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Case Code: FINC136
Case Length: 16 Pages 
Period: 2016-2017   
Pub Date: 2018
Teaching Note: Available
Price:Rs.400
Organization : Saudi Aramco
Industry : Oil and Gas
Countries : Global
Themes: -
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Finance
Human Resource Management
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Leadership & Entrepreneurship

SAUDI ARAMCO

 
This case won the Second Prize in the 2018 oikos Case Writing Competition (Sustainable Finance track), organized by oikos International, Switzerland.
 
 
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EXCERPTS

SAUDI’S ECONOMY: PERILS OF A WELFARE STATE

 

Saudi’s economy was largely dependent on oil exports (Refer to Exhibit A for economic highlights). Until mid-2014, oil contributed more than 90% to the state revenue and to about 85% to the export revenue. The oil sector contributed to more than 44% of Saudi’s GDP. In the decade which preceded the oil glut (between 2003 and 2013, oil prices rose from US$ 30 a barrel to US$ 110 a barrel), the Kingdom had prospered only because of the oil boom (2000-2014), and became the world’s 19th largest economy. Saudi’s government spending index rose proportionately...

 
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DYNAMICS OF OIL PRICING: PRESENT AND THE FUTURE
During the boom years and especially from 2009-2014, oil prices increased rapidly. The demand generated by the emerging markets pushed the value of oil to three digits in 2013.

By December 2014, the prices had crashed by 40%. OPEC was unable to arrive at a win-win agreement among its members to keep the prices stable.
 
ARAMCO’S OPERATIONS
Aramco had absolute access to the complete oil and natural gas reserves of the Kingdom. Its upstream operations comprised oil wells in the desert and some onshore oil rigs. The upstream operations had four businesses: exploration, oil production, gas processing, and optimization (established to increase efficiency of operations). The downstream comprised mostly refining, chemicals (oil derivatives), and some retail operations. .
 
ARAMCO’S VALUATION: NOT AN EASY MATH
In 2016, when Prince Salman declared Aramco to be worth $ 2 trillion, his estimate was believed to have been arrived at through rule of thumb math – by simply multiplying the proven reserves (of 261 billion barrels) by 8. But valuating the reserves and valuating Aramco were two different things. In 2017, the estimate for Aramco’s valuation ranged from $400 billion to $7 trillion, depending on the source which estimated the valuation. Such a wide range was due to varying reasons, depending on the methods used for valuation...
 
THE POLITICAL SCENARIO
Saudi Arabia was an absolute monarchy. The government mostly comprised the ruling Al Saud family. There were no elections and no political parties. Economists rated the country as the 5th most authoritarian government on the Democracy index..
 
IPO VERSUS THE CLIMATE CHANGE
“New York and London have been competing hard to get the Aramco listing, but I don’t think they have been paying enough attention to how much it would increase oil price risk and climate risk for investors,” said Greg Muttitt. OCI had calculated that policies to meet the Paris climate agreement’s commitment to limit global warming to “well below” 2°C could reduce the value of Aramco by around 40% from the 2 trillion estimation...
 
LOOKING FORWARD
A state-owned oil company was about to float an IPO which would be the largest ever in history. The fate of 33 million Saudis and Prince Salman’s vision 2030 to diversify Saudi’s economy depended on the success or failure of the IPO. The IMF had warned the Kingdom that its large wage bill was unsustainable given its overdependence on oil exports and the bleak future of oil prices...
 
EXHIBITS
Exhibit (A): Economic Highlights of Saudi Arabia
Exhibit (B) : Relative Valuation Data