Saudis Moving to Reduce Dependence on Oil Money

Source: By BEN HUBBARD and STANLEY REED, New York Times • Posted: Monday, April 4, 2016

As the head of a council that oversees Saudi economic policy, Prince Mohammed bin Salman is leading the kingdom’s search for ways to reduce the country’s dependence on oil income. Credit Charles Platiau/Reuters 

RIYADH, Saudi Arabia — A top Saudi prince has announced new elements of a plan to reduce the kingdom’s heavy dependence on oil, amid a drop in world prices that has sent shock waves through the Saudi economy.

The plans include publicly selling shares of the state oil giant, Saudi Aramco, and routing much of its worth into a public investment fund, said the prince, Mohammed bin Salman, in an interview with Bloomberg published Friday.

The fund could become the world’s largest, he said, with more than $2 trillion in assets.

“Undoubtedly, it will be the largest fund on earth,” said Prince Mohammed, who is second in line to the Saudi throne and has emerged as the country’s most powerful and dynamic official. “This will happen as soon as Aramco goes public.”

Although less than 5 percent of Saudi Aramco would be sold, the prince said the national oil company would be transferred to a government fund, now relatively small, called the Public Investment Fund, giving it instant heft and potential financial firepower.

Saudi Aramco is the world’s leading oil producing company. It has about 10 million barrels per day of output, or about 10 percent of global production, and reserves of about 160 billion barrels. The company also has large refining and petrochemical interests inside Saudi Arabia and internationally, including in the United States.

At present, Norway’s fund, called the Government Pension Fund Global, is believed to be the world’s largest so-called sovereign wealth fund. It has about $850 billion in investments.

The announcements came as Saudi Arabia, the world’s largest oil exporter, struggles to reformat its economy.

A decade-long boom left the kingdom’s economy heavily dependent on oil, which provides most of the government’s income, and made the state far and away the country’s biggest employer. The drop in oil prices — to about $39 a barrel from more than $100 a barrel in June 2014 — undermined that model, leading to huge budget deficits and vast cuts in public spending.

Rachel Ziemba, an analyst at Roubini Global Economics in New York, estimates that Saudi Arabia is burning up its financial reserves at the rate of $10 billion to $15 billion per month. She estimates that the kingdom has about $600 billion left.

There are longer-term worries as well. A recent study by the consultants McKinsey warned that with more than half of Saudi Arabia’s population under 25, a surge of young people was likely to enter the work force in the coming years. This will require the creation of almost three times as many jobs for Saudis as the kingdom created during the 2003-13 oil boom.

Prince Mohammed, a son of the monarch, King Salman, is leading the effort to find solutions as the head of council that oversees economic policy. Although only about 30 years old and relatively unknown before his father became king last year, he is also the country’s defense minister, at a time of great regional instability and with Saudi forces at war in neighboring Yemen.

The prince’s intention, analysts say, appears to be to create a vehicle that would make direct investments in companies outside of Saudi Arabia as well as inside. The idea would be to use these holdings to generate income at a time when oil prices are low and to develop business relationships that would lead to investments in Saudi Arabia.

In initiating the changes, Saudi Arabia trails behind some other countries. The Public Investment Fund, for instance, has about $5 billion in assets, according to the Sovereign Wealth Fund Institute, a research organization.

The full plan to restructure the Saudi economy has yet to be released, but the announcements touched on central aspects of it.

Shares of the parent company of Saudi Aramco, widely believed to be the world’s most valuable company, as well as shares of its subsidiaries, could be sold to the public on the Saudi stock exchange as early as next year, Prince Mohammed said. But the shares would be for “less than 5 percent” of the company, he said.

Assets raised from the stock sales would be routed into the Public Investment Fund, which could grow to hold more than $2 trillion, the prince said. The fund currently has $5 billion in assets and includes shares in a large Saudi chemical manufacturer and the kingdom’s largest lender.

The fund is considering foreign opportunities and will seek a variety of investments to move the kingdom away from its dependence on oil. “So within 20 years, we will be an economy or state that doesn’t depend mainly on oil,” the prince said.

Western diplomats and analysts say it is hard to gauge the Saudi plans because much about the kingdom’s economy remains opaque and the deadlines for implementation remain unclear.

“The strategy makes sense,” Ms. Ziemba said, “but it is not a silver bullet.”

She said it would have been easier to try such reforms when oil prices were higher and Saudi Arabia’s assets were worth far more than they are now.

Some have questioned how many private investors will want to put their money in a company like Saudi Aramco that releases very little financial information and is seen by many as the piggy bank of the Saudi royal family.

Jean-Francois Seznec, a senior fellow in the Global Energy Institute at the Atlantic Council, said an initial public offering of less than 5 percent made sense because the amount of cash involved in a larger offering could flood the market.

The bigger challenge, he said, will be bringing transparency to a company that has long avoided it. “All of a sudden, everyone could see how much money is being taken off the top by the royal family, and everyone wants to avoid that,” he said.

Still, the prince receives some credit at home for trying. “A lot of young people at home are feeling excited that there is a clear direction and leadership,” said Sadad Husseini, a former executive vice president of Saudi Aramco. “It makes you wonder why no one else did it before.”