Saudi Tax Change Curbs Oil-Price Upside for Aramco IPO Investors

(Bloomberg) -- Saudi Arabia has overhauled the royalty system that taxes oil giant Aramco, creating a new levy on revenue with a marginal rate of 50 percent when crude rises above $100 a barrel, according to financial information seen by Bloomberg News.

The oil price-linked royalties were introduced last year and replaced a 20 percent fixed levy on revenue that had served for decades.

The change, made without any public announcement, is significant for the planned initial public offering of Aramco — potentially one of the biggest events in financial markets for years.

Saudi officials have said they hope to raise a record $100 billion by listing the world’s largest oil producer, valuing the company at about $2 trillion and dwarfing rivals like Exxon Mobil Corp. and Royal Dutch Shell Plc.

Rising royalties would direct more of Aramco’s revenue to the kingdom and limit the gains to investors from higher oil prices after the IPO.

Asked to comment on the figures, the company said in a statement: "This is inaccurate, Saudi Aramco does not comment on speculation regarding its financial performance and fiscal regime."

Government Take

Since Jan. 1, 2017, Aramco’s royalties have been "calculated based on a progressive scheme" linked to oil prices, according to the information seen by Bloomberg.

The new system has a marginal rate of 20 percent of revenue for oil prices up to $70 a barrel, 40 percent between $70 and $100, and 50 percent when crude’s above $100.

Saudi Tax Change Curbs Oil-Price Upside for Aramco IPO Investors

In another significant move, the government has widened the volume of crude covered by the royalty. The levy previously applied to the "value of crude oil and refined products sold as exports.”

Now it’s imposed on "crude oil and condensate production.” The difference between production and exports is about 3 million barrels a day, or roughly a third of the company’s total output.

On top of the royalty on revenue, Aramco pays a 50 percent income tax, a rate that was lowered from 85 percent, announced publicly last year.

Tax Alterations

Riyadh will have to explain in detail how the taxation system works for Aramco if it goes ahead with the IPO, initially scheduled for 2018 but now likely delayed to 2019.

The information didn’t specify why the changes haven’t been announced or whether other alterations to the rules are planned.

Bloomberg first reported the plans for an oil price-linked royalty in 2017. At the time, both Aramco and the Ministry of Finance declined to comment. Amin Nasser, the chief executive officer of Aramco, later confirmed a variable levy was likely in an interview in January.

He said that all the tax details wouldn’t be revealed until the company publishes its IPO prospectus.

Like Saudi Arabia’s new fiscal regime, 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 oil and gas. Russia also varies tax rates with oil prices and the Australian government has in the past proposed price-linked rates for iron ore producers.

Saudi Arabia relies heavily on oil for its finances. While Crown Prince Mohammed Bin Salman has an economic program, dubbed Vision 2030, intended to reduce dependence on hydrocarbons, the government still gets most of its revenue from petroleum.

©2018 Bloomberg L.P.