TOKYO Plans to list shares of Saudi Aramco, the world's biggest oil producer, have taken a twist in recent weeks. Rather than being sold as shares through a stock exchange, the stake could be sold directly to China or to institutional investors.
There is also uncertainty coming from the anti-corruption crackdown by Crown Prince Mohammed bin Salman, in which several influential princes and senior officials have been implicated, including an Aramco board member who was arrested.
The Aramco initial public offering forms the centerpiece of the Vision 2030 reforms meant to diversify and re-energize Saudi Arabia's oil-dependent economy. The proceeds from the sale are to be used to help domestic industry and create jobs.
The plan is to sell around 5% of Aramco shares next year on the Saudi Stock Exchange, or Tadawul, and an overseas bourse.
Early last year, Prince Mohammed expressed his desire to see the sale of Aramco shares. He has stated that the company should be valued at $2 trillion or more, which means a 5% stake would be worth $100 billion. This would make it the largest IPO in history, dwarfing the current record of $25 billion raised by China's Alibaba Group Holding.
The stock exchanges of New York and London, which could offer the two biggest pools of capital, have been lobbying to host the listing, along with Tokyo, Shanghai and Hong Kong -- the last one would have the fewest regulatory hurdles.
U.S. President Donald Trump wants a U.S. listing. "I just spoke to the king a little while ago, and they will consider it," he told reporters on Nov. 5.
But with 2018 just around the corner and so few details emerging, there is speculation that the process is being held up by internal debate in the royal court. With oil prices at low levels, many feel that a $2 trillion valuation is too ambitious and it would be better to find another option.
Moreover, meeting the regulatory requirements for an IPO on an exchange like London or New York is far from straightforward, and the upheaval caused by the crackdown leaves the crown prince with little time to spare.
The rationale for Saudi Arabia is to try and secure a guaranteed price for the first slice of Aramco, rather than leaving it to the lottery of the stock market. In addition, it could help pull in the world's largest oil importer as a long-term customer just as the future for oil becomes more uncertain.
For Beijing, the carrot is a stable, long-term supply of oil. China has been diversifying its sources but is uncomfortable with the idea of becoming too dependent on geopolitical rival Russia.
This option has its roots in the high-profile visit to Beijing made by Saudi Arabia's King Salman in March, during which he signed deals worth $65 billion. In addition to bilateral energy projects, the two countries discussed possible investments in Aramco by China National Petroleum Corp. and Chinese sovereign wealth fund China Investment Corp.
Whereas a delay in the stock flotation could hamper progress on Vision 2030, failure to raise the funds required by Prince Mohammed would put the reform plan in jeopardy.
EASY OIL In 2015, China imported 6.6 million barrels of oil a day, a figure that rose by an average 6.9% each year from 2010 through 2015. The Chinese government forecasts that oil import growth will slow to 3.2% annually through 2020, but that is still 7.8 million barrels a day by 2020.
China's oil consumption will peak around 2025 to 2030, according to Mika Takehara, a senior researcher at Japan Oil, Gas and Metals National Corp. "Wider use of electric vehicles may or may not cause the oil consumption peak in China to arrive a little earlier," Takehara said. But, she added, "Because the over 100 million gasoline-powered cars that have already been sold in China will continue to need fuel, it is vital for the country to secure a stable source of oil."
Beijing is keen to promote electric vehicles. However, the global shift to electric vehicles could help solidify the Middle East as the world's top crude supplier.
Saudi Arabia's oil lies under sand, which is easier to extract than oil beneath thick ice or under the seabed. The break-even price for U.S. shale-oil is said to be around $50 a barrel. For Russia it is about $40. Saudi Arabia can still turn a profit even if crude prices drop to around $10.
As the world's energy mix becomes more diverse, low-cost oil producers like Saudi Arabia will have an edge. China's investment in Aramco would be a big bet on this low-cost crude.
Another factor is China's ambitious Belt and Road Initiative. The brainchild of President Xi Jinping is partly aimed at ensuring stable energy supplies to fuel China's growth. Saudi Arabia is a priority under the initiative. Beijing is hoping to invest in Aramco to strengthen its ties with the world's largest oil exporter, thereby securing a steady flow of oil for years to come. Estimates by the Institute of Energy Economics, Japan, show that if electric cars, fuel cell cars and other "zero-emission" vehicles make up 30% of global auto sales by 2030 and 100% by 2050, global oil consumption will peak around 2030.
But that scenario is "under the most extreme scenario," according to Akira Yanagisawa, a senior economist at the institute. He believes a substantial fall in the world's oil consumption is not in the cards. Even if global oil consumption does start to decline after 2030, the world will still burn 89 million barrels of oil a day in 2050, roughly the amount it consumes today.
Still, the economies of oil producers in the region will be hit hard by dwindling income from oil. At the same time, the shift toward electric vehicles will make oil-consuming countries more dependent on the Middle East despite regional instability.