private-sector privatisationWhile Saudi Arabia’s plans for the partial privatisation of Aramco through an initial public offering (IPO) have dominated the region’s news agenda, less attention has been paid to Abu Dhabi’s already effected efforts to transform its state oil company into a more commercially driven entity.

Last December, Adnoc listed 10 per cent of its newly created shares in Adnoc Distribution, a wholly owned downstream retail business, on the Abu Dhabi Securities Exchange. The final investor allocations were approximately 90 per cent for qualified investors (split 60 per cent local and 30 per cent international) and 10 per cent for individual and other investors, giving it a market capitalisation of approximately $8.5bn.

Major shake-up

The IPO is the first part of a shake-up of its flagship national oil company, which pumps 3 million barrels a day (b/d) of crude oil, and can refine more than 900,000 b/d. Adnoc has made it abundantly clear, however, that despite the Adnoc Distribution listing, it will not consider privatising the Adnoc holding company, which will remain wholly owned by the Abu Dhabi government.

Since the IPO of a retail business is on a much smaller scale than Aramco’s ambitious sale of its holding entity, it is clear Adnoc will not be following a similar path.

Indeed, the objectives are not the same. Adnoc does not appear particularly interested in generating cash from the IPO. Under the leadership of CEO Sultan al-Jaber, it is much more concerned with changing the company’s operating culture. The stated idea behind the part-privatisation was to allow Adnoc to better manage its capital and portfolio of assets, and expand its range of new and existing partnerships — from upstream through to downstream.

Some analysts have also speculated that Aramco could pursue a strategy of incrementally listing some of its downstream assets. A precedent is already in place in the form of PetroRabigh — the Saudi Aramco/Sumitomo Chemical refinery and petrochemicals complex, which was formed in 2005 and listed in 2008 on the Tadawul. As a result of the listing, the ownership of shares held by Saudi Aramco and Sumitomo Chemical was diluted to 37.5 per cent each.​​

The problem here is that downstream assets will not create enough cash for Saudi Arabia’s economic investment and diversification plans.

“Riyadh is not interested in a stake which could be valued at $60bn plus. They want to sell much more than that to invest in the local economy to have additional money in the Public Investment Fund to support strategic sectors. The downstream assets by themselves don’t create that cash,” said a senior banking source in Riyadh.

Splitting the assets would also make little economic sense when the integrated upstream/downstream chain creates more value. “You create demand for Aramco’s upstream by keeping it tied to the downstream,” the source said.

IPO fanfare

Crown Prince Mohammed bin Salman (MBS), along with his key executors – Energy Minister Khalid al-Falih and CEO Amin Nasser – have all staked their reputations on the Aramco IPO plan. In the case of Al-Falih and Nasser it is not clear how much input they have in the decision or if they are simply going along with the crown prince. But they have doubled down and insisted that it is progressing. For MBS, who could well be king, the IPO is a key symbol of the public’s trust. Explaining the failure of the IPO after all the fanfare would not be easy.

The reality is that the kingdom has not yet answered internally what kind of company it wants Aramco to be, and until it can do that, and justify the initial valuations offered, it remains unknown how it will move forward.

This article is extracted from a report produced by MEED and Mashreq entitled The Future of Middle East Energy. Click here to download the report