RIYADH: Imagine how shareholders would react if Exxon Mobil gave away a third of the oil it produced, rather than selling it at market prices. There would be hell to pay, right. But state-owned Saudi Aramco does something almost as ruinous, selling a third of its oil inside the kingdom for less than $6 a barrel. That’s a discount of 87 percent on the international price. For would-be subscribers to Saudi Arabia’s forthcoming IPO, the national oil company’s huge subsidy burden is emerging as a major bone of contention. A few decades ago, providing discount oil and gas to Saudis wasn’t such a big problem. Only 6 percent of Aramco’s oil was consumed domestically in 1980. The rest — 94 percent — was exported. But the exported share of Saudi Aramco’s production declines every year.
Now the kingdom only gets full price for two-thirds of the oil it produces. Next year it will probably be even less. What about Aramco’s natural gas exports? There are none. One hundred percent of Saudi Aramco’s natural gas is consumed domestically, which is unsurprising because it is priced under $2 per million British thermal units, which means there is more demand than supply. Countries that border Saudi Arabia, including Kuwait and the United Arab Emirates, currently import LNG at international prices around three times as high. The kingdom’s lavish energy subsidies ought to give pause to investors giddy over the prospect of buying into the world’s largest IPO, and the world’s largest company, period, in revenue terms. Domestic prices are shaping up as a major sticking point between private investors and Aramco’s management. Ultimately, Aramco shareholders must contend with the Saudi public, which views ultracheap energy as a birthright.
The kingdom’s crown prince, Mohammed bin Salman al-Saud, understands the stakes. He aims to dismantle some of the more onerous state claims on Aramco. In March, the government’s cut Aramco’s tax rate from 85 percent to 50 percent. Mohammed bin Salman has also said the government aims to gradually take away energy subsidies, replacing them with cash. The kingdom made impressive strides in this direction in 2016, raising prices on energy products across the board. Unfortunately, Saudi prices were so low in 2015 that the new prices still remain a fraction of international benchmarks, as the table below shows.