Aramco CEO Says Post-IPO Tax Burden Will Link to Oil Prices

(Bloomberg) -- Saudi Aramco’s chief executive said the most important tax paid by the state-owned energy giant will fluctuate with the price of oil, a significant move ahead of the company’s initial public offering this year.

Adjusting the 20 percent royalty on oil revenue Aramco currently pays would help the kingdom to raise extra money if prices climb. While not unusual in commodities industries, the move may not prove popular with potential investors. It would protect them from downturns, but also reduce their gains at times of rising prices.

The Aramco IPO would be one of the biggest events on financial markets this year, so any change affecting the deal is of significant interest to global investors. Saudi officials said they hope to raise a record $100 billion, valuing the company at more than $2 trillion and dwarfing the $25 billion raised by Chinese Internet retailer Alibaba Group Holding Ltd. in 2014.

The royalty will remain "for the time being" at 20 percent, Amin Nasser said in a Bloomberg television interview at the World Economic Forum in Davos, Switzerland. Later on "there will be some alterations that would happen when the price changes in the market.”

The comments are the first confirmation of a possible price-linked royalty, which was reported by Bloomberg last year. Nasser cautioned that all the tax details would not be revealed until the company publishes its IPO prospectus "in due course." On top of the royalty, Aramco pays a 50 percent income tax.

A number of commodity producers take a larger share of the pie during boom times. The U.K., for example, uses a similar model in the North Sea. Russia also varies tax rates with oil prices and the Australian government has proposed in the past price-linked rates for iron ore producers.

The CEO reiterated his company’s readiness to conduct the IPO in the second half of this year, pending a government decision on the venue for the listing. Aramco will attract a lot of investor interest and offer competitive dividends, he said.

Yet, Nasser also drew a distinction between Aramco’s preparatory work and the decision to go ahead with the sale, which is in the hands of the royal court. He also said the kingdom’s rulers have yet to decide where on the location for a second international listing, in addition to the local stock exchange.

Second Venue

"We are currently waiting for the decision from the shareholder," he said, in reference to the government. "As a company, we are ready, and hopefully we would be listed by the second half of 2018, but it’s all depending on the decision on the second venue."

Saudi Arabia relies heavily on oil for its finances. While Crown Prince Mohammed Bin Salman has an economic program, dubbed Vision 2030, intended to break free from hydrocarbons, the government still gets most of its revenue from the industry today. The sale of 5 percent of Aramco, which Saudi officials say could raise as much as $100 billion, is part of the diversification plan.

Privately, Aramco executives and its advisers say that if the government gives the green light soon, a listing on the second half of 2018 in Riyadh is possible, but adding London or New York on top would be very difficult. A domestic sale could be enough to claim mission accomplished and save face, even if it’s a long way from the original plan.

The international IPO is proving difficult for several reasons. First, Prince Mohammed has said publicly Aramco should be valued at $2 trillion or more, a figure few outside the kingdom see as realistic. Saudi authorities are also struggling to reconcile their desire for the biggest possible pool of capital, probably found in New York, with their preference for relaxed regulation, which would point to Hong Kong.

Any delay in selecting the venue affects other preparations such as accounting, putting the schedule under further pressure. Yet the IPO is so important for Prince Mohammed -- the kingdom’s dominant political force -- that few would dare to bet against it happening.

Asked whether the IPO could be postponed to 2019, Nasser said: "We don’t know. It’s all depending on how soon we hear about the second venue. But currently, we’re ready for the second half of 2018."

To contact the reporters on this story: Francine Lacqua in Davos at flacqua@bloomberg.net, Javier Blas in Davos at jblas3@bloomberg.net.

To contact the editors responsible for this story: James Herron at jherron9@bloomberg.net, John Deane

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