Fiscal woes and Aramco IPO fears ‘drive Saudi oil policy’

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Faced with dire economic straits due to low oil prices, Saudi Arabia is gearing up for deeper production cuts ahead of its massive Aramco share offering. Analysts say the cuts aim to rebalance the market after Saudi Arabia lost hundreds of billions of dollars in oil income, posting huge budget deficits in the wake of the 2014 crash in global crude prices.

Saudi Arabia, the world’s top crude exporter, is now going a step further by making even deeper cuts to its oil production, long the backbone of the Arab world’s largest economy. A factor influencing Saudi oil policy is the planned sale of close to 5% of national oil conglomerate Aramco in an Initial Public Offering (IPO) next year. The project, expected to be the biggest IPO in history, is part of a vast economic reform programme aimed at reducing the kingdom’s reliance on oil.

A potential rise in oil prices by then will likely earn the kingdom more returns from the sale of Aramco stocks — but to what extent remains a point of debate among analysts. For Jean-Francois Seznec of the Atlantic Council’s Global Energy Center, the increase in prices will likely be marginal at best but could still boost the value of Aramco. “The market will not price the shares based on short-term price gyrations, (but) rather on long-term expectations,” Seznec said.

Kuwaiti oil expert Kamel al-Harami said current Saudi oil policy is more geared towards the Aramco sale. “The Saudi policy is somehow directly linked to the planned partial privatisation of Aramco,” al-Harami told AFP. Aramco, the world’s largest company, is being valued at between $1tn and $2tn, and the 5% sale could generate up to $100bn. Saudi Arabia have quashed Western press reports that the sale could be shelved and insisted the listing is on track sometime in 2018. Riyadh recently announced it would reduce its production by 560,000 bpd from November — the deepest cut so far after the historic deal by Opec and non-Opec producers to scale back output by 1.8mn bpd.

The deal, passed in November 2016, came two years after Saudi Arabia defended its original market share strategy, which flooded an already oversupplied market and sent prices spiralling. “Had it not been for this cut, today’s oil prices might have been lower than $30 per barrel,” said Ibrahim Muhanna, a top aide to former Saudi oil minister Ali al-Naimi. “Opec, through its alliance with key non-Opec producers, has recently created a new paradigm for managing markets,” Muhanna said in a lecture at the Arab Gulf States Institute in Washington last month. Saudi Arabia, a G20 member, has come under extreme fiscal pressure since the oil market crash, posting $200bn in shortfalls in the past three years, withdrawing an estimated $245bn from its reserves and revisiting the debt market.

The kingdom has also introduced a series of price hikes, imposing fees on expats and preparing to introduce VAT in the new year. Oil prices, and consequently revenues, rose after the six-month production cut deal, which has since been extended for another nine months until March. Saudi Arabia and its partners are now hoping to extend the deal further and are ready to make even bigger cuts if needed after having taken a hit under the market share policy. Analysts say Saudi Arabia is looking at the price of around $60 a barrel, on condition Riyadh can secure support and commitment from Opec and non-Opec producers.