/AFP/Getty Images

If it wasn’t a sales pitch, it really sounded like one. “Aramco is by far the lowest-cost producer,” said Khalid al-Falih, the Saudi oil minister, at the Future Investment Initiative in Riyadh. The October gathering, dubbed “Davos in the desert,” brought together a who’s who of business and finance, including the bosses of Blackstone Group LP and Credit Suisse Group AG. Al-Falih was talking up Saudi Arabian Oil Co., also known as Aramco, the state-owned oil company the kingdom is planning to sell shares of.

Aramco is the world’s largest energy company. With a monopoly on exploiting a good quarter of the planet’s oil reserves, it pumps more crude than Exxon Mobil, Chevron, and Royal Dutch Shell combined. Regardless of the rise of electric vehicles and the fight against climate change, “Saudi Aramco is going to be the supplier of last resort,” al-Falih said. “I am certain the last barrel that gets produced globally is going to be here in Saudi Arabia.”

It’s a hugely valuable business—the question is, just how huge? The Saudis say the company is worth at least $2 trillion. Analysts question that figure, and oil executives, speaking privately, say that something closer to $1 trillion sounds about right. To put that in context, the valuation gap is larger than the total value of Apple Inc., the world’s most valuable public company, at about $870 billion.

Whatever the final valuation, Aramco’s initial public offering is likely to be the biggest in history, even though it’s selling only a sliver of itself. If it floats a 5 percent stake, it could snag at least $50 billion, twice the record set by Alibaba Group Holding Ltd. in 2014. Saudi officials say the sale is “on track” for 2018, but that calendar looks tight.

The problem isn’t Aramco, but the Saudi government—or, more precisely, the young crown prince, Mohammed bin Salman, who controls most of the levers of political, security, and economic power in the kingdom. For months he’s delayed the decision about where to list Aramco’s shares beyond the local Riyadh stock market, known as Tadawul.

On the table are three main candidates: New York, London, and Hong Kong. Each has advantages and problems. New York offers the biggest pool of money and potentially the highest valuation, but listing there could also leave it more exposed to litigation in the U.S. London is more friendly legally, but it’s unclear that British regulators would allow the IPO in its current form. Hong Kong offers few regulatory obstacles, but its smaller capital pool means a lower valuation, too.

The indecision about where to place the international portion of the IPO will have a cascade effect. If Aramco ultimately goes to New York, it will need to present its balance sheet under the U.S. accounting system, which is different from the one used by Saudis and Europeans. Accountants and auditors can shift numbers around to comply with American rules, but that will take time.

Recently, people familiar with the situation have said the international portion of the IPO may be delayed until at least 2019. Saudi officials have hedged their answers to questions about timing, making a distinction between the preparatory work, which they said would be completed on schedule, and the decision to sell the shares. When asked if both the local and international pieces of the IPO would happen in 2018, Aramco Chief Executive Officer Amin Nasser gave a guarded answer. “The shareholder will make the decision regarding the venues,” he said. The shareholder, of course, is the government.

The Aramco IPO is the cornerstone of a much wider Saudi program to retool the economy and make it less dependent on oil. Professor Paul Stevens, a distinguished fellow specializing in energy at Chatham House, a London think tank, says the reputation of the crown prince himself is on the line. “Clearly, there are many serious problems with Saudi Aramco’s privatization,” he says. How the kingdom resolves them could mean a difference of tens of billions of dollars when the world’s investors are finally able to put a price on the company’s shares.

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