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Questions over Aramco flotation

Saudi Arabia drives ahead with plans for world's largest IPO but worries persist over state's role and company's true worth

Saudi Arabia’s legal move to restructure Aramco is designed to counter scepticism about its determination to move ahead with what would be the world’s largest flotation by selling a stake in the state-owned oil behemoth.

Riyadh broke months of silence this week about the planned Aramco’s initial public offering by redesignating the firm as a joint-stock company, meaning private investors can own a slice of its most prized asset.

The IPO forms a major plank of Vision 2030, the ambitious reform plan spearheaded by Crown Prince Mohammed bin Salman in his determination to shake up the Saudi economy through reducing reliance on oil revenues.

The prince has pushed ahead with unprecedented social and religious reforms in the past two years by deciding to allow women to drive and attend sports stadiums, while curbing the powers of the religious police.

He has also made bold moves on the economic front, reducing energy subsidies by raising oil product prices and jailing dozens of powerful princes and wealthy individuals through a so-called anti-corruption crusade.

His audacity leaves little doubt that the prince, best known by his initial MbS, seems determined to do whatever it takes to pull off Aramco’s listing and use the proceeds to create jobs for young Saudis, seen as his core support base.

Aramco’s surprise IPO plans for a 5% listing were unveiled in January 2016, but doubts soon surfaced among investors about robust corporate governance and lack of an independent audit of the company’s estimated proven reserves of 261 billion barrels.

Other big worries relate to the dominant role the Saudi state will play and the true financial worth of the company.

Aramco has valued itself at about $2 trillion, while some global financial firms estimate its true worth to be less than $1 trillion based on certain international yardsticks.

Private investors will have little powers, if any, with their rights subordinated to Saudi national interests.

Experts point out that Aramco is not just an energy company — it is the country's sovereign wealth and social development fund and as such it is unlikely to be managed from a purely commercial perspective.

Nonetheless, Aramco has moved to ease doubts about its reserves by hiring US firms DeGolyer and MacNaughton and Gaffney, Cline & Associates to carry out an independent audit ahead of the partial sale later this year.

At the same time, banks seeking roles in its IPO, including Citi and Goldman Sachs, have been called for meetings at Aramco’s headquarters in Dhahran to make their proposals. The meetings, scheduled for late January and February, are yet another sign that the IPO remains on track.

Judging by Aramco’s calculations, the IPO is expected to fetch $100 billion, potentially making it the biggest in financial history.

The crown prince plans to plough the proceeds into the Public Investment Fund as part of his efforts to wean the economy off its reliance on oil through economic diversification.

Riyadh now has to make the difficult decision on which stock exchange to pick for the listing to give it maximum financial and political clout.

Both US and UK leaders have publicly lobbied to host the listing. Tokyo and Hong Kong are also in the race.

In case Aramco fails to get an attractive price for the IPO, there have been reports that China has offered to buy the 5% stake as a strategic investment, leaving little doubt that Saudi Arabia can succeed in sharing a slice of its enormous pie with others.

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