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Saudi government will do what it takes to ensure Aramco offering is a success

Saudi Arabia surprised pundits this week by announcing it is slashing the tax burden for oil giant Aramco, which is destined to make history by becoming the world’s largest listed company.

A royal decree set a tax rate of 50% for the state-owned company, which has so far been paying 85% on top of a 20% royalty.

It is a calculated move by Riyadh to lure investors to the planned sale next year of a 5% stake in the company valued officially at $2 trillion.

The move also implies a desire by Saudi Arabia to ensure a successful initial public offering by rallying fellow Opec and non-Opec producers to continue with oil production curbs in support of high oil prices.

Only a robust oil market, without over-supply, can guarantee a bumper sale that will underpin a Saudi sovereign wealth expected to generate enough income to be the dominant source of state revenues by 2030.

Energy analysts believe the tax reduction will increase Aramco’s after-tax net income threefold and thus allow for higher cash returns to shareholders in the form of dividends.

Some think the lesser burden will boost Aramco’s valuation by 250%, assuming a long-term oil price of $75 per barrel.

Estimates of Aramco’s potential valuation vary widely with Deputy Crown Prince Mohammed bin Salman, the man behind Aramco’s planned sale, talking about $2 trillion. However, that price tag is seen by others as too high, given current soft oil prices.

Aramco has the ability to pump more than 10 million barrels per day. That is about two and a half times more than ExxonMobil, which has a market cap of $340 billion. 

The US supermajor, though, pales before Aramco in terms of assets and proven crude reserves, estimated at 260 billion barrels.

Aramco’s IPO arises from the fact that the Saudi government, which obtains 60% of its revenue from crude sales, is struggling to close a budget deficit caused by the oil market collapse.

For that reason, it will do whatever is needed, including strict crude output curbs, to keep a floor under oil prices in the period leading up to Aramco's sale in 2018.