TORONTO: The jury is out on Saudi Aramco — the state oil giant of Saudi Arabia.
With the Aramco IPO expected next year, the intensity of the debate about its real value is rising. Initially, Prince Mohammad bin Salman floated a figure of $2 trillion as Aramco’s real value. However, experts seem to disagree. As per clients quoted by Bloomberg, who attended a private meeting organised by Wood Mackenzie Ltd, Aramco’s core business was valued at $400 billion.
According to two clients, the company reportedly based its calculation on the current tax rate, a cost of capital of 10 per cent and an in-house oil-price forecast. It used a so-called discounted cash flow method to value Aramco’s upstream business, which is very sensitive to taxation.
Last year, Foreign Reports, a Washington-based oil industry consultancy, too estimated that Aramco could have a market value of $250-460bn. This too excluded the value of its refining assets and guaranteed access to oil and gas.
There are definitely a lot of guesstimates involved in this entire exercise as until now Aramco figures have been a tightly guarded secret. Then there are tax issues too. Many feel that its tax rate, which currently stands at around 80pc may be reduced considerably before the IPO. Aramco CEO Amin Nasser hinted in Davos that before the IPO, Aramco tax rates would, “be aligned with other listed companies.” If this is followed through, Wood Mackenzie’s estimate stands to rise.
Aramco currently is believed to be paying a royalty and income tax to the Saudi government. This is the lifeline of the Saudi economy. Any changes in the tax regime would result in a sharp cut in the amount which Aramco pays to the Saudi government.
Yet there is a positive side of this equation too. Oil is a cyclical business. Revenues from oil could go up and go down – as it went below the $26 a barrel mark last February, reducing the Saudi revenues significantly.
Vision 2030 wants to get rid of this. It wants to generate a regular and more stable source of income. As per Vision 2030, a profitable IPO could help anchor a sovereign wealth fund that could generate enough investment income, both at home and the abroad to dominate state revenues.
There is another strategic dimension to this entire debate too.
Oil demand would peak, one day or the other. The Kingdom needs to get out of its addiction to oil revenues – sooner rather than later.
Peter Tertzakian, writing for Financial Post recently, painted a dismal picture of the emerging scenario, underlining the variation in forecasts about global oil consumption.
He points out that on one end, the consumption forecast in 2040 stands at 35 million barrel per day and on the other, it is 120m bpd. And even the top cluster varies by 20pc. Stakeholders in the oil business generally have the tendency to adopt the idiom that, “the truth lies in the middle.” This method instructs us to believe a midpoint somewhere between denial and exuberance, Tertzakian underlines. Taking the median of all expert opinions and calling it the “consensus” of wisdom, suggests oil demand will drop by 20pc over the next quarter century.
And there are reasons for the emerging pessimistic scenario. Toyota Motor Corp. now wants to rely on hydrogen and replace traditional-engine models by 2050. Use of petrol, which accounts for one in four barrels consumed globally, is already peaking, the International Energy Agency is conceding. “Electric cars are happening,” IEA Executive Director Fatih Birol said, adding that their number will rise from little more than 1 million last year to more than 150 million by 2040. All this would definitely have a significant impact on global crude consumption.
The oil landscape is changing. Officials including Bank of England Governor Mark Carney have warned investors it’s a matter of time before reserves are “stranded” in the ground. The Royal Dutch Shell Plc, the world’s second-biggest energy company by market value, shocked the energy world when one of its senior executives said the overall oil demand could peak in as little as five years.
Even Birol too concedes that while the number of passenger vehicles will double to 2bn by 2040, “the amount of oil we use for cars will be lower than today.”
Hence if the current moment is not opportune for the Aramco IPO, then when?
Published in Dawn, March 5th, 2017