The bankers will already be thinking about how many houses in Kensington they could buy with the proceeds. The flotation of Saudi Aramco, the Saudi Arabian oil giant, and on some measures the largest company in the world, looks set to be staged at least partly in London. The plans have not been finalised yet, but it is reported that 5% will be floated initially, at a price of $100bn or more, and that the shares will be listed in London, New York and Hong Kong.
Saudi Aramco controls the exploitation of the kingdom’s vast oil wealth, and its value, although hard to estimate precisely, is put in the region of $2trn. That compares with $505bn for Apple and $370bn for ExxonMobil.
The float would be a powerful boost for the City and could keep the bonuses flowing all year. The bill could easily come to a billion dollars – a serious sum of money. Yet, hard as it to turn down lucrative work, the City – and investors – would be better off avoiding this one. There are three reasons for that.
Firstly, the oil price is under long-term pressure. The development of shale gas means there is far more supply than there ever used to be. Big new suppliers such as Iran are being reintegrated into the global market. The power of oil cartel Opec looks to have been permanently broken, and that means the price can’t be controlled any more, and certainly not by Saudi Arabia, which used largely to call the shots. New technologies mean that we consume far less energy that we used to – GDP rises but the amount of oil we need to make that happen is far lower than it was in the past.
New technologies, such as solar power and electric cars, are about to go mainstream, and that will mean we need less of the black stuff than we do now. The oil price has recovered a bit since dropping below $30 a barrel earlier this year. But there were reasons why the price collapsed so suddenly, and industries in rude health don’t see those kinds of collapses. Over the medium term, it is hard to be optimistic about the oil market – and that is bad for a company that is one of the biggest players within it.
Next, the Saudi regime looks precarious. The autocratic state faces huge challenges, from diversifying its economy to dealing with hard-line Islam and hostile neighbours. There are not many royal families left in power in 2016 and this one looks no safer than any other. As the oil money dries up, as it surely will, it will be harder and harder to buy off an increasingly restive population – it wouldn’t be the first regime to tumble amid financial pressures.
A whole string of Arab governments have fallen in the last decade and there is no reason why the Saudi one should not join them. If it goes down, you don’t want to be invested in, or advising on, its main asset. No one knows what kind of forces would take control of the country if there was a revolution. But let’s put it this way: whoever they are, protecting foreign minority shareholders in Saudi Aramco is not likely to be very high on their list of priorities. They certainly won’t be bothered whether those shareholders get their money back or not.
Finally, even if it does survive, the company has been run for decades as effectively an arm of the Saudi government, providing jobs for its favoured groups, and furthering its foreign policy aims. Sure, there will be lots of guff about how it is going to become a more normal commercial operation. You can fall for that if you want to. In reality, very few companies ever change that much.
There was a lot of hype around the big Russian oil companies a decade ago, but they are also largely instruments of the state, and they have proved very disappointing for investors. Don’t expect this one to be any different – Vladimir Putin looks like a model corporate citizen compared to the Saudi royal family.