A $2 Trillion Saudi Aramco IPO Keeps Getting Less Realistic

(Bloomberg Opinion) -- Friday's news that Saudi Arabia's crown prince vows a $2 trillion IPO of Saudi Aramco within a few years may provoke a sense of déjà vu. It's essentially the same headline that flashed around the world in early 2016, when he first raised the idea. Back then, it provoked a reaction of “Wow! Really?” Now it's more “Huh. Really?”

Prince Mohammed Bin Salman reaffirmed plans for the biggest-ever IPO, and talked about much else besides, in a Bloomberg News interview late last week. Might it actually happen in “late 2020, early 2021,” as he now says? Maybe, but we've gone through a few deadlines already for the debut of Saudi Arabian Oil Co. (to give it its full name).

The prince's rationale for this delay — that Aramco must first acquire the state's majority stake in petrochemicals producer Saudi Basic Industries Corp. — seems contrived. Aramco's valuation is tied overwhelmingly to the value of its upstream business. There is some industrial logic to combining this with Sabic's downstream operations, though consolidating the country's industrial assets even further under Aramco runs counter to the prince's objective of making the economy more competitive. But Sabic's market capitalization of $100 billion is just 5 percent of the $2 trillion valuation the prince still assigns to Aramco. Even assuming wildly valuable synergies, the idea that absorbing Sabic is critical to the oil giant's IPO isn't credible.

Rather, the prince's insistence that the IPO will happen feels more like a defensive reflex; a desire to reassert that all is basically going to plan, despite the inevitably patchy progress on his ambitious reforms announced almost three years ago. This shouldn't be a surprise; transforming a patronage-based economy supported by oil rents into something like a 21st-century economy is, to use a technical term, hard. Indeed, the IPO of Aramco shouldn't have even been raised until Saudi Arabia showed more tangible evidence of reforms taking hold. It should be the capstone, not the foundation.

If the timetable starts to slip again in a year or two, it doesn't seem like it will matter all that much. And if the prince keeps doubling down on that $2 trillion valuation, he all but guarantees it won't happen. As I wrote here, Aramco's valuation in March looked closer to $1 trillion using reasonable assumptions (Sabic wouldn't move that by much more than 10 to 15 percent).

Moreover, the further out the timetable goes, the forces weighing on the valuation may only get stronger.

It was interesting to read that the prince expects global oil demand to keep rising until 2030 “by above 1 percent, 1 to 1.5 percent, maybe more.” Take the midpoint of that range, and it would imply the world using 120 million barrels a day in 2030. Not even OPEC expects oil demand to be anywhere near that level — and OPEC is what you might call a highly motivated forecaster.

The prince's view is on firmer ground when he portrays Saudi Arabia as essentially the last man standing as rival producers drop away. Provided the country can reduce the social costs of its oil production — a mighty big “provided” there — it should take market share from others (ironically, those others include many so-called partners in OPEC).

It was interesting that he singled out China as a country where oil production will drop away. He is almost certainly right about that. But as I wrote here, China's dependence on foreign oil (along with considerations around pollution and fostering domestic industries) is a primary factor that will push it toward alternatives such as electric vehicles, renewable energy and natural gas.

Indeed, this was the essential subtext to the prince's original IPO declaration almost three years ago. Oil's place in the energy firmament looks less secure than it once did, and Saudi Arabia's implicit plan to monetize some of its oil riches in one hit was the surest sign of that. Regardless of whether the Aramco IPO ever happens or simply helps market the broader project of reforming Saudi Inc., that underlying challenge remains.

To contact the editor responsible for this story: Mark Gongloff at mgongloff1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.