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Chart 3: Saudi Arabia proven crude oil reserves Chart 4: Saudi Arabia proven gas reserves bribbi mSaudi Aramco = Others tn cf eSandidvenos withers 0 300 unt 250 mn 250 200 200 150 | Tl 150 100 100 + 50 50 N wore wastr re @GOMeWweoenwonorwyFtrtrseo om ao" oe @See OwnTr Oey OMWMse B= o wD ooonrenrenrewewewernwvoodooo ono eo rt ~YTiowdonwdoenaonoooomoodononoecoddcaoeoeog4r r= DODD AaD&OOOWDDPDSe SSS FS DMPODWDDADWWADHA DOGG FSG So fo GS + BS BS v ied BS bs NNN NN ba 7 x x v e v ied v = + NNNNN NN N a a Source: SAMA, Bank of America Merrill Lynch Global Research Source: SAMA, Bank of America Merrill Lynch Global Research Oil sector privatization could slow debt build-up and support Fx reserves Potential energy sector asset partial privatization could raise a substantial amount for the Saudi government, in our view. A share sale would be a non-debt creating financing flow for the budget, which would lessen the need to borrow domestically or externally. A share sale could also increase Saudi Arabia’s ability to project soft power and influence regionally and internationally. However, it would only support the build-up of Fx reserves in the case of foreign investor participation. Assuming a USS2trn valuation suggested by the Deputy Crown Prince as the value for the SWF, the vast majority of which would be Aramco through a possible 5% listing, such a listing could raise up CUS$100bn, which would represent the current annual government borrowing requirements and associated Fx reserves drawdown. We expect further administered energy price adjustments over the next five years, which should increase state revenues, in our view. A share sale may also facilitate international borrowing on the back of Saudi Aramco’s balance sheet. Saudi Aramco also announced it would look to set up a corporate debt program to fund its NTP initiatives, although issuance does not appear to be an immediate prospect. A corporate debt program, alongside a sovereign one, could allow the government to simultaneously tap a new pool of liquidity through corporate bond investors, upstream proceeds if needed and support Fx reserves. This could be achieved without impacting central government debt ratios and without saturating the government debt issuance room with sovereign debt investors. Saudi Aramco raised a US$10bn syndicated loan in late March 2015 in part to fund acquisitions. The loan replaced USS4bn in existing facilities agreed to in 2010, and includes a USS6bn five- year tranche with two 1-year extension options, a US$1bn 1-year renewable facility, a non-interest bearing SAR7.5bn (USS2bn) five-year tranche with two 1-year extension options and a SAR3.75bn (US$1bn) 1-year tranche renewable yearly. Very roughly, taking the US$2trn Deputy Crown Prince potential valuation for Aramco, and assuming an optimal 10% net-debt-to-equity medium-term target, it would suggest that Aramco could manage leverage of up to US$200bn (c30% of GDP) in domestic and external debt on its balance sheet. Within a corporate setting, possible higher gearing needs to be justified to shareholders and could reflect financing of acquisitions or NTP costs. From a macro angle, international issuance would support Fx reserves. Three aspects of energy policy to consider going forward Energy sector privatization is likely to raise questions on the future path of energy policy, though we believe the latter will stay the course for now. We believe that are three aspects that are central to energy policy in Saudi Arabia: a) competition for global market share in upstream operations; b) future investment decisions and maintaining of spare capacity buffer; and c) integration and expansion of downstream ventures to create domestic jobs, secure captive crude demand and make operations less volatile. OS merrill Lynch GEMs Paper #26 |30June2016 11 HOUSE_OVERSIGHT_016121