A Tokyo listing for Saudi Aramco?

Saudi Arabia appears to be accelerating its plans for an initial public offering (IPO) for the Kingdom’s state-owned oil giant, Aramco. The appointment of Yasir al-Rumayyan to Aramco’s chairmanship underscored Aramco’s sense of urgency in terms of moving ahead with the world’s largest IPO.

The company is reportedly looking at the idea of splitting this IPO into two phases. Under this plan, there would first be an offering of a percentage of Aramco shares on the Saudi Stock Exchange (or Tadawul), before 2019 ends, followed by an international offering before the end of 2021.

Interestingly, there has been some discussion from informed sources about Aramco considering the Tokyo Stock Exchange for this proposed plan’s second stage.

Undoubtedly, a Tokyo listing for Aramco would mark a major disappointment to the other venues—New York, London, and Hong Kong—that Aramco is considering. Yet deciding to go with the Tokyo Stock Exchange instead of these other options could make much sense for Aramco given several risks in play.

As an equity analyst at CLSA (a capital markets and investment group) explained: “Aramco is looking for long-term stable buyers—preferably of the quiet, less litigious kind. That describes Japanese investors very well.”

Turning to the New York Stock Exchange would come with certain litigation risks that the Saudis may want to avoid at this juncture. First, there is antitrust legislation in the United States that could be problematic, given that Saudi Arabia is a member of OPEC.

Second, although the Justice Against Sponsors of Terrorism Act (JASTA) issue has received significantly less attention in the media since President Donald Trump entered the Oval Office, the legislation remains a relevant factor. Notwithstanding Crown Prince Mohammed bin Salman's (MBS) push for New York as a means of further strengthening his relationship with the US administration, the board of Aramco opposes this option based on concerns that American citizens would sue the Saudi government for compensation for the September 11, 2001 attacks, resulting in the Kingdom’s assets being targeted in JASTA-related lawsuits.

Unclear is whether Aramco could ever be offered sovereign immunity in the US to protect the company from lawsuits.

Following MBS’ visit to the United Kingdom last year, there was much speculation that Aramco would decide on London, which did lobby Riyadh to host the IPO. Yet there’s a growing realisation that London would be risky as much uncertainty surrounds the UK’s regulatory environment in the post-Brexit period. If there is a no-deal Brexit, there is a growing possibility of the UK aligning its terrorism laws with the US, as one Aramco adviser warned.

Ongoing unrest fueled by “pro-democracy” protests in Hong Kong likely gives Aramco less reason to favour the special administrative region in southern China for its overseas IPO. Considering the extent to which such demonstrations have upset business and travel in Hong Kong, the protests are a major issue for the Saudi oil giant to factor into account when assessing risk. The protesters' demand to withdraw a controversial extradition bill has been granted by Hong Kong's Chief Executive Carrie Lam, but the administrative region has a long history of protest and an ongoing power-struggle with China.

It is unclear how much the Saudi government seeks to disclose of Aramco’s production. Nonetheless, the oil giant will most likely desire a venue that enables some manoeuvrability on this front. For Aramco, it is problematic that the US Security and Exchange Commission has the world’s most strict rules governing disclosure, which could hinder the Saudi oil company’s capacity to raise USD 100 billion.

Thus, by presenting Tokyo as less risky and requiring much less in terms of disclosure compared to other options that Aramco has considered for its overseas IPO, the Japanese may successfully sell the Tokyo Stock Exchange as the most attractive venue.

Given Japan’s determination to re-establish Tokyo as an international financial hub, Japan would welcome a Tokyo listing for Aramco. Such a development would significantly boost the already deep ties between Japan, which relies on the Kingdom for a third of its oil imports, and Saudi Arabia, whose sovereign wealth fund invested USD 45 billion in Masayoshi Son’s SoftBank Vision Fund earlier this year.

As Saudi Arabia—like its five fellow Gulf Cooperation Council (GCC) member-states—makes a geo-economic pivot to the East, a Tokyo listing for Aramco would factor into a grander strategic agenda which Riyadh is pursuing in Asia.

Against the backdrop of the Jamal Khashoggi affair, the ongoing war in Yemen, and other issues that have hurt Saudi Arabia’s reputation in the US and UK, there is a perception that legal and political risks would be much lower if Aramco goes with Tokyo for its overseas IPO as opposed to a western venue.

Ultimately, whether the Saudis are serious about the Aramco IPO or are just using such prospects as a means of enhancing political leverage remains an open question. Nonetheless, Riyadh’s revival of this IPO shines further light on the role of Japan—an economic powerhouse that has the world’s fourth-largest economy—in Saudi Vision 2030.

Based on a history of close bilateral ties dating back to the 1930s, the Saudi leadership views Japan as having a crucial role to play in terms of helping the Kingdom diversify its economy away from the oil sector. With officials in Tokyo seeing long-term stability in Saudi Arabia—and by extension the greater Middle East—as serving Japan’s national interests, Tokyo undoubtedly is vested in the success of Vision 2030 which is necessary for thwarting an eventual economic crash in the Kingdom.

By providing a venue for Aramco’s overseas IPO, Japan would increase the importance of its position in relation to the Saudi economy’s transformation, ultimately paving the way for a much stronger relationship between Riyadh and Tokyo for many years to come. Nonetheless, Saudi officials have yet to decide, and there is no guarantee that there will be a Tokyo listing for Aramco.