- The Washington Times - Sunday, September 2, 2018

The abrupt indefinite “postponement” last month of Saudi Arabia’s plan to sell off part of the treasured state oil company Aramco, projected to be the largest-ever sale of stock to the public at more than $100 billion, is raising even bigger questions about the state of hard-charging Crown Prince Mohammed bin Salman’s drive to transform the oil giant’s economy and profile in the world.

Saudi officials touted the initial public offering as a critical first step to raise revenue, reform the oil sector and underwrite the effort to diversify the economy, attract foreign investors and tourists, and find meaningful work for the rising generation of young Saudis. On an even more ambitious scale, the Aramco sale was seen as key to the 33-year-old crown prince’s bid to consolidate his authority at home and bolster Saudi Arabia and its allies in the struggle for influence against regional archrival Iran.

The crown prince “has been rather clubfooted and has scared away investors,” Joshua Landis, director of the Middle East Center at the University of Oklahoma, said in a phone interview.

Widely known as MBS, the charismatic and popular prince is the acknowledged power behind the throne of his father, King Salman, and has spent the past year introducing — some say force-feeding — political and social liberalizations in one of the world’s most hermetic kingdoms.

The bold moves have earned him praise in Riyadh and Washington as an Arab reformer. The prince was also the prime mover behind the idea to sell off 5 percent of Saudi Aramco, long the crown jewel of the Saudi economy and the source of the fabulous riches of the ruling family.

Hefty domestic taxes on Aramco oil were cut to make the company more attractive to investors. The money raised from the sale was earmarked for Saudi Arabia’s sovereign wealth fund, to finance infrastructure improvement and such MBS projects as a $500 billion high-tech city dubbed NEOM.

But that was before reports emerged late last month that the initial public offering was off. The reports came from none other than the prince’s father, the 82-year-old king.

The Reuters news agency reported that King Salman spent time during the Ramadan fasting holiday in June discussing the Aramco deal with family members, bankers and senior oil executives, including the oil giant’s former CEO.

The king was reportedly upset about aspects of the IPO, specifically that the selling of stocks would force the public disclosure of sensitive internal financial details to potential investors. Airing of dirty laundry, critics said, could undermine the ruling family’s authority, which already is in question after MBS launched a broad crackdown on corruption that swept up many rivals within the top ranks of the kingdom.

Since the cancellation, the public-relations-savvy crown prince has been silent on the matter.

John Kilduff, founding partner of New York-based Again Capital, said the crown prince has other ways to raise the tens of billions of dollars he needs to keep his other reforms moving forward, though none comes with the spinoff benefits that an open, Western-style public stock sale could have brought.

“There was still enough of the old guard within Saudi Aramco, and Saudi Arabia itself for that matter, [who] were bristling at the disclosure requirements of the Western exchanges,” Mr. Kilduff told CNBC last week.

Regional analysts say MBS will face increasing pressure to explain what comes next in the reform push, from supporters and critics alike. Many warn that the reform drive could lose momentum if the first major step in the overhaul is called off.

The kingdom itself seems to be divided on how far to go in liberalizing a strictly religious society and recalibrating its policies in the region. The crown prince has called for a less-strict approach to religious orthodoxy and, most notably, ended the long ban on Saudi women driving. He is considered one of the world’s most closely guarded leaders in the world because of threats from Islamic radicals infuriated by his progressive nature.

But the kingdom’s new tolerance for pluralism has clear limits. International rights groups condemned the Saudi government’s arrest of women’s rights activists over the summer and the news that some may face the death penalty for their protests. The crown prince abruptly shut down diplomatic relations with Canada as the Canadian ambassador publicly questioned the arrests.

The crown prince’s unprecedented relationship with the Trump administration has proved as polarizing as leading foreign policy initiatives.

Riyadh led the regional campaign to ostracize and isolate Qatar, in part because of its ties to Iran, engineering a regional split between U.S. allies that has yet to be resolved. The Saudi-led military campaign to oust the Iran-allied Houthi rebels in neighboring Yemen’s civil war has degenerated into a grim stalemate, with Saudi Arabia widely blamed for the humanitarian crisis and massive civilian casualties that have resulted as the war grinds on.

The blocked Aramco deal is also significant because Saudi Arabia’s role as the global oil supplier of last resort has been accentuated by the U.S.-Iran clash and the prospect that Iranian oil and gas will be blocked from global markets. The crown prince reportedly handled a personal request from President Trump to increase Saudi oil exports to keep prices stable in the wake of Washington’s withdrawal from the Iran nuclear deal this spring.

“There can be no question that the collapse of the IPO plan is a blow to [the crown prince’s] prestige,” Financial Times international affairs editor David Gardner wrote last week, adding that the damage was at least “partly self-inflicted.”

The world’s largest

The size and scope of the proposed IPO was enormous, spurring a fierce competition from the globe’s leading investment houses to manage the sale. For decades, Saudi Aramco has ranked as the world’s largest oil and gas company, boasting the world’s second-largest proven crude oil reserves — 15 times more reserves of oil and gas than Exxon Mobil — and the second-largest daily oil production.

It operates the storied Ghawar Field, the world’s largest onshore oil field, and the Safaniya Field, the world’s largest offshore field — making Saudi Aramco the world’s most profitable company, according to Bloomberg News. Forbes magazine estimates that it generates $1 billion in revenue a day.

The idea of the partial public sale, which the crown prince first proposed in early 2016, was initially born of necessity.

As oil prices dipped below $35 a barrel earlier this decade, the kingdom’s oil-dependent, state-driven economy was in tatters. There were fears, driven by the emergence of cheaper fracking technology in the United States, that oil would never return to the $90-a-barrel range that the kingdom requires to balance its books.

An Aramco IPO was seen as a way to address a ballooning budget deficit, raising cash while introducing Western standards of regulation and transparency.

The IPO quickly became the linchpin of the crown prince’s ambitious Vision 2030 program to radically transform the Saudi economy’s dependence on oil into one that is more driven by private investment with innovation and entrepreneurship.

At the time, he predicted that Aramco would be valued at about $2 trillion. Although this caused murmurs of doubt among astute energy market analysts, the world’s leading international financial centers — New York, London and Hong Kong — scrambled to win the honor and the fees that come with hosting the IPO.

Mr. Trump even made a pitch, tweeting last year: “Would very much appreciate Saudi Arabia doing their IPO of Aramco with the New York Stock Exchange. Important to the United States!”

A dream deferred

Although rumors of troubles with the IPO had circulated for some time, Saudi Arabia’s energy minister made sure to soften the blow when the news became final late last month.

“The government remains committed to the IPO of Saudi Aramco at a time of its own choosing when conditions are optimum,” Khalid al-Falih said in a statement.

Despite the lobbying from the world’s financial centers, Saudi officials had not even decided where the shares would be offered, regional energy analysts say.

London voiced concerns about compromising rules for good corporate governance to make the listing easier. The New York listing, meanwhile, worried that terrorism legislation would allow U.S. citizens to sue Saudi Arabia.

Persistent speculation also had Aramco simply scrapping the IPO in favor of a private sale of stock to the large institutional investors.

Ultimately, however, the crown prince’s erratic policies — including the Yemen conflict and the ambiguous anti-corruption and political liberalizing moves at home — were the main reasons it was scrapped.

Many Saudi businessmen and princes once considered national leaders now wear ankle bracelets to track their movements and have had their bank accounts restricted. The seemingly arbitrary corruption campaign terrified international investors who were being asked to take a chance on the Aramco IPO.

“Turning all the Saudi moneybags upside down to shake the cash out of their pockets made capitalists around the world go a little white,” Mr. Landis said.

This April, leaked Aramco financial data raised serious questions about the kingdom’s projected valuation of the company at $2 trillion. Some said the real figure was closer to $1.2 trillion.

On Friday, the crown prince turned 33. Both critics and supporters say it is far too early to count out him or his dreams for his country.

“He certainly can recover,” Mr. Landis said. “Saudi is immensely rich and has a fairly small population. It has structural problems, but he is exploring ways to address them. Most of all, however, oil is not going to collapse and suddenly go away.”

• Dan Boylan can be reached at dboylan@washingtontimes.com.

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