Botched Aramco IPO typifies how some oil-rich countries struggle with reforms

Saudi Arabia has formally put the initial public offering (IPO) of Aramco, its giant oil company, on hold while it focuses on buying a strategic stake in local petrochemical group SABIC for as much as $70 billion.

Aramco will raise funds from banks and international bondholders to buy a controlling stake in the petrochemical group. That money will go into the coffers of the kingdom’s sovereign wealth fund, which currently owns a 70 percent stake in SABIC. That will replace at least some of the money the Public Investment Fund had been expected to receive from the Aramco IPO.

Khalid al-Falih, Saudi Arabian Energy Minister, denied media reports that the kingdom had cancelled the planned IPO.

“The government remains committed to the IPO of Saudi Aramco at a time of its own choosing when conditions are optimum,” Falih said in a statement.

“This timing will depend on multiple factors, including favorable market conditions, and a downstream acquisition which the Company will pursue in the next few months, as directed by its Board of Directors,” he added.

However, Saudi Arabia has dismissed the financial advisors it had hired to work on the IPO. Aramco had hired several Wall Street banks including HSBC Bank Plc, Morgan Stanley and JPMorgan Chase & Co., who have been working for months to prepare the IPO. However, Aramco has also formally communicated to some but not all of its advisers on the IPO to suspend work for now.

The Aramco IPO has been a centerpiece of Crown Prince Mohammed’s reform program to diversify the country’s economy away from oil, known as Vision 2030. Saudi officials said they hope to raise a record $100 billion by selling a 5 percent stake. Riyadh had valued the state energy giant at $2 trillion.

The decision to shelve what was billed as the biggest share sale ever is seen as a major blow to the credibility of Crown Prince Mohammed bin Salman and typifies how difficult it is for some of the extractive resource-rich countries to see through reforms.

It also raises doubts about the management of the process as well as the broader reform agenda, sapping the momentum generated by Prince Mohammed’s dramatic 2030 Vision announcement in 2016 that helped propel him to power in the world’s top oil exporter.

“The more it gets delayed and the more there is no clarity on why it is getting delayed and what the issues are, the more it undermines confidence,” said James Dorsey, a senior fellow at Singapore’s S. Rajaratnam School of International Studies

“The reform process has to be judged on its entirety and over a period of years but this will negatively affect perceptions of its credibility overall, considering that the IPO was promised in such high-profile terms,” said Richard Segal, senior analyst at Manulife Asset Management.

The IPO process started in January 2016, when the crown prince said Riyadh was considering selling shares in Aramco, kicking off a deal set to be the world’s largest-ever flotation.

FRANK UZUEGBUNAM