The Wall Street Journal

Posted: 25 November 2019

Test for Saudi: Aramco’s IPO, Oil Prices and Iran

Saudi Aramco recently released a valuation target for its IPO that undershot the $2 trillion target Saudi Crown Prince Mohammed bin Salman had been fixed on for more than two years.

Aramco’s listing follows months of regional tensions between Saudi Arabia and Iran. An effective proxy war between the two countries in Yemen spilled over into attacks on Saudi oil tankers and infrastructure in September.

Iran denies involvement in the attacks. Yemen’s Saudi-backed government recently signed a power-sharing agreement with Iran-aligned Houthi rebels.
Charles Hollis, a former U.K.-Saudi diplomat and managing director of geopolitical risk consultancy Falanx Assynt, spoke with the WSJ’s David Hodari about what’s next for Saudi Arabia and Aramco. Here are edited excerpts.


Q: Why do you think Aramco pushed for a 2019 domestic IPO?

A: Mr. Hollis: Promises have been made in terms of diversifying the economy and the Saudi public is increasingly frustrated. It’s very common now to see on social media criticism even from members of the armed forces.


Q: Does the IPO’s timing signal anything about the Saudis’ outlook on oil prices?

A: Mr. Hollis: That could be one of the reasons that the IPO wasn’t pushed back another couple of years and it could be a call on the future direction of oil prices. Clearly, that’s what Aramco’s asset is. I know people are saying it’s worth twice tech and comparing the two, but they are looking at the value of putative future profits which aren’t known yet. Aramco’s profits are clear and in the ground. That’s probably one of the reasons why they want to get it done sooner rather than later.


Q: Can a domestic listing be seen as a success?

A: Mr. Hollis: I think clearly [Crown Prince Mohammed bin Salman] will be massively disappointed by this. Despite quite a punchy valuation at the top end from some advisers, I think he’s got to face the reality of what the market is saying. It could be that a domestic listing proves an enormous success and shares soar and valuation—and on the back of that, an international listing is approved. I think the ambition is still there. The focus on the IPO will continue because for MBS it’s political so he can secure his institution.


Q: Have there been moves to de-escalate tensions between Riyadh and Tehran?

A: Mr. Hollis: There are efforts to de-escalate. We saw engagement with Oman because it was a reported mediator. There are some positive changes as a result of the IPO, but unfortunately for Saudi Arabia, this is not a Saudi decision. As long as there are U.S. sanctions on Iran, Saudi is the main target for Iran. Iran is showing no signs that they’re ready to compromise over regional influence so therefore pressure will continue.


Q: Is there a risk that conflict will escalate?

A: Mr. Hollis: It’s unlikely there’ll be repeated and unjustified attack[s] in the next few weeks especially when there seem to be some diplomatic efforts in Yemen. It will be difficult for the Houthis to claim another such attack but a ship can be an easier target and less controversial. In the medium term, it will heavily depend on the current protests in Iran and the future of U.S. sanctions on Iran—they will likely renew the threat to Saudi oil infrastructure.

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