Saudi Arabia unveiled a long-awaited plan for a radical transformation of its oil-dependent economy, promising to list less than 5 per cent of the state oil company, Saudi Aramco, in a deal open to foreign investors that could value the company at more than $2tn.
The so-called “Vision 2030”, brainchild of Mohammed bin Salman, the deputy crown prince and the most powerful man in the kingdom, has been in the works for months and sets out targets for economic and social reform that aims to bolster the private sector.
The Saudi cabinet approved the plan on Monday morning, shortly after the prince was interviewed on the state-owned al-Arabiya channel and optimistically asserted that the kingdom could end its reliance on oil within four years.
The influence of the deputy crown prince over Saudi oil policy is growing, writes Roula Khalaf.
Saudi Arabia derives more than 90 per cent of its budget revenues from hydrocarbons.
“We have an addiction to oil … this is dangerous,” he said in the interview. “It has delayed development of other sectors.”
Saudi Aramco will be converted into a holding company, he said, and all financial information related to the company will be disclosed. Subsidiaries of the entity will also be listed and its board will be elected.
“After the IPO, the Aramco board can take its own decisions,” he said.
Details of the listing will be announced over the next nine months, he said. The proceeds of the IPO will help bolster the state’s Public Investment Fund into a sovereign wealth fund valued at up to $3tn, the world’s largest, with a mandate to kick-start domestic investment.
“The vision is a road map of our development and economic goals,” he said. “A part of that is related to Aramco and this is a very small aspect.”
Prince Mohammed said the vision had been planned with a price of $30 a barrel in mind, so a further decline in oil prices would not put the kingdom at risk.
The prince, who is also defence minister and oversees economic ministries, has emerged as the key decision maker in the country since his father, King Salman bin Abdulaziz, assumed the throne. He has since worked with a group of technocrats to slash expenditures, reform energy subsidies and lay out a vision for a post-oil economy.
The collapse in oil prices, precipitated by Saudi Arabia’s decision to protect its market share rather than the oil price, has forced a re-evaluation of economic priorities in Riyadh, prompting the prince to press for the development of non-oil sectors.
The vision sets out plans for a mining industry that could create 90,000 jobs by 2020 and a domestic military industry that would allow 50 per cent of defence spending to be sourced locally by 2030.
Privatising government assets, from Saudi Aramco to healthcare and education, will help meet ambitious diversification targets of raising non-oil government revenue from SR163bn ($43bn) to SR1tn by 2030 and boost the role of the private sector from 40 per cent to 65 per cent of gross domestic product.
The plan also aims to reduce unemployment from 11.6 per cent to 7 per cent by 2030, increase women’s participation in the labour force from 22 per cent to 30 per cent, and boost the share of small and medium-sized enterprises from 20 per cent of GDP to 35 per cent.
The prince said women’s participation was “extremely important” to Saudi Arabia’s future but acknowledged that society had yet to be persuaded about issues such as female drivers, even though there is no religious proscription against it.
“The future might hold some changes, and we always hope these will be positive,” he said.
In the meantime, oil markets are signaling that prices have bottomed out even as growth in demand for crude is forecast to slow this year, according to a senior executive at Vitol Group, the world’s largest independent oil trader.
“We’ve come back from some pretty low levels in January this year,” Christopher Bake, a member of Vitol Group’s executive committee, said Monday at a conference in Abu Dhabi. “Especially over the last few weeks, there’s definitely a sentiment in the market that we’ve bottomed.”
Global crude use will rise by 1.2 million barrels a day this year compared with 1.8 million in 2015, Bake said. At the same time, as much as 3 million barrels a day in supply that has been forced off the market in countries including Libya and Iraq could return and alter what Bake called a “fairly fine balance” of supply and demand.
Oil has rebounded after falling to the lowest level in more than 12 years amid signs that a global surplus will ease as U.S. production declines. Futures retreated Monday from the highest close in five months amid signs that the glut will continue as Middle Eastern producers such as Iran boost supply and output capacity.
Benchmark Brent crude fell 36 percent in the last year and was trading as low as $44.26 a barrel on Monday in London. Brent futures for settlement later this year show a month-by-month increase beginning in August, and they exceed $50 a barrel starting in April 2018.
Demand in Asia is “the big question mark going forward,” Bake said. China’s oil use won’t grow as fast as it has over the last 10 years, while India’s consumption may not be as strong as it has been over the past two years, he said.
On the supply side, OPEC nations will continue pumping at record-high levels, and some “politically constrained oil production” in Libya, Nigeria, Yemen and northern Iraq could return to the market, Bake said. He estimated that output of at least 2.5 million barrels a day has been disrupted in these countries.
Force majeure constraints on Forcados crude from Nigeria could persist through June, he said. Royal Dutch Shell Plc declared force majeure — a legal status protecting a party from liability if it can’t fulfill a contract for reasons beyond its control — on shipments from the Forcados oil terminal after a leak forced a suspension of crude loadings in February.
