How to Save the Saudi Golden Goose

A Saudi Aramco employee sits in the area of its exhibition at the Middle East Petrotech conference for the refining and petrochemical industries, in Manama, Bahrain, in 2016.CreditHamad I Mohammed/Reuters
A Saudi Aramco employee sits in the area of its exhibition at the Middle East Petrotech conference for the refining and petrochemical industries, in Manama, Bahrain, in 2016.CreditHamad I Mohammed/Reuters

For almost 40 years, Saudi Aramco has operated with a tremendous degree of independence for a national oil company. That has worked well for the company and for the country: Aramco has prospered financially and almost single-handedly funded the Saudi state and the royal family.

But that could all be changing. Mohammed bin Salman, the hugely popular crown prince, is reshaping his country, and he seems intent on putting his stamp on Aramco. There are signs that the government is exerting new control over Aramco’s most fundamental decisions.

This is a mistake. Too much interference could destabilize the company and, by extension, a large part of the Saudi economy. When it comes to the future of Aramco, the government in Riyadh needs to let the professionals do their jobs.

Aramco is unique among national oil companies. Rather than seizing the company through nationalization, the Saudi government purchased Aramco from its American owners in transactions in the 1970s. The Saudi leadership in the 1970s insisted on a legal purchase to avoid disrupting a hugely profitable enterprise.

After the purchase, the Saudi government essentially left the business to Aramco employees who were, at the time, a mix of American and Saudi managers. In less than a decade, Saudi executives took the reins. Many of them had worked their way up within Aramco starting when they were teenagers. The professional oilmen were in charge.

The company was owned by Saudi Arabia, but it collected its own revenue and controlled its own finances. Ali al-Naimi, Aramco’s chief executive from 1988 to 1995, told me recently that the Saudi finance ministry tried to co-opt the company’s finances in the 1980s. “What they wanted was all the income to come to the ministry and they dole out our expenditures,” he recalled. “I said no way. The income comes to us and we give you royalty, taxes and dividends from our profits. We cannot have the income come to you directly.”

The king at the time, Fahd, sided with Mr. Naimi, because he understood that Aramco’s independence was vital to the success of the venture and thus the wealth of the Saudi state, people and royal family.

With financial independence came strategic independence. Aramco developed and carried out a plan to expand globally. Under Mr. Naimi and his successors, the company became the most influential in Asia, supplying huge amounts of crude oil to refineries it purchased in China and South Korea. It even gained control of the largest oil refinery in the United States through maneuvers beginning in the late ‘80s.

Aramco executives also invested heavily in research and technological innovation. The company now says it hopes to preserve Saudi Arabia’s natural resources and prolong its position in the energy industry past the 70 years its oil reserves are expected to last. Even without the pressure of politics or investors, and without meaningful regulation, Aramco has worked to protect the environment, for example through carbon-capture technology and solar power.

Rather suddenly, in January 2016, an announcement upended this tradition of independence. In what seemed like an offhand remark during an interview with The Economist magazine, Prince Mohammad, then just 30 years old and the deputy crown prince, announced that Aramco would go public. The company seemed unprepared to answer basic questions and issued a statement saying that additional examination was needed. Ever since, Aramco’s plans have looked uncharacteristically disorganized. A lot of money has been paid to banks and consultants to facilitate an initial public offering, but there has been little guidance or information about when, where and how it will happen.

Indeed, different parties within the Saudi government have openly discussed conflicting priorities for Aramco’s I.P.O. The Saudi finance minister has indicated that the company may sell stakes to Chinese interests in a private deal. There are reports that Prince Mohammed wants to list Aramco on the New York Stock Exchange, but that the oil minister believes the London Stock Exchange would be better. Just last week, the chief executive of the Saudi stock exchange said it is prepared to handle Aramco’s listing on its own. When Aramco’s current chief executive, Amin Nasser, is asked about the I.P.O., he simply says that it’s up to the “shareholder.”

Therein lies the problem. The company has always made its own decisions about its next steps. It is now waiting for direction from the outside. Even the identity of this “shareholder” is unclear. Who really owns Aramco? The official company line is that it is owned by the Saudi government. But what does that mean? Mr. Naimi made sure that the finance ministry stayed far away from Aramco’s revenue, and although the oil ministry represents Saudi Arabia in OPEC, it does not determine Aramco’s strategy.

When I asked Aramco’s vice president of strategy and markets, Yasser Mufti, he said that the Saudi Aramco Supreme Council, headed by Prince Mohammed, acts as the “shareholder representative.” The council’s traditional role is just to approve Aramco’s spending plans and select new members for the company’s board. In April, this council appointed new board members, including the first woman and two high-ranking government officials close to Prince Mohammad.

The Saudi kings have always protected Aramco’s independence because Aramco’s profits made them strong. Now, the royal family and the state bureaucracy are exerting their control and the relationship is changing. Prince Mohammad explains that he is ridding the kingdom of its “addiction to oil” and is diversifying the economy.

But right now, and for the foreseeable future, Saudi Arabia still depends on Aramco for its wealth, and the monarchy depends on that wealth for its power. Without a strong, independent Aramco, power could be precarious.

Ellen R. Wald is the author of Saudi, Inc.: The Arabian Kingdom’s Pursuit of Profit and Power and the president of Transversal Consulting.

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