Why Saudi Aramco’s IPO Might Never Happen

British and U.S. Markets Vying for Big Prize

SMITH BRAIN TRUST – There's been a ton of speculation about how, where and when Saudi Aramco, the world's largest oil company, will launch an initial public offering. But the Smith School's Charles Olson says there's increasingly reason to believe the IPO isn't actually going to happen.

"I'm dubious," says Olson, professor of the practice at the University of Maryland's Robert H. Smith School of Business. The kingdom's decision earlier this month to arrest dozens of people in a sweeping anti-corruption crackdown is just part of the reason why. 

If Olson is right, that's bound to be a let-down for the markets and politicians around the world who have been hoping to land the big listing. Muhammad bin Salman, Saudi Arabia's crown prince, had promised that the public offering would be the largest in history, and would value Aramco at roughly $2 trillion.

Britain and the U.S. are both vying to host the proposed IPO, with the U.K. government reportedly agreeing to a controversial $2 billion loan guarantee for Saudi Arabian Oil Co., and President Donald Trump recently saying on Twitter he would "appreciate" Saudi Arabia listing Aramco on the New York Stock Exchange, adding "Important to the United States!"

For the 32-year-old Salman, the IPO was said to be the cornerstone of his plan to revolutionize the Saudi economy, investing in other economic sectors and, crucially, reducing the country's long dependence on oil. "The country suffers from what's called 'the Dutch disease,' more than almost any other resource-rich country," says Olson, who is also director of the Smith School's Business Honors Program.

The curse of the Dutch

Dutch disease is the economic condition named for the crisis that hit the Netherlands in the 1970s. Years earlier, a hydrocarbon-producing boom in the country had sent the Dutch gilder soaring, putting all other sectors of the economy at a severe disadvantage. Those industries were neglected and eventually hollowed out, and when energy prices eventually plunged, the Dutch economy suffered. There were no longer any other productive industries to keep the economy aloft. What happened to the Dutch economy remains a global cautionary tale.

Wealthy Saudi Arabia's so-called Dutch disease is a decidedly different.

In Saudi Arabia, the education and the lives of citizens are subsidized by oil riches. Many Saudis opt not to work. The professional class in the country is heavily populated by foreign workers, from the most menial jobs to the most highly skilled.

Saudi Arabia's population has steadily expanding for generations. There were an estimated 32.3 million people living in the kingdom last year, compared to 20.8 million in 2000, and just 4.1 million in 1960. "And in the meantime," Olson explains, "you are using up the oil that's in the ground. It's finite. And you've got a bigger and bigger population base that it needs to be spread over."

But modernizing and diversifying the Saudi economy is no small matter. Geographically, it's challenged. "It's hot, it's dry. The utility requirements are very significant," Olson says.

Neighboring Qatar, with a similar geographical makeup, managed to find a niche: Airports. "It is free of winter and can build long runways with long flat areas. You're not going to run into a mountain when you are trying to land or take off in Qatar," Olson says. Neighboring Dubai, meanwhile, built an identity as a luxury retail hub, offering endless high-end shopping for the moneyed elite.

"I give Salman credit for trying to diversify. It's not easy," says Olson.

As the oil runs out

Though not ascended to the throne, the crown prince has drawn some support from the West. He's not a religious fanatic, and that helps. He says he is willing to have a secular society develop and is willing to grant women new rights, including a recent one: the right to drive. The country is expected to bring cinemas back as well, following a long ban. 

"It's part of his plan," says Olson, "and it makes sense. He's has got to shake things up." The other part of the plan is jobs.

Over time, Olson says, the kingdom will begin paring the number of guest workers in the country. The jobs they once held, from taxi driver to hotel managers to Aramco engineers, will increasingly go to Saudis. For the government, it will mean far less money paid out in royalty-funded entitlement. "He's going to be letting all the Saudis know, ‘The good deal is that you are going to have some freedoms. The bad news is gotta have a damn job," Olson says.

On the jobs front, Salman has been transparent – a trait generally applauded in business schools, Olson adds – and has been telegraphing what he wants to do.

The changes won't come overnight.

But Salman is 32 years old. And the kings, they generally live into their 80s, Olson says. "Here he is, looking at a 50-year horizon. He can easily see over that 50-year horizon that there won't enough oil left and not enough oil money – not with the increase in the population and not with the fall in the price of oil."

Plan A

Olson admits he's dubious about the prospects for an Aramco IPO, but he says he thinks the idea might have been Salman's Plan A. He suspects the offering was doomed as the price of oil cratered.

"They waited too long with Plan A," Olson says. An IPO should have launched in 2013 when the price of oil was at $100 a barrel. That's the time to sell.

"Once the price of oil crashed from $100 a barrel down to $50 and then occasionally into the high $30s, it's too late for that plan," Olson says. "Because it's going to take a long time for oil, even at $100 a barrel, to get investor confidence up again. Investors have seen what's happened with fracking and with competitive oil elsewhere."

Plus, he says, it's likely that the Saudis are realizing that doing the public offering is hard. There are lawyers and regulatory bodies to contend with, and neither London nor New York, the two likeliest places for the IPO, make the process simple.

Selling a stake privately, say to China, as has been rumored recently, isn't straightforward either. "That comes with complications including China's potential proclivity to go to war over something like this and to be a bigger rival than you are," Olson says.

The notion of selling a stake, whether by IPO or private sale, may be off the table for a while now. "With all this political stuff being out there now," Olson says, referring to the anti-corruption crackdown, "who is going to buy the stock now with all of these arrests. Who wants that political risk?"

Nonetheless, it's always been about the money, about extracting money, like oil from the ground.

Plan B

In a wide-reaching anti-corruption crackdown that launched earlier this month, Saudi authorities have questioned roughly 200 people and detained at least 60, including 11 princes, some former government ministers, businessmen and other prominent Saudis. 

Those detained were being held in the opulent five-star Ritz-Carlton in the capital city, Riyadh.

Olson says this looks like the start of Plan B, a plan for confiscating what is potentially ill-gotten wealth from members of the royal family and other Saudi elite. According to reports, authorities are expecting to rake in cash and other assets worth some $800 billion.

By way of contrast, Saudi Arabia's total gross domestic product last year was about $646 billion.

"That $800 billion would go a long way toward patching the budget hole that is going to exist until they can create an oil market that allows them to support themselves at the current price of oil," Olson says. "Or until they can start toward the path of better economic diversification."

When the price of oil topped $100 a barrel, Saudi Arabia had a budget surplus every year. They could spend the way they wanted to, lavishly, and "still be adding to the pile," Olson says. Now, with oil priced at less than $60 a barrel, Saudi Arabia is subtracting from the pile.

Olson says the Saudis under house arrest at the Ritz-Carlton will likely look to strike a deal with Salman, one that will afford them economic independence, perhaps in exchange for a promise not to challenge or threaten the crown prince.

"That promise, and that clawback money, that's what could turn the country in a new direction," he says.