Saudi Aramco's IPO would be a major step into uncharted territory.
Saudi Aramco’s IPO would be a major step into uncharted territory.

When people think oil, at least anyone who lived in the U.S. through the 1970s, they probably think of OPEC. Ever since the 1973 oil embargo made OPEC a household name around the U.S., it has also served as a stand-in for overseas energy competition. Whether it’s “foreign oil” or something more sinister, North American oil producers have sought to leverage any political capital they can to gain support from legislators and the public.

However, as OPEC and its Saudi Arabian establishment fights to retain its position at the top of the global oil food chain, their leadership is looking to diversify their assets, in a way. That’s why one of the most closely watched developments in the energy industry for the past year has been the overtures made by Saudi Aramco, the Saudi state-owned corporation looking to began trading shares on the public stock market.

If the deal goes through, it could have major implications for the Saudi leadership, as well as the many banks and financial institutions around the world who may invest in it. That could cause some noticeable shifts throughout the global oil market.

IPO and Aramco basics

For those unfamiliar, an initial public offering can seem like a confusing, convoluted process. As Nasdaq explained in an online article, the steps involved in an IPO require a company to divulge a wealth of information about its financial status. Then, with the help of several banks and financial experts, the company’s net worth is estimated and divided into units, or shares. The final step of an IPO comes when the company “goes public,” in other words, the day these shares are sold on the open market for anyone eligible (and wealthy enough) to afford them.

Going public involves many potential risks and rewards for everyone involved. For Saudi Aramco, which is currently owned entirely by the Saudi government, an IPO will bring a massive infusion of cash. In return, however, these banks and shareholders will expect not only a piece of the profits gained from its oil drilling and export business – they will also have a say in its strategy and future.

Already, the realities of an IPO have caused some pushing and pulling between the Saudis – which still function as a monarchy and are known for being rather secretive – and international financiers. The New York Times reported that several essential questions surrounding the IPO have not been sufficiently answered.

Among the close-kept secrets that foreign investors will want to know: How much oil do the Saudis really own? Including its material assets as well as an estimated 266 billion barrels of oil reserves, Saudi Aramco claims a total valuation of $2 trillion. Banks who are underwriting the IPO, however, disagree. Using various calculation and estimation methods, Western firms like energy consultancy Wood Mackenzie estimate a net worth closer to $400 billion – a huge sum by any measure, but significantly less than what the company itself posits.

Some of the world’s biggest banks, including JPMorgan Chase, Morgan Stanley and HSBC, are working with Saudi Aramco toward a deal structure that benefits everyone. But another roadblock that must be worked through is the Saudi government’s hesitance to cooperate across borders. While the IPO is reported to comprise just 5 percent of the company, investors will still demand certain shareholder protections, as well as the establishment of complex tax structures.

All of this requires a high level of cooperation that some in the Saudi government are uncomfortable with, according to sources speaking to The New York Times. In essence, the Times explained, completing the IPO would effectively require separating Aramco from the Saudi government and royal family, which some consider “as complicated as separating conjoined twins.”

The situation becomes even more complicated when considering the interests of oil producers in the U.S., who have been fighting to remain profitable as Saudi drillers compete for market share. A successful IPO could provide Saudi Arabia with the cash flow it desperately needs to continue funding public programs at the same level as in the past. This has proven more difficult in recent years as the price of oil has remained relatively low and unstable. Saudi drillers are working to cut back even more on production and export activity in an attempt to price out Western competitors. An IPO would give them some much-needed breathing room to accomplish that goal. However, the deal remains stuck in neutral, while the oil market continues to churn onward.