Most headlines with "Saudi Arabia" in them seem to feature a hefty sum of money. A US$500-billion smart city here, a US$200-billion solar project there--it's beginning to look like Saudi Arabia wouldn't even look at a project if it costs less than a billion dollars.
One also gets the distinct feeling that Saudi Arabia is still an extremely rich nation that can afford all these projects, even without the listing of its state oil giant Aramco.
The truth, however, may be that it can't afford them even with the Aramco listing. Here's a simple calculation. The Neom city project and the SoftBank deal alone come in at US$700 billion. Add to this a US$10-billion deal with Egypt for another smart city, the US$44-billion refinery deal with three Indian companies, and a couple of smaller projects: a US$7-billion refinery in Malaysia and a US$5-billion petrochemicals complex in Saudi Arabia. The bottom line of this selection: US$766 billion.
Of course, the Kingdom won't finance all these projects on its own, but it will need to finance a certain portion of them—in some of the projects, even half of the total. Also, these are not all the large-scale projects that Saudi Arabia has signed up for. Let's make a crude assumption that Riyadh's participation in the megaprojects is half, at US$383 billion. Can it afford it?
Saudi Arabia's sovereign wealth fund, the government's investment vehicle, has US$250 billion in assets under management. Plans are to expand this to US$400 billion by 2020 through local and international investments, but right now US$250 billion is what the Kingdom has in the fund, and oil is still below its target price of US$80 a barrel. Meanwhile, the 2018 Saudi budget features a deficit of US$52 billion and some observers believe the Kingdom is stretching itself too thin with all its ambitious reform plans.
So far so good, but won't Aramco's listing be enough to cover all expenses related to the megaprojects and then some? That's a tough one to answer. The Saudis themselves insist that the world's largest oil company by reserves is worth US$2 trillion. Independent experts, however, doubt that. As Bloomberg's Liam Denning recently wrote, the only way to come up with the US$2 trillion valuation is to make "some heroic assumptions."
Let's be heroic, then, and assume that Aramco is really this valuable. At a total value of $2 trillion, the 5 percent that the government in Riyadh plans to float will bring in proceeds of US$100 billion—in a best-case scenario, of course. Add this to the US$250 billion currently available in the sovereign wealth fund, and you end up with US$350 billion, which is US$33 billion short of the first assumption about the six abovementioned investments that Saudi Arabia has committed to make.
Also, this week the Financial Times did some computer modeling on Aramco using the impressive but questionable income figures reported by Bloomberg earlier. The results revealed that Aramco would need oil to be trading at US$120 by 2023 to make it to a US$2-trillion valuation. At a price of US$64 a barrel of oil, Aramco would be worth just US$1.1 trillion, the FT said.
So, how likely are all these projects to become a reality, bearing in mind that they are by no means the only things that Riyadh will be spending money on in the coming years? Well, no one can really say because there are too many variables, but the chances look slim. Chief among them is, of course, the price of oil. The Saudis have gone an extra mile to make sure they rise, but there is only so much a producer can do, even if it is—to date—the third-largest in the world.
The recent heat-up in Syria certainly helped, but it wasn't enough to push Brent to $80. This heat-up could deepen, benefiting Riyadh, but as some cool heads note, neither Washington nor Moscow really want a war, so it wouldn't be wise to bet on a new world war as a price driver.
Investors' appetite for the Aramco IPO is also far from a certain thing. In fact, some investors in the United States were clearly unimpressed with the prospect of acquiring Aramco stock. Investors are much more wary in the post-2014 world of oil, just like producers. In other words, that US$100 billion Riyadh eyes from the listing may never materialize.
The list of challenges could continue: the international leg of the listing will likely never happen, reducing the chances of US$100 billion in proceedings further; the budget gap will sooner or later need addressing; the private investors Saudi Arabia will count on for a lot of project financing may never get on board, and so on. In short, the Vision 2030 program of Crown Prince Mohammed might just end up like its predecessor, Vision 2025. Boy, was that ambitious!
By Irina Slav for Oilprice.com
