Profits — and pitfalls — of a China deal for Saudi Aramco

The official position of Saudi Aramco and its advisers has not altered. The initial public offering (IPO) scheduled for 2018 is on track and plans are advancing toward that end, with a number of foreign stock exchanges lined up in addition to the Tadawul as a potential venue.
But behind the scenes, a lot has changed since the Financial Times reported at the end of last week that Aramco was considering a private deal with Chinese investors to take a chunk of its equity before an international IPO.
Since then, further reports have emerged that name two Chinese oil companies, PetroChina and Sinopec, as being part of a consortium that has offered to buy 5 percent of Aramco — exactly the amount slated for the IPO. 
If all this is true — and Aramco is sticking to the line that it is “speculation” — it could change the entire dynamic of what was slated as the biggest IPO in history. Indeed, it would represent a significant shift in the plan to diversify the Kingdom’s economy away from oil dependency under the Vision 2030 strategy.
The first hint of Chinese interest in Aramco as an equity partner surfaced in the summer in another FT article by Nick Butler, an experienced oil executive and political adviser, that suggested China was going to “buy Aramco.” That did not seem very plausible at the time, given that Aramco’s focus was firmly locked on maximizing the valuation of the company and deciding between London and New York as the venue.
But in fact Butler deserves full credit for tapping into the community of banking advisers hired by Aramco to advise on the IPO, and uncovering what at least one of them had hatched as a “plan B.” 
If, for whatever reason, Aramco feels unable to press ahead with an international listing, or if it cannot get the $2 trillion valuation placed on the company when the IPO plan was first announced, what then?
The bankers’ plan — much discussed privately last week at the annual gathering of financiers at the International Monetary Fund — proposes attracting a Chinese trade partner as a cornerstone investor in Aramco. It could still offer shares publicly on the Tadawul and, maybe at a later date, on an international exchange.
The benefit of such a deal would be to set a benchmark price for Aramco equity, though in a private deal neither party would have to disclose that price. It would be difficult to judge how it would measure up against the $100 billion IPO value already set as the target.
There would be other benefits too. Presumably, China would get a favorable supply deal to ensure a flow of crude to keep its economic growth on track; Saudi Arabia could get Chinese expertise in construction and infrastructure, and a skilled labor force, to help with its diversification.
Aramco would get the financial injection it wants too, of course, but this is where the logic of a deal with China starts to unravel. Would China be willing to put up $100 billion when many of the independent estimates of the value of a 5 percent stake fall short of that? If not, where is the financial benefit of a China deal?
And if the plan is to do a trade deal first and then later attempt an IPO on international markets, would the presence of a big Chinese investor already on the share register be regarded as a positive? Chinese companies are not renowned for the transparency of their disclosure policies, which is one of the factors that has clouded the Aramco valuation hitherto.
There is also a more general issue with a trade deal with the Chinese, in terms of the grand transformation taking place in the Kingdom.
Energy Minister Khalid Al-Falih said at the World Economic Forum meeting in Davos earlier this year that a successful IPO of Aramco was key to the implementation of the Saudi Arabian transformation plan. He made it clear that the benefits of the IPO were not just financial, but also symbolic.
Indeed, the point has been reinforced several times this year, most recently by the International Monetary Fund, that the Kingdom does not actually need the money. It is still sitting on enormous financial reserves, and has shown repeatedly that its credit is good in the international debt markets with a string of multibillion-dollar bond issues.
Saudi Aramco is the fountain of the nation’s prosperity, and generally regarded as the best-run corporation in the Kingdom. To open it up to the kind of international inspection required by global investors would be an enormous practical demonstration of the new extrovert spirit in Saudi Arabia, embodied in the Vision 2030 plan.
If an Aramco trade deal with China is conducted in darkness and secrecy, it would be a setback for that whole process.