Transparency & Aramco

Summary: Discrepancies between Aramco revenue and official Saudi government oil income data; leaked documents shed light on royal family’s offshore investments.

The Aramco float is on track and will be boosted by a new $500 billion mega-city project, MBS told Reuters in a wide-ranging interview last Thursday that covered topics from the new mega-city NEOM where he hopes to woo investors to the Opec pact, Qatar and the Yemen war. “We are on track in 2018… but the listing (details) are still under discussion…It will be IPO-ed in 2018… NEOM will be floated in the markets. The first zone floated in the public markets. It’s as if you float the city of New York….The first capitalist city in the world… This is the unique thing that will be revolutionary in the city and its growth.”

The interview was a riposte to the October 13 report in the FT (paywall) that Saudi Aramco is considering shelving plans for an international listing in favour of a private share sale, possibly to China. With no confirmation about which stock market Aramco will be listed on speculation about the IPO has been rife in recent weeks with attention focusing in particular on the issue of transparency.

“There has been much official fanfare regarding the proposed privatisation of Aramco in Saudi Arabia’s Vision 2030, with one of the main benefits of privatisation being touted as the possible increased transparency in the company’s financial figures” wrote an LSE paper “Show us the Money” which was published last month.

“Such justification seems to be a red herring, however, and is akin to arguing that if one is concerned with increasing the market demand for steel, then one should advocate for the legalisation of firearm sales.As of 2017, only Kuwait has a transparent, accountable and independently audited budget, oil revenues included. The rest of the GCC countries do not have an independently and publicly accountable audited budget, with the spectrum ranging from no kind of public auditing at all to some form of public, but not independently audited, budgets…With the exception of Kuwait, there is strong evidence to suggest that there are significant amounts of undeclared budget revenues, which go either into private hands or into secretive government transactions. These are mainly concentrated in foreign transfers, military expenditure and private royal allocations.”

As we discussed in our posting of May 31 on corruption in Saudi Arabia the kingdom suffers an acute transparency problem. The Open Budget Initiative which evaluates countries on three criteria – transparency, public participation and budgetary oversight – gave both Qatar and Saudi Arabia a score of 0 out of 100 on all three criteria in 2015. Although it is well-known every royal family member receives a stipend and this has been detailed in Wikileaks and admitted from time to time by a prince, remittances to the royal family were not even listed in the last state budget.

Saudi newspapers used to publish the budget including royal family allocations.

Although not all the missing money ends up in overseas bank accounts one way to try and calculate how much money is raked off is by looking at who owns the wealth in tax havens around the world. In 2015 the International Consortium of Investigative Journalists published data leaked by an HSBC employee-turned-whistleblower which ranked Saudi Arabia #11 among the countries with the largest dollar amounts in HSBC Private Bank (Suisse). The maximum amount of money associated with a client connected to Saudi Arabia was $704.3M. Saudi Arabia’s GDP per capita in 2007 was $16K.

Building on the data from the Swiss HSBC Leaks, a recent paper by the US non-profit organisation the National Bureau of Economic Research which attempts to calculate total offshore wealth for countries around the world finds in 2007 Saudi Arabia’s total offshore wealth was $234 bn; the UAE’s $189bn; Kuwait $115 bn; Qatar $80 bn and Oman $42 bn.

Two leaked internal Saudi documents which were created by a UK law firm in 2016 to help members of the royal family make investment decisions shed a little light on how the Saudis invest their money. This Project Global document explains the steps required to set up a trust structure. This financial strategy document is a briefing paper for royal family members explaining what a private trust company is and how confidentiality can be maintained through the use of complex financial structures.

We thank Nick Stadtmiller for his analysis below which attempts to calculate leakage from Aramco’s total (domestic and foreign) gross revenue by subtracting its estimated costs and comparing this figure to the official oil income in SAMA statistical yearbooks.

Nick is a US-based analyst focusing on economic trends impacting the GCC. He worked in the region for eight years, including two years as an advisor with a branch of the Dubai government and a six-year stint with one of the UAE’s largest banks.

Transparency & Aramco

Saudi Arabia ranks at the bottom globally in measures of fiscal transparency. The Kingdom reports a headline oil revenue figure in annual reports, but it is difficult to determine whether this represents the total of taxes and dividends collected from Aramco. Likewise, detailed financial information from Aramco has not been revealed, despite the prospect of a global IPO next year. Any difference between Aramco’s taxes and dividend payments and how much the government receives may include payments to the ‘privy purse’, i.e., transfers to members of the royal family. Any attempt to determine the size of this gap forces the analyst to make a number of assumptions, and hence the results should be viewed with some caution. Nevertheless, performing this exercise yields useful tentative results.

We begin with production data from Aramco’s Annual Review, which shows total crude extraction of 3.8bn barrels in 2016. The company also refined 665 mn barrels of crude last year, and it sold 366 mn barrels of natural gas liquids. Using market prices for crude oil, refining margins, and liquids, we get a total revenue figure for 2016 of just under US$ 160bn. We then assume an extraction cost of $7/bbl., which is around the midpoint of many estimates for this figure. We also add general and administrative costs of US$ 12bn, which is comparable to other global oil companies of similar size. Furthermore, the government collects a 20% royalty from Aramco on oil extraction and an 85% tax on profits. This leaves Aramco a net profit of US$ 14bn, and the government collects taxes and royalties of US$ 107bn. Assuming the government further receives a dividend in the amount of Aramco’s net profit, Saudi government oil revenues should total US$ 121bn, or just over SAR 450bn.

The government reported 2016 oil revenues of just SAR 329bn, a difference of over SAR 120bn compared to the above estimate. The disparity between Aramco’s estimated taxes and dividend payments and the government’s reported oil revenues averaged SAR 130bn (US$ 35bn) per year between 2011 and 2016.

There are two sources of uncertainty around the size of this gap. We have excluded some other revenue sources for Aramco, specifically petrochemicals, due to a lack of data; these revenues mean the gap may be larger than our estimate. Also, it is unclear how much of Aramco’s net profits is paid in dividends to its shareholder, and how much is retained by the company for future investment. In the extreme case, assuming zero dividends are paid, then the difference between estimated payments to the government and reported oil revenues would be only US$ 5–10bn per year.

The US$ 35bn variation between Aramco’s estimated payments to the government and the government’s reported intake represented roughly 1mn barrels per day of oil revenue between 2011 and 2014. The gap did not decrease after oil prices fell, and it now represents over 2mn barrels per day of revenue. Last year’s gap accounted for 21% of Aramco’s total estimated revenue. That figure is close to the 26% gap estimated by one LSE researcher examining similar discrepancies across GCC countries.

It is unclear that all of the difference identified would have gone into the pockets of royals. The LSE paper argues that GCC countries probably use some missing funds to finance certain ‘off budget’ expenditures, specifically military spending and foreign grants.

The existence of a large gap raises questions over Aramco’s possible IPO in a foreign market. If Aramco sells shares in a foreign jurisdiction, then they will be forced to declare taxes and dividend payments. Any analyst could then add total taxes plus the dividend payment for the government’s stake and compare this to Saudi Arabia’s reported oil revenue. That could prompt many uncomfortable questions for authorities.

The proposed structure of the IPO leaves wiggle room in this regard. Authorities have said that Aramco’s ownership will be transferred to the Public Investment Fund (PIF), and hence dividends will be paid to PIF. PIF in turn makes dividend payments to the Saudi government, albeit in a non-transparent fashion. The tax rate on Aramco’s profits was lowered this year to 50%. That would boost the amount of net profits available for dividend payments, leaving some room to obscure the amount of Aramco’s total payments to the government.

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