The Plans of the Crown Prince of Saudi Arabia Are Likely to Fail

Sep. 4, 2019
Bob Adelmann

There's just no other way to say it: the Crown Prince of Saudi Arabia, Mohammad bin Salman, or MBS, is a thug. Upon taking control of the country in 2017, he spent the next two years consolidating his power. Human rights groups have complained loudly about the detentions he ordered and the tortures of dissidents he mandated, about the murders he orchestrated, his bombings of Yemen causing the starvation of millions, the arrest of members of the royal family (confiscating their wealth in exchange for their lives), and, last but not least, his ordering the murder of dissident journalist Jamal Khashoggi last October.

But he has big plans. He wants to turn his country into an international showplace, an uber-tourist attraction, a manufacturing mecca, and the economic centerpiece of the Middle East.

It's going to take billions of dollars and he knows just where to get the money: sell off a piece of the country's primary asset, ARAMCO, and use the proceeds to diversity the country's economy and bring it into the 21 st century.

His former energy minister counseled a wait-and-see approach: see if OPEC could cut enough production to drive the price of oil to $80 a barrel. By his calculations that would place a value of $2 trillion on ARAMCO. He could sell five percent of it and raise $100 billion.

MBS got tired of waiting. U.S. frackers and a slowing global economy along with a forecast by Morgan Stanley that oil will languish in the 60s for at least the next two years triggered the departure of his energy minister.

On Monday he canned him and gave the IPO responsibilities to Yasir al-Rumayyan, the head of his country's sovereign wealth fund. He doesn't know anything about the oil business, but an awful lot about finances – just the man for the job MBS wants done.

That "wait-and-see" approach almost worked. Brent crude oil prices peaked at $85 a barrel briefly in October before plummeting to $50 two months later. Since then world crude oil prices have languished, and trade (as of Tuesday) under $60.


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Yasir's plans are still in flux, but becoming clearer by the day. Deciding that now is the time – not the best time, but better than waiting longer – to move ahead with the IPO, the new director is considering doing the offering in two pieces: one offering through the country's own stock exchange (to take the temperature of bond investors and see how they respond) before offering the balance through a larger exchange that can attract more international sovereign debt investors, probably the Tokyo Stock Exchange. This makes political sense, as Saudi Arabia supplies about a third of Japan's crude oil demands and such a deal would further cement that relationship.

As the Wall Street Journal noted, "For Aramco observers, the change [replacement of al-Falih with al-Rumayyan] signaled a new sense of urgency in moving ahead with the public listing."

The crown prince is likely to be sorely disappointed when the results of the sale of two offerings of a small slice of his country's primary asset are in. He needs a valuation of ARAMCO at $2 trillion. Bankers looking at the deal are privately estimating that Aramco is worth between $1.2 trillion and $1.5 trillion. The sale of five percent of it would generate between $60 billion and $75 billion in net proceeds. Given his government's budget shortfall, it's more than likely that most of them would go to shore up its finances, leaving precious little left for al-Rumayyan to invest for the country's future.

Blame U.S. frackers for MBS's difficulties. Without them, oil would likely be trading above $100 a barrel. MBS would then easily sell off a piece of ARAMCO, raising all the money he needs to diversify his country's economy. Tears when he fails won't fall from this writer's eyes.

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Sources:

Thug in a Turban: background on Mohammad bin Salman

The Wall Street Journal: Low Oil Prices Slam Saudi Economy

The Wall Street Journal: Aramco Replaces Chairman as IPO Planning Heats Up

The Wall Street Journal: Aramco Proposes Two-Stage IPO, Shunning London, Hong Kong

Bloomberg.com: Saudis Replace Aramco Chair With Wealth Fund Boss Before IPO

History of Aramco

Reuters: Aramco's reserves: 265 billion barrels, 15% of world's proven reserves

Brent Crude Oil Price 3-year chart

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