Bloomberg has just released an expansive interview following a five hour conversation with Saudi Arabia’s Deputy Crown Prince, Mohammed bin Salman, regarding the country’s strategy over the coming years. Here are the top takeaways:
Saudi Arabia is positioning itself for a post-oil world
The single biggest takeaway from the interview is the fact that Saudi Arabia knows it cannot sustain itself on oil revenues alone forever. One of the major signs is the restructuring and amplification of the Public Investment Fund (PIF). Saudi Arabia wants to increase the size of this fund to $2 trillion, which will include shares of Saudi Aramco.
Prince Salman’s forecast non-oil revenue for 2016 is $10 billion, meaning the country would need to bolster non-oil revenue ten-fold within four years.
Aside from the PIF, Saudi Arabia wants to diversify its economy by achieving $100 billion in non-oil annual revenue by 2020. Prince Salman’s forecast non-oil revenue for 2016 is $10 billion, meaning the country would need to bolster non-oil revenue ten-fold within four years. The top industries it is developing are solar energy and petrochemical production, as well as healthcare and the service sector. There’s also a major emphasis on international investments in emerging markets.
The Kingdom sees higher oil prices as expediting the end of the age of oil. When asked if Saudi Arabia is better off with oil at $100 per barrel than $40, the Prince replied, “This question can have two possible aspects. The rise in oil prices is beneficial to us, however it poses a threat to the lifespan of oil. The decline in oil prices poses a drop in revenue for us, but we are adjusting to market conditions, whatever they may be.”
The Freeze and market forces
Other oil producers hoping that the freeze deal would shore up prices had little to cheer for in the Prince’s comments: When asked if Saudi Arabia will insist that Iran will join the deal he said, “Without a doubt.” When asked to clarify if Saudi Arabia would freeze even if every single other producer they listed agreed to freeze production except Iran, he said, “If there is anyone that decides to raise their production, then we will not reject any opportunity that knocks on our door.”
Reiterating the country’s newfound emphasis on letting market forces rebalance oil supply, Prince Salman said, “For us, it’s a free market that is governed by supply and demand and this is how we deal with the market.”
Asset sales and the Aramco IPO
Salman emphasized that the purpose of conducting an IPO of Aramco’s assets is not about raising money to cover the country’s lost oil revenues, but is instead about diversifying the country’s income sources, and that the IPO will include an announcement of the company’s new strategy
Price Salman said that he is pushing to conduct an initial public offering (IPO) of shares of Saudi Aramco in 2017, although it may take until 2018. Saudi Aramco is currently the largest company in the world. Only five percent of the company’s shares will be available to the public—however, it looks like both upstream and downstream assets will be included, because the IPO will include the parent company as well as some downstream assets. Salman emphasized that the purpose of conducting an IPO of Aramco’s assets is not about raising money to cover the country’s lost oil revenues, but is instead about diversifying the country’s income sources, and that the IPO will include an announcement of the company’s new strategy, in which it will transform from an oil and gas company into a broader energy/industrials company.
In describing how the company would be managed, Salman said, “By simply transferring the shares of Saudi Aramco to PIF will make PIF the largest fund on Earth. Aramco has other benefits to the economy. Many were saying that the idea of IPOing Aramco was just an attempt to get liquidity to cover Saudi financial needs, but that’s far from the truth. The objective is to diversify income. This is the main objective. Therefore, IPOing Aramco and transferring its shares to PIF will technically make investments the source of Saudi government revenue, not oil. However, investments are mostly in oil. What is left now is to diversify investments. So within 20 years, we will be an economy or state that doesn’t depend mainly on oil, whether from profits of the PIF or other sources of income that we target. So this is one of the benefits of listing Aramco, other than the benefit to the Saudi market, the benefit to the Saudi economy in general and the benefit to the continuity of Aramco and its growth.”
Introduction of VAT and subsidy reform
To complement the country’s diversification away from oil, Saudi Arabia is shifting rapidly in certain state services, and introducing a value-added tax (VAT) on energy drinks, soda, and tobacco, often referred to as “sin tax.” There may also soon be a tax on certain luxury goods.
Saudi Arabians are accustomed to heavy subsidies on fuel, electricity, and water. Many of these are being gradually tapered back as the Kingdom has been forced to adjust spending in the low price environment.
Many of these changes were discussed at some length in a recent report from the Atlantic Council by Jean Francois Seznec, who sees the country shifting away from a “rentier” state into a more modern economy. Low oil prices may be an unpleasant jolt for the oil kingdom, but they are forcing certain reforms that have been years in the making.