Last week, FT reported that Riyadh was considering ditching plans for an international listing for Saudi Aramco in favor of a private offering and a possible local listing.
The IPO process had been been fraught with difficulty from the very beginning as questions about valuation, transparency, and state control created stumbling block after stumbling block.
Beijing was said to be “close to playing a key role.”
Well this morning, Reuters reports that China is offering to buy up to 5% of Aramco directly.
Reuters cites “industry sources” as saying that PetroChina and Sinopec have written to Saudi Aramco in recent weeks to express an interest in a direct deal. “The Chinese want to secure oil supplies,” one of the industry sources said. “They are willing to take the whole 5 percent, or even more, alone.”
Reuters goes on to provide further details, including that the kingdom is eager to work with its biggest buyer of oil (for obvious reasons) although there has been no decision made as of yet.
In the absence of taking down the entire stake directly, China is said to have formed a consortium comprised of state-owned oil firms, banks and its SWF to act as “cornerstone” investor in an IPO. So that would suggest that China would get an initial allocation and then shares would be listed somewhere else later.
Selling China a 5% stake directly would effectively kill the IPO, a less-than ideal option.
Reuters goes on to note that its sources said “postponing the listing would be the least preferred option, given the preparations that have been already done and the determination of Prince Mohammed, who is expected to be the next king, to proceed with the listing.” That underscores what we said last week: “the obvious question here is what this means for bin Salman’s ‘Vision 2030’ and for the crown prince’s economic reform platform more generally.”
A deal with the Chinese would pave the way for deeper cooperation including, again according to the sources, “a reciprocal move by Aramco to invest in the Chinese refining industry.” Ultimately, Riyadh is keen on cementing its relationship with Beijing in order to prevent Russia from making further inroads in terms of overtaking the Saudis as the lead supplier to China.
“The reason for Saudi Arabia delaying its IPO of state oil monopoly Saudi Aramco is becoming abundantly clear and it may have to do with how long the Kingdom’s leadership thinks it will take to clear the global crude glut and get back to high prices that don’t need to be supported by production-cut deals with Russia,” Bloomberg’s Benjamin Dow writes, adding that “while it was known that the Saudis wanted a cornerstone investor for the largest oil company in the world, and that the Chinese were in the running to be that investor, the implications of a closed sale would point to either a belief in oil prices staying lower for too long to get the public deal done in Saudi terms, or the desire to get a better price in a private placement vs what the current crude futures strip would allow.”
So that would be bearish – if true.
Stay tuned because clearly, this has wide-ranging implications and will help shape not only the global oil trade, but also geopolitics more generally, for years to come.