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6 November 2019

How the UK pitched for oil giant Saudi Aramco – and lost

The biggest, dirtiest deal in history. 

By Will Dunn

On 21 July 2017 Roger Barker, the head of corporate governance at the Institute of Directors, wrote to the Financial Conduct Authority (FCA) to warn the regulator about its planned changes to rules on state-owned companies that wanted to sell shares on the London Stock Exchange (LSE). The FCA had proposed creating a special category that was not subject to the same rules as other firms. “There is potential for undue hands-on and politically motivated ownership interference… leading to… a lack of accountability” in companies controlled by sovereign shareholders, warned Barker.

What the letter didn’t say was that the FCA was greasing the City’s gates to squeeze in a whale. Three months earlier, Theresa May and the then CEO of the London Stock Exchange Group, Xavier Rolet, had flown to Saudi Arabia to meet Khalid al-Falih, the country’s energy minister and the chairman of its state-owned oil producer, Saudi Aramco. The world’s most profitable company was exploring options for an initial public offering (IPO) and it was considering selling the first $100bn in London.

The sum, more than twice the UK’s defence budget, was just a small chunk of the Saudi oil giant. The country’s Crown Prince, Mohammed bin Salman, wanted the company to reach a valuation of $2trn.

For Aramco to sell its shares in London would have given a powerful boost to the idea of “global Britain” – a mainstay of the economic argument for Brexit. But while Britain strained to bring the deal to London, it is not clear how it would have benefited the economy. The LSE’s listings fees are capped at just under £600,000 and regular data and admin fees would have come to less than £1m a year. Banks and law firms in the City would have made significantly more money from the flotation, but hardly enough to justify sending the prime minister on the sales trip.

That said, Aramco’s monstrous size makes it a powerful political and economic entity. Last year, with revenues approaching $1bn a day, the company made more money than Denmark. And unlike the “unicorn” tech firms in Silicon Valley, which promise explosive growth but no profit in the short term, Aramco made $111bn in profit last year.

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In contrast to the arcane methods by which many banks and technology companies make their money, Aramco’s profits come from a single, easily understandable source: it has exclusive access to 268 billion barrels of oil. Because this oil is onshore, beneath the deserts of the kingdom’s Eastern Province, it can be extracted more cheaply than, for example, the fields at the bottom of the North Sea or the Gulf of Mexico. Aramco says it spent an average of just $2.80 to produce a barrel of crude oil last year. The average price per barrel for the year was $70.

But Aramco is also the world’s largest polluter. According to the Climate Accountability Institute, it has added gases equivalent to 59.3 billion tonnes of CO2 to the Earth’s atmosphere since 1965. More than 4 per cent of the pollutants that have already drastically altered the world’s climate have been produced by this one company.

Aramco does recognise climate change in its IPO documents, which detail its investments in technologies such as carbon capture and more efficient engines. It is a founding member of the Oil and Gas Climate Initiative (OGCI), an exercise in double-mindedness that is brazen even by the standards of the fossil fuels industry. Each member of the OGCI has committed to spend $100m over ten years on sustainable development. Aramco makes this much money in just under two and a half hours.

Nor is Aramco the cleanest company in terms of transparency. In September, sources told the Financial Times and Bloomberg that Saudi Arabia’s richest families had been “invited” to become “anchor investors” in Aramco – to commit to buying shares before the IPO in order to inflate the price at launch. A cousin of Mohammed bin Salman, Al-Waleed bin Talal, who was arrested and held for three months during the 2017 “purge” of the Saudi elite, was reportedly told that he would be able to access the billions of dollars demanded for his release only if he reinvested them in Aramco.

While the LSE and advocates of “global Britain” will have been disappointed by the announcement that Aramco would instead float on Riyadh’s stock exchange, the Tadawul, others see it more positively. Helal Miah, an investment research analyst at LSE investment broker The Share Centre, described the deal as a “headache” that investors never really wanted. “There are corporate governance issues, there are political risks… The big banks are coming up with valuations that are extremely wild. Goldman Sachs has a $700bn gap between the highs and lows.” The idea that a company could be given a value, give or take a few hundred billion, would not have helped the LSE to maintain its reputation for stability and integrity. “We should be sighing with relief,” he says.

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This article appears in the 06 Nov 2019 issue of the New Statesman, What went wrong