Original plan was to make Aramco "industrial conglomerate", but this could make valuation more complex
Saudi Arabia is considering two options for the shape of Saudi Aramco when it sells shares in the national oil giant next year: a global industrial conglomerate, and a specialised international oil company, industry and banking sources said.
The listing of Aramco , expected to be the world's biggest initial public offer and raise tens of billions of dollars, is a centrepiece of the government's ambitious plan - known as Vision 2030 - to diversify the economy beyond oil.
When the plan was publicly released in June last year, it pledged to "transform Aramco from an oil-producing company into a global industrial conglomerate".
But now Saudi officials and their advisers are debating whether to make Aramco "a Korean chaebol", as one source said, referring to sprawling South Korean conglomerates, or a specialised company focused purely on oil and gas.
A specialised company might be easier to value because of its simplicity and, since the risks in its business would be clearer, achieve a higher price for its shares.
"There are two options being studied now. Either to make Aramco a pure oil and gas company, or a conglomerate and expand its role in petrochemicals and other sectors," said a Saudi industry source, declining to be identified because the debate is being conducted in private.
An Aramco spokesperson said: "Saudi Aramco does not comment on rumour or speculation."
Other than its core oil and gas production, exploration and refining businesses, Aramco - which employs more than 55,000 people - has plans to build solar and wind-power facilities.
As the kingdom's biggest company and one of its most efficient, it is being pressed into service to jump-start industrial projects that are too big or daunting for the private sector. It is developing a $5 billion ship repair and building complex on the east coast, and working with General Electric on a $400 million forging and casting venture.
It has also often been tasked with executing government projects that have social goals, such as building industrial cities, stadiums and cultural centres. It was involved in creating the King Abdullah University of Science and Technology.
As the IPO approaches, officials are asking themselves whether the domestic and international investors who will be asked to buy Aramco shares really want exposure to such a complicated array of assets.
A banking source familiar with the IPO preparations said the government was studying a "clean-up exercise" to make Aramco's structure neater.
One option under study is moving all businesses not related to oil to a separate entity before the IPO, although this would be a complex process, the sources said.
"It is going to be a legal nightmare for them. And the more they dig, the more they find out issues they need to sort out," an industry source said.
The plan to sell up to five percent of Aramco, championed by Deputy Crown Prince Mohammed bin Salman, who oversees the country's energy and economic policies, is also running into other complexities that have not yet been resolved.
Last year, Prince Mohammed said he expected the IPO would value Aramco at a minimum of $2 trillion, and that the figure might end up being higher. But this will depend partly on the tax regime that Aramco faces.
The company currently pays a 20 percent royalty and 85 percent tax to the government, Saudi officials have said. These could lower its value in an IPO, and sources said talks were under way to move the tax rate as low as 50 percent. But this could hurt state revenues at a time when Riyadh is running a big budget deficit due to low oil prices.
The upstream and downstream oil businesses of Aramco will remain part of the company when it is offered to the public, the sources said, but how to value Saudi Arabia's oil reserves, over which Aramco has exclusive rights, is still being finalised.
Aramco has declared proven crude oil reserves of 265 billion barrels, more than 15 percent of global deposits. It has hired two US specialists to review its deposits: Gaffney, Cline & Associates, part of Baker Hughes, and Dallas-based DeGolyer and MacNaughton.
A third issue under discussion is how much of Aramco will be owned by the Public Investment Fund, Saudi Arabia's top sovereign wealth fund: all of the non-public stake, or something less.
This is related to another question that may influence investors' attitude to the IPO, and which remains to be answered: the company's precise relationship to the government. For example, who will have the right to production-related decisions - the government or Aramco's board?
Last May, Aramco Chief Executive Amin Nasser said production decisions were sovereign matters that would remain with the government. But one industry source noted this would make Aramco something other than a profit-oriented international oil firm.
"Why would an investor buy shares in a company if the board has no say on production decisions? If the Saudi government decides it wants to cut production, then Aramco will cut and lose market share to rivals," he said.