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Despite a 44% drop in profits in 2020, the Saudi government has ordered majority-owned Saudi Aramco to stick to paying dividends of $ 75 billion a year to shareholders it claims. was committed at the time of the company’s initial public offering (IPO) in December 2019. Sticking to such a huge dividend payment – a guarantee of US $ 18.75 billion paid out each quarter – required a reduction significant capital expenditure for Aramco in the coming year, which will hurt the company’s growth prospects and even the sustainability of its operations. So why doesn’t the Saudi government just reduce the dividend payable to Aramco shareholders?
The basic answer to this oft-asked question is that without such a massive payout guaranteed, hardly anyone would have bought the shares in the first place and few people would hold them now. This failure of yesterday or today would be very dangerous for the de facto ruler of Saudi Arabia, Crown Prince Mohammed bin Salman (MbS). It should be remembered that MbS was not appointed Crown Prince until June 2017, taking on the unprecedented role of Mohammed bin Nayef (MbN), the direct grandson of the founding father of modern Saudi Arabia, the King. Abdulaziz. From that point on, the scramble for succession after the death of the frail current King Salman between the two groups of supporters grew even more vigorous. It was in this feverish atmosphere that MbS came up with the idea of ​​classifying Aramco internationally as a symbol of the new Western-style oil player, with a commercial mind but socially aware and savvy that he wanted him to. be considered. The crux of this fundamental strategy of securing his succession as King – not to mention his very survival as Crown Prince – was that Aramco’s IPO was seen as a palpable success and he has him. – even set the metric for this valuation: that the value of the 5 forecast percentage of the stake sold in Aramco should give the company a total value of at least 2 trillion US dollars. With a view to also bolstering his broader support among his own people, MbS has made it clear that new funds from Aramco’s IPO will go into his “ Vision 2030 ” development plan which aims to diversify the Saudi economy far from its dependence. on oil and gas exports.
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The fundamental problem for him in achieving his own goals was that the more international investors learned about Saudi Aramco’s operations, the less they wanted to be a part of it. This included all the lies about its crude oil reserves claims, its reserve capacity claims, its production claims, the terms of its oil concession claims and its independence from claims of government influence, among other toxic elements for investors. This meant that by the time the company finally went public at the very end of 2019, it was not a 5% stake that MbS was able to sell, but only 1.5% in the window of opportunity. ‘Initial Public Offering. It was also not at a value that would give Aramco a total value of US $ 2 trillion, but rather at a listing price per share of SAR 32 (US $ 8.53), which implied a total value. for Aramco of US $ 1.7 trillion. Worse yet, no major (or minor, for that matter) international stock exchange wanted Aramco to be on it and even to sell the 1.5% stake that was sold during the IPO, the MbS team had to resort to tactics which his reputation did not do any good internationally.
One was to ‘encourage’ the same high-ranking Saudis who had been jailed and tortured at the Ritz-Carlton in 2017 (to force them to hand hundreds of billions of riyals to the government for allegedly corrupt payments. that they had accepted in their company (transactions, despite these payments – considered “commissions” – an integral part of all business done in Saudi Arabia) to buy shares in connection with Aramco’s IPO . A similar style tactic was also used on countries in the Middle East who wanted to avoid suffering the same fate as the blockade of Qatar by Saudi Arabia in 2017, which bought shares of Aramco through their sovereign wealth funds and other. Much of the rest of Aramco’s IPO was taken over by investment vehicles from countries seeking a geopolitical advantage like China and Russia and by investment banks working for Aramco and acting in the underwriting syndicates. Finally, Saudi nationals were promised the unprecedented deal of being able to take out new loans at a ratio of 2 to 1 for every riyal they would invest in Saudi Aramco, compared to an average limit on the leverage ratio for 1 to 1 loans. And it was precisely in light of this that MbS and its bankers knew they had to offer a massive payout guaranteed unheard of for years – in the form of the US $ 75 billion dividend paid out. quarterly – to all buyers of Aramco shares. Related: Is Natural Gas Still A Safe Bet For Oil Majors?
So why was there so little common interest in Aramco shares? In the most basic terms, this is because Aramco’s future is very uncertain. It could once again suffer a huge level of value destruction if Saudi lawmakers decide to launch a new oil price war. Saudi Arabia’s 2014-2016 oil price war against America’s then still nascent shale oil sector collectively cost OPEC member states at least US $ 450 billion in revenue, according to the International Energy Agency, and pushed Saudi Arabia to move from country to country. budget surplus to a then-record deficit in 2015 of US $ 98 billion and to spend at least US $ 250 billion of its precious foreign exchange reserves during that period that even senior Saudi officials have said have been lost forever.
The 2014-2016 oil price war also irrevocably severed the Kingdom’s most important relationship in the world, established with the United States in 1945 in an agreement signed by then-US President Franklin Roosevelt and the Saudi King. Abdulaziz. The deal was simple: The United States would receive all the oil supplies it needed as long as Arabia had oil in place, in return for which the United States would guarantee the security of both the ruling House. Saud and, by extension, Saudi Arabia. Arabia. After the 2014-2016 oil price war, that effectively changed for: in return ensuring the security of both the ruling Saudian House and Saudi Arabia, Saudi Arabia will provide the United States with everything. the oil they need as long as Saudi Arabia has oil. in place and allow the U.S. shale oil industry to thrive and grow. After the 2020 oil price war once again shattered that final commitment, then-US President Donald Trump told MbS directly in a phone call on April 2, 2020 that at least for OPEC to start cutting oil production – that is, ending the oil price war – it would be powerless to prevent lawmakers from passing laws to withdraw US troops from the US. Kingdom. Furthermore, it was made very clear by Trump that he now expected that the next time the Saudis tried to destroy the American shale sector, it would be the end of the 1945 agreement, without further warning, and that the US military would. be removed immediately.
Even if new President Biden has not followed through on his predecessor’s threats in the event that Saudi Arabia starts another oil price war, he can use the threat of the “ production cartel bill. ” and oil export ” (NOPEC) which was taken as good both by Trump and before that by George W. Bush. In early 2019, a US House of Representatives committee approved the NOPEC bill which would have a broad mandate, making it illegal to artificially cap oil (and gas) production or set prices, which is precisely what OPEC and Saudi Arabia try to do. It would also immediately remove the sovereign immunity that exists in US courts for OPEC as a group and for its individual member states. This would leave Saudi Arabia open to prosecution under existing US anti-trust law, with its total liability estimated at US $ 1 trillion in investment in the US alone. The United States would then be legally allowed to freeze all Saudi bank accounts in the United States, seize their assets in the country, end all use of US dollars by Saudis all over the world (oil, of course). , is denominated in U.S. dollars), and attack Aramco, its assets and funds, as it is still a majority state-owned production and trading vehicle. It would also mean that Aramco could be ordered to split into smaller constituent companies that are not known to violate competition rules in the oil, gas and petrochemicals sectors or influence the price of oil. In fact, it would reduce Aramco’s value to zero.
By Simon Watkins for OilUSD
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