Apple is currently the world's largest company by market capitalization. But the Kingdom of Saudi Arabia is seriously considering creating a much larger company — by staging an initial public offering (IPO) for shares in its state-owned oil company, Saudi Aramco.
Rumors of a potential IPO flew on Thursday following a statement by the kingdom's deputy crown prince, Mohammed bin Salman, and confirmed by a terse statement from Aramco headquarters Friday morning.
It's impossible to know how much Aramco would be worth on the private market if sold, especially without details regarding the terms under which it might be privatized. But based on the scope of Aramco's operations and the values of other oil companies, it seems likely that it would achieve a market capitalization of more than $1 trillion — far ahead of any American company.
Aramco's tangled history
The company currently known as Saudi Aramco has its roots in an exclusive concession to explore for oil in Saudi Arabia that the kingdom granted to Standard Oil of California (now Chevron) way back in 1933.
This concession was operated by a subsidiary called the California-Arabian Standard Oil Company, and it became a joint venture with Texaco in 1936. In 1944, both Standard Oil of New Jersey (which later became Exxon) and Socony-Vacuum (which later became Mobil and then merged with Exxon) joined the consortium — which was named Arabian-American Oil Company, or Aramco.
In essence, all of America's major oil companies were working together to exploit a monopoly on Saudi oil.
In 1950, Saudi King Abdullah threatened to nationalize the oil company — a way to get Aramco to agree to a deal in which 50 percent of profits would be handed over to the Saudi government. In response, the US Congress instituted a tax credit known as the "golden gimmick" that ensured all of Abdullah's money would come out of Uncle Sam's tax haul rather than out of the pockets of Aramco shareholders.
This arrangement didn't last long. By the 1970s, with anti-Western sentiment and Arab nationalism running high in the Middle East, the Saudis decided to nationalize anyway. Except instead of doing a full expropriation, the Saudis did a gentler takeover, using oil revenue to buy Aramco from its parent companies.
As recounted by Charles McPherson in his comparative study of oil nationalization schemes, "The Saudi approach to nationalization was very different than that of other countries" — not only in the financial terms under which it was done but in how the company was operated after nationalization.
By 1980, McPherson writes, Saudi Arabia was the sole owner of Aramco, but "under strict instructions from the King, the new Aramco [was] left very much to itself on operational matters" and "many of the Aramco companies continued as advisors to Saudi Aramco ensuring continuity of management." So the company was nationalized, but US-based oil companies got all its money and were still running the company operationally.
That deal came more than a generation ago. In the subsequent 35 years, the Saudi government has been able to use its control of Aramco to move the corporate headquarters from New York to Saudi Arabia and to fill more and more jobs with Saudi natives. As of 2015, it really operates like a state-run company, seeking revenue but more broadly pursuing the Saudi government's policy objectives.
Why Saudi Arabia is considering partial privatization
Having gone through the literally decades-long slog of nationalizing the world's most valuable oil company in a non-disruptive way that preserved the country's positive relationship with the United States and major private oil companies, why would Saudi Arabia consider turning around and re-privatizing?
The starting point for understanding is that Prince Salman told the Economist he wants to list a minority stake in Aramco — perhaps 5 percent — while leaving control firmly in government hands.
Questions surround the company, though. Mr DeLucia says 87% of its output is oil; it needs to develop more gas to satisfy the country’s needs for cleaner, cheaper power. Some argue that its reserves, which have barely budged since the late 1980s, are overstated. Internal documents about them are "phenomenally closely guarded secrets" says a local observer.
The company does not report its revenues. Its fleet of eight jets, including four Boeing 737s, and a string of football stadiums suggest that it is not run on purely commercial lines. It is the government’s project manager of choice even for non-oil developments, and runs a hospital system for 360,000 people. A listing would require it to become more transparent.
The Economist analogized the situation to concerns about state-owned oil companies in Mexico and Brazil that have been accused of corruption and mismanagement, in response to which the Mexican government has begun to open things up to foreign investors — an idea that conservative politicians in Brazil have also proposed.
But Mexico and Brazil are democracies with free media and judicial systems where the transparency induced by a listing would operate as a lever for change. Saudi Arabia is a closed autocracy with a controlled media, so it's not clear through what mechanism transparency per se could shift management. Aramco presumably operates football stadiums and a hospital system because that's what the Saudi government wants it to do — selling a minority stake that leaves all control in the hands of the Saudi government wouldn't really change anything.
Saudi Arabia is afraid
One way to understand the Aramco IPO talk is probably through the same lens that has to be used to understand all of the Saudi government's other recent decision-making: fear.
The Saudis are beset by problems ranging from the low price of oil to Iran's regional activism to the rise of ISIS. A successful flotation of a minority stake in ARAMCO would generate a good news story about Saudi Arabia. Aramco would be the world's largest company by market capitalization, and the Saudi stock exchange would suddenly be a big deal.
Partial privatization would serve as a token of change and reform in a country that is often seen in the West as excessively hostile to change and reform. It would also give a new generation of Saudi leadership a chance to put their personal stamp on things — not the best reason for taking dramatic action but at least a reason.
Perhaps most fundamentally, as Jennifer Williams has explained, one thing the Saudis fear is "abandonment by the United States in favor of Iran, or even just US disengagement from the region in general, thus depriving Saudi Arabia of its great power protector."
Giving Western investors a concrete financial stake in the Saudi national oil company would serve as a way to deepen and broaden the coalition of stakeholders in the kingdom's stability. The US-Saudi alliance is about much more than oil, but oil was its ground floor, and bringing foreign investors back into the Saudi oil business could be a way to strengthen its foundation.