Saudi Aramco + SABIC

WHY THIS MATTERS: Politics + Finance + Technology

Saudi Aramco has been moving into “oil to chemicals” for several years. The purchase of SABIC (Saudi Arabian Basic Industries) is an important step in that effort.

However, while the technology makes sense, the politics and the finance of the move pose challenges.

The New York Times article excerpts (below) illustrate the point.

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[EXCERPTS]
Saudi Aramco’s deal for a stake in Sabic will help to finance an ambitious campaign to modernize the kingdom without an Aramco I.P.O.
Faisal Al Nasser/Reuters
By Stanley Reed and Michael J. de la Merced
New York Times, March 27, 2019
LONDON — Saudi Arabia’s oil company, Saudi Aramco, said on Wednesday that it would buy a 70 percent stake in a state-controlled petrochemical giant for $69.1 billion, in what appears to be an alternative to a much-delayed initial public offering.
The deal, which involves three entities controlled by the Saudi government, largely accomplishes the primary goal for Aramco’s share offering — helping to finance an ambitious campaign to modernize the kingdom.
Aramco will buy the stake in the petrochemical company, the Saudi Basic Industries Corporation, known as Sabic, currently held by the country’s sovereign wealth fund. The remaining 30 percent of Sabic will continue to be listed on Saudi Arabia’s Tadawul stock exchange.
The transaction would give Crown Prince Mohammed bin Salman, who had been the main proponent of selling a portion of Aramco to public investors, a chunk of the cash he needs to diversify the Saudi economy, which is heavily dependent on oil. The prince hopes both to buffer the economy from oil price fluctuations and invest in industries that will provide income for the kingdom if demand for its oil wanes.
The deal “gives the crown prince what he wanted,” said F. Gregory Gause III, professor of international affairs at the Bush School of Government and Public Service at Texas A&M University. “It is certainly more convenient than having to raise cash through an I.P.O. that would have required opening up all of the books of Aramco.”
The stake that Aramco is buying is held by the Public Investment Fund, which Prince Mohammed has designated as a vehicle for carrying out his modernization plans. The transaction will convert the fund’s holding into cash, allowing it to make other investments.
Analysts say that buying a giant petrochemical company like Sabic also fits with Aramco’s own plans to diversify. The company has been pumping money into petrochemicals, betting that demand for plastics will grow faster than for fuels like gasoline in a world increasingly concerned about climate change.
source: https://www.nytimes.com/2019/03/27/business/saudi-aramco-sabic.html
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Here is another article that can help in understanding the interplay of politics + finance + technology 

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[EXCERPTS]
The Two-Trillion Bubble-What Aramco IPO reveals about MBS’s 2030 Vision
18th September 2018
Al Jazeera Centre for Studies
Dr. James M. Dorsey (jcforstudies@aljazeera)
Senior Fellow at the S. Rajaratnam School of International Studies, co-director of the University of Würzburg’s Institute for Fan Culture, and co-host of the New Books in Middle Eastern Studies podcast. James is the author of “The Turbulent World”
A Saudi decision to indefinitely delay an initial public offering (IPO) of five percent of the Saudi Arabian Oil Company or Aramco, the Saudi state-owned oil company, has further dented investor confidence and fueled debate about Crown Prince Mohammed bin Salman’s ability to push economic reform. It has even prompted speculation that his assertive policies, including the Kingdom’s ill-fated military intervention in Yemen, harsh response to Canadian human rights criticism and failed Saudi-United Arab Emirates-led diplomatic and economic boycott of Qatar, could dampen his prospects of eventually ascending the throne.
The Beginning of the End?
Saudi oil minister Khalid Al Falih was emphatic in his insistence that the Kingdom remained committed to an Aramco initial public offering in his August 2018 announcement that the IPO had been indefinitely delayed. “The government remains committed to the IPO of Saudi Aramco at a time of its own choosing when conditions are optimum,” Al Falih said in a statement. The statement put an end to speculation about the timing and fate of the offering that had been originally planned for 2017. To be fair, Al Falih had long maintained that the Kingdom was not bound by a timetable. "Timing isn’t critical for the government of Saudi Arabia," he said more than a year before the final postponement.
The disconnect between Saudi imperatives and the expectations of Western governments and financial markets who repeatedly focused on unmet Saudi time indications of the IPO rather than broader policy statements fit a pattern of misperceptions that dates back to the days of Aramco’s founding by US oil companies that at the time had a major stake in what was then a US registered entity, the Arabian American Oil Company when American oilmen repeatedly underestimated their Saudi counterparts and misread their intentions.
The fact that Bin Salman’s father, King Salman, had by ordering the delay of the IPO, intervened for the second time within a matter of months to curb his son’s policy initiatives fueled speculation that the move may be the beginning of his son’s end. Salman had stepped in earlier to put an end to Bin Salman’s tiptoeing around condemning US President Donald J. Trump’s recognition of Jerusalem as Israel’s capital.
A Blessing in Disguise?
In the ultimate analysis, the delay of the IPO of Aramco, the world’s largest private oil company with estimated hydrocarbon reserves of 261 billion barrels or ten times those of ExxonMobil and one of the world’s lowest production break even points, could prove to be in Bin Salman’s string of failures the one blessing in disguise. No doubt, an IPO would have raised a substantial amount even if it likely would have been below Bin Salman’s unrealistic expectation of a US$100 billion yield and it would have made good on the crown prince’s promise of a more transparent, more user-friendly business environment.
The delay, however, at least temporarily resolves a number of technical or more principle issues associated with the public offering. The most immediate was timing given that the current market climate does not favour national oil companies.
If the Aramco IPO in Bin Salman’s vision was in part intended to promote transparency in Saudi Arabia and convince foreign investors that the Kingdom was rolling out an environment friendly to investors and the conduct of business, its indefinite delay sends a very different message. “Whether…foreign enterprises will risk their own capital in Saudi ventures…remains to be seen. The failure of the Saudi Aramco IPO has highlighted the mismatch between the needs of foreign investors and Saudi Arabia’s current investment environment,” said Stephen Grand, executive director of the Atlantic Council’s Middle East Strategy Task Force.
Conclusion
The indefinite delay of the Aramco IPO has dealt a body blow to Saudi Crown Prince Mohammed bin Salman’s efforts to reform and diversify the Kingdom’s economy. It has also further dented foreign investor confidence, a pillar of Bin Salman’s reform effort. The crown prince’s effort to compensate for the loss of expected proceeds of up to US100 billion from the sale has forced him to look for funds elsewhere. His proposed acquisition by Aramco of a majority stake in petrochemicals giant SABIC threatens to undermine the managerial independence of the oil company, the rock bed of Saudi rule since the Kingdom was founded in 1932.
The delay of the IPO is nonetheless not all bad news even if it has called into question the future of Saudi reform and even sparked speculation about Bin Salman’s future. Bin Salman is not left without options. The Kingdom continues to enjoy access to international financial markets and retains the option of a private equity sale. Moreover, discounts of national oil companies by financial markets favour a delay of the IPO.
That does not necessarily shield Bin Salman. He may nevertheless be down, but he is not out. The delay, however, makes it all the more imperative for Bin Salman to meet expectations of a predominantly young Saudi population by delivering job creation and enhanced economic and social opportunity. That could be a tough nut to crack in the absence of domestic and foreign investor confidence in the crown prince’s ability to deliver.
About the Author
source: http://studies.aljazeera.net/mritems/Documents/2018/9/18/5202af0c990848d8902aed184d41aa46_100.pdf
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TIP: Visit the links below to see what Saudi Aramco and SABIC have to say about the merger.

Saudi Aramco
https://www.saudiaramco.com/
SABIC
https://www.sabic.com/en
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