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Opinion

IPO puts Saudi Aramco under Asian oil buyers' spotlight

Exporter will need to carefully balance expectations of investors and customers

Saudi Arabia may deny any connection between the Aramco listing and its decisions at the helm of OPEC.   © Reuters

The launch this month of the initial public offering of state-owned oil giant Saudi Aramco -- the world's most profitable business -- has focused the attention of not only the global investment community but also its crude-oil customers.

Nowhere is that scrutiny higher than in Asia, which absorbs more than two-thirds of Aramco's crude exports. Asia's top four oil-consuming countries -- China, India, Japan and South Korea -- are heavily reliant on supplies from Aramco, which has a monopoly on crude production in the kingdom.

The ties go beyond crude trade. Asia has attracted the lion's share of Aramco's overseas investment push into refining and petrochemical projects in recent years, as the company prepared itself for a blockbuster international and domestic flotation.

These projects have committed to consuming Saudi crude as a substantial part of their diet. That affords them security of supply, but also gives Saudi Arabia a long-term assured market when the world has begun to contemplate the sunset of the oil industry.

Asian refiners, and ultimately the region's oil consumers, are thus highly exposed to the prices the Saudi oil giant sets for its crude supplies under long-term contracts every month. Buyers have an informal understanding of how Aramco decides its differential, or discretionary margin, but are routinely surprised and disappointed, especially when the number comes in much higher than expected.

When refining margins are razor-thin -- as they have been in Asia in recent weeks -- every cent of that differential counts. Earlier this month, Aramco handed disappointed refiners in Asia the third consecutive monthly hike in differentials for the majority of its crude cargoes.

It is not only its own prices that Aramco controls. Saudi Arabia, as the de facto leader of the Organization of the Petroleum Exporting Countries, is in a position to regulate about 30% of the world's crude supply.

Fourteen-member OPEC's leverage has grown since it secured the collaboration of 10 major producing countries outside the group to agree voluntary production limits starting in 2017, in an effort to mop up surplus oil supply and prop up prices.

It is no coincidence that Saudi Arabia worked arduously to forge the OPEC/non-OPEC alliance in the months following then-Deputy Crown Prince Mohammed bin Salman's unveiling of the Aramco IPO plan in January 2016. The kingdom reversed its two-year policy of non-interference in the oil market with a pledge at the end of 2016 to tighten supply and drain the excess in the world's commercial oil inventories. Benchmark Brent crude prices responded by jumping nearly 22% on average in 2017 against the previous year.

The launch of the IPO, although scaled down to a 1.5% stake-sale from the 5% initially proposed by Mohammed bin Salman and limited to the domestic Saudi stock market instead of a simultaneous international listing, has refocused attention on the kingdom's power to push up oil prices.

As an economy heavily dependent on oil export revenues, it was a given that Saudi Arabia benefited from higher oil prices. But now the success of the IPO, the performance of the listed shares, the dividend yield afforded to the public shareholders and the prospects of any international listing down the road also hinge on crude prices.

The stakes are high because the listing will reflect on Mohammed bin Salman's ability to execute his economic transformation plan for the kingdom, Vision 2030. It will also be a reflection of Aramco's perceived value and the capability of the government -- the majority shareholder -- to institute world-class corporate governance standards around a traditionally secretive company.

The listing will reflect on Mohammed bin Salman's ability to execute his economic transformation plan for the kingdom.    © Reuters

Though Saudi Arabia may deny any connection between the Aramco listing and its decisions at the helm of OPEC, it will be natural for the kingdom's crude customers to be on their guard. How the producer manages its tightrope walk, balancing the divergent interests of its public shareholders and its customers, remains to be seen.

Saudi Arabia has approached some of its customers and joint-venture partner companies in Asia, aside from sovereign wealth funds, to invest in the IPO, but some have declined or been noncommittal.

This request to invest puts Aramco's international customers and joint-venture partners in an awkward position. Is there an implied quid pro quo? Could a "no thanks" jeopardize their relationship? How would the companies or sovereign wealth funds be perceived at home, in their import-dependent countries, if they owned a piece of an oil behemoth that coordinates international production policies aimed at bolstering oil prices?

As Aramco steps into a brand-new phase of its 86-year-old life, the management will do well to bear in mind not only the aspirations of its new shareholders, but also the hopes of its age-old customers -- the ones contributing to its revenues and profits.

Vandana Hari is founder of Singapore-based Vanda Insights, which tracks energy markets. She has two decades of experience providing intelligence on the energy sector.

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