Aramco IPO tops Saudi agenda

Bloomberg

Saudi Arabia’s Deputy Crown Prince Mohammed bin Salman has a daunting to-do list as the real work begins on his plan to transform the world’s biggest oil exporter into an economy no longer reliant on crude.
“2017 is a reality check,” said John Sfakianakis, director of economic research at the Gulf Research Center. “We’re done with the announcements. Now it’s the teeth that need to show behind the actual plan. The global investor community will be looking at that.”
From planning potentially the world’s biggest initial public offering to rolling out taxes and protecting Saudis from the impact of spending cutbacks, here are six developments to watch this year:
SHIELDING THE POOR
The Citizen’s Account is a program meant to soften the impact of austerity measures on low- and middle-income Saudis. It will start with 20 to 25 billion riyals ($6.7 billion) of disbursements this year, and increase to 60 to 70 billion riyals by 2020.
Registration opened February 1, and more than half of Saudi Arabia’s 20 million citizens have already signed up. With the government planning to begin payments later this year, newspapers and social media have reflected the widespread confusion over eligibility. Should Uber drivers report their side-income? Can ministers also sign up? What about professional soccer players?
The program goes to the heart of the implied social contract in Saudi Arabia, where the Saud family has traded generous spending on its subjects for absolute loyalty for more than eight decades.
“You have to assume that there will be mistakes,” said Crispin Hawes, London-based managing director at Teneo Intelligence. “You just have to make sure they’re not so egregious that they dilute the process of political authority.”

TAXES
The government is also planning new taxes as it seeks to balance the budget. In April, it will impose an
excise tax on “harmful products,” doubling the price of tobacco and energy drinks and putting a 50 percent levy on soda.
The new levies are a prelude to a planned 5 percent value-added tax in 2018, which will have an even broader impact on the cost-of-living for Saudi residents. Riyadh-based Jadwa Investment Co. expects inflation to rise toward the end of this year, as Saudis front-load purchases ahead of the new tax.

SUBSIDY CUTS
The government began a multiyear program of gradual reductions to fuel, water and electricity subsidies with a surprise announcement in late 2015, sending Saudis rushing to gasoline stations to fill up. Energy Minister Khalid Al Falih said in December the next round of cuts will happen before the end of the year. “The intent is to do it soon enough,” he said.

FOREIGNER FEES
From July, the government will charge an unprecedented monthly fee for foreign workers with dependents in the kingdom. The levy will increase each year until it reaches 400 riyals per month per dependent by 2020.
While potentially popular among locals — slogans like “ Saudi is for Saudis” are spreading on social media as the economy slows — private sector reaction may be more challenging for the government. Large Saudi-owned businesses including the
construction conglomerate Saudi
Binladin Group “are massively dependent on low-cost foreign labor,” Hawes said.

STIMULUS
Introducing the expatriate fee and other measures in a way that doesn’t “choke the economy” will be difficult, Sfakianakis said. Growth slowed to 1.1 percent last year from 3.4 percent in 2015, according to a Bloomberg survey of economists, and will decelerate further to 0.9 percent this year.
The government is responding with a stimulus package of 200 billion riyals through 2020. Commerce
Minister Majid Al Qasabi said in December that target areas would be announced within three months.

LISTING A GIANT
Much of the groundwork for the 2018 listing of as much as 5 percent of Saudi Arabian Oil Co., known as Aramco, must be done this year. There’s growing debate about the potential market valuation, and a profitable IPO is critical to overhauling the economy; it’s the anchor for a sovereign wealth fund meant to generate enough income to dominate state revenue by 2030.
As with the taxes and subsidy cuts, the IPO carries potential political risks — from foreigners buying a stake in the Saudi economy’s crown jewel to a clear picture of Aramco’s financial health becoming visible for the first time. The IPO “is not so much the elephant in the room as the entire herd of elephants,” said Hawes at Teneo Intelligence. The government will also have to win the “internal arguments” on why the listing is necessary, he said.
The IPO will be organized “to maximize the economic benefits of the kingdom,” the government source said. “Saudi Arabia will not give up on its majority ownership of Aramco, and will not relinquish the control of it.” Prince Mohammed’s to-do list “is ambitious but not impossible,” the source said.

Aramco to pay shell $2.2bn
in refinery breakup

Bloomberg

Saudi Arabian Oil Co. will pay Royal Dutch Shell Plc $2.2 billion including debt to finalize the breakup of a 19-year refining partnership known as Motiva Enterprises LLC.
Saudi Aramco’s Saudi Refining unit will take full ownership of
the Motiva Enterprises name and legal entity, including the largest refinery in the US at Port Arthur in Texas, and 24 distribution terminals, according to a joint statement. Shell will take sole ownership of the Norco and Convent refineries in Louisiana and 11 distribution terminals.
Aramco will make a $2.2 billion balancing payment, split between debt and cash and subject to adjustments including working capital, Shell said in a separate statement. Aramco will assume almost all of Motiva’s $3.2 billion of net debt, including $1.5 billion of Shell’s share. A cash payment will cover the balance, Shell said. The arrangement will also take the Anglo-Dutch company closer to its target of selling $30 billion of assets in the three years to 2018.
“Motiva is a strong competitor among US refiners, and we value this important link with the dynamic US energy sector,” said Abdulaziz Al-Judaimi, senior vice president of Aramco’s downstream business. “Our intent is to continue providing Motiva with strong financial support as it transitions into a stand-alone downstream affiliate.”
The transaction is subject to regulatory approval and expected to close in the second quarter, the companies said. Shell and Aramco agreed last year to end the Motiva venture, which oversaw the three oil refineries as well as fuel terminals and fuel-branding rights in multiple US states.
Under the agreement, Motiva will have the exclusive right to sell Shell-branded gasoline and diesel in Georgia, North Carolina, South Carolina, Virginia, Maryland and Washington, D.C., as well as the eastern half of Texas and most of Florida. Shell’s markets will be Alabama, Mississippi, Tennessee, Louisiana, a portion of the Florida panhandle, and the Northeastern region of the US.
Motiva, formed in 1998, was a major player in US refining with capacity to process more than 1.1 million barrels of crude a day. But it was plagued by cost overruns and construction delays that eroded profits, Fadel Gheit, an analyst at Oppenheimer & Co., said in March 2016. The 600,000-barrel-a-day Port Arthur refinery suffered leaks and fires that delayed a $10 billion expansion to double the size of the plant. A former partner in Motiva, Chevron Corp., exited the partnership in 2002 as part of a settlement with regulators that allowed it to acquire Texaco Inc. Chevron’s divestment left Shell and the Saudis as 50-50 partners in the venture.