The Future of Crude Oil, Saudi Aramco the World’s Richest Oil Company Proposes an IPO, and what the NNPC can learn from the move.
Last week Saudi Arabia hinted the world that it might be taking Saudi Aramco, the state owned Oil Company and the richest oil company in the world generating more USD$1 billion a day to the stock market to float an IPO.
So why is Saudi Arabia proposing to float an IPO in the States owned oil company said to be the most secretive company in the world worth trillions of dollars. The country is obviously the biggest player in the global oil market, a strategic ally of the United States and most favoured oil market for the United States with insider information and assurance on oil purchase. Founded in 1933, Saudi Aramco popularly known as Aramco is a Saudi Arabian national petroleum and natural gas Company based in Dhahran, Saudi Arabia, the story is that of discovery and development of the greatest energy reserves the world has ever known and the rapid transformation of Saudi Arabia from the desert kingdom to modern nation state.
For years Saudi Arabia has always protected its share of the global oil trade even if it means not cutting down on production to increase market price when prices fall in the international market. It is becoming clearer and clearer by the day that crude may never hit the 3 digit figure again……obviously not for years to come and not looking elsewhere for foreign earnings will spell doom for the kingdom and a serious threat to its monarchy.
The richest and the most secretive company in the world has woken up to the fact that going public and retracting the economy may be the only way out of their present situation, they have woken up and seen the market dangers ahead and their corporate survival will depend on a new strategy. The shift in environmental and resources strategies has ultimately forced the Saudis to consider new strategies of survival as the old strategy can no longer be sustainable.
When the lead global player holding the largest reserve of crude oil in the world decides to take a bold step and change directions, then the world should know and read meanings to this strategic move that the future of crude might never be the same again.
Living in Opulence!
With a population of about 28 million people and a GDP of USD$746.2 Billion and the 19th largest economy in the world with an average GDP growth of 3.8%, Saudi Arabia has one of the highest GDP per capita in the world with a figure of USD$24,161 boasting of a whopping 16% of the world’s total petroleum reserve.
Saudi Arabia is the largest exporter of crude oil with the petroleum sector accounting for 80% of its budget revenue, 45% of GDP, and 90% of export earnings. As of 2014, Saudi Arabia had a labour force of 11.22 million people with 80% of its labour force as non-nationals, which means of this number, 8.98 million are foreigners working in Saudi Arabia and only 2.3 million of Saudi nationals about 8% of the population actually works, with the government being the employer of majority of the working population. Everything is subsidized in Saudi Arabia, from food to petrol, to electricity, water and education, which eventually has its burden on the economy.
With a sluggish economy built around crude oil and holding a strategic alliance with the United States in crude sales, the global oil sales can best be described as a global chess game where every move is geared towards killing the queen which in this case represents the price. Oil prices have collapsed by 65% from about a year and a half ago, while this has created a positive outcome for the American consumers because of the reduced pump gas price, it has thrown countries like Saudi Arabia, Nigeria, Brazil, Venezuela, Russia and Iraq into economic chaos. With the end of sanctions in Iran, it will further add a devastating blow to the dwindling oil price, China which is the world’s second largest economy and world largest importer of crude oil has also seen a slowdown in its economy which has further reduced the demand for crude in the international market, and hence the supply now heavily outweighs demand.
The fall in the global demand and price created a budget deficit of 15% of the GDP for the Saudi Arabia in 2015 of about USD$98 billion with a total deficit standing at USD$100 billion. Though having a USD$650 billion in its foreign reserve, the IMF warns that the country could run out of money within 5 years if it does not tighten its expenditures and find new ways of raising money.
So what’s the Plan?
With the fear that crude prices may never hit USD$100 again, the Saudi’s have acknowledged that the economy must change, and people have to be made to work rather than living in opulence and putting the burden on the state. Prince Muhammed bin Salman, the powerful prince and son of the King has that the first stage of the blue print will be for fiscal consolidation to help eliminate the budget deficit.
Floating of IPO in Saudi Aramco, the national icon and the world’s most valuable company which will allow the Saudis to open its books to the world, this will help the Saudi nationals know exactly how much Aramco make in profit yearly which has always been a center of debate on the Royals expenditure.
Increase prices of petrol, electricity and water which is still heavily subsidized, new taxes of 5% VAT, introduction of SIN taxes, diversify from the oil boom by boosting private business and introducing market driven efficiencies, getting the state out of all but its essential functions from health and education to state own companies, privatization and private provisions of public services, complete or partial privatization of dozen agencies and state own companies including national airlines, Telecoms, and power generation.
The Future of oil!
One of the political and economic reasons why the global oil price has plunged from USD$110 in 2014 to a record low of about USD$30 is because the Saudis are determined to protect their share of the global oil trade. Ordinarily, applying the laws of demand and supply, oil producing countries were supposed to cut down on supply to maintain an appreciable market price, but the politics of protecting market share and the fear of losing such market share if the prices increase has made countries like Saudi Arabia continue to produce at normal capacity.
The country enjoyed a budget surplus in the past from the oil boom which has been slowing down lately and creating a budget deficit, in 2006, there was a budget surplus of 19.9% of the GDP, 29.8% in 2008, 11.6% in 2011, and 13.6% in 2012. There was budget deficit of 5.38% in 2009, 2.3% in 2014, and a whopping 15% in 2015. Revenue this year is expected at USD$137.1 billion down from USD$162.2 billion in 2015 further creating a budget deficit if appropriate measures are not put in place.
NNPC and the Nigeria’s oil Future!
The Nigerian government must start to come to terms with the fact that the future of oil may be coming to an end and must start looking for alternatives in generating funds for the country. Though the sale of oil will continue but at low prices with an uncertain future which might not be sustainable for the income that will be required to run the economy. It is becoming clearer by the day that you cannot project the growth of your economy and the projected income on a resource that is a buyers market.
Following the example of the proposed IPO by Saudi Government, NNPC should make every effort to go public and raise money through an IPO which will help the Nigerian State owned company raise money and be better managed. With a long history of corruption, going public, the NNPC will be better accountable to the people and government and it be difficult for corrupt government officials who may want to use the agency as their cash cow at the detriment of the state. Going public at this time will obviously help with increased prestige and visibility, improving its financial conditions and build a better trust between the NNPC and the Nigerian people.
With a bleak future price of oil, government should start to reconsider its strategy of the control of the NNPC which might no longer be sustainable on the long run for the economy.
January 18, 2016 at 6:56 am
From an investor’s perspective, one would be hesitant in investing in an NNPC IPO. With oil prices dwinding and set to remain low for the foreseeable future, and with increase in the value of shares invested dependent on a company’s future earnings, I worry if NNPC is a worthwhile investment.
January 21, 2016 at 12:44 am
As part of efforts to boost its revenue base, the federal government of Nigeria is exploring revenue opportunities in the non-oil sectors especially taxes and rates. Based on this, The Federal Government has introduced a stamp duty of N50 on bank customers for money received into their accounts. This implies that every bank customer will henceforth pay N50 stamp duty for money received into their accounts through electronic transfer, cash and cheques.
Do you see this as a good way of generating revenue?
November 24, 2022 at 11:47 pm
Loved reeading this thank you