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Abu Dhabi, UAEWednesday 12 December 2018

Saudi Arabia to link Aramco tax to oil price

Adjusting the 20 per cent royalty on oil revenue Aramco currently pays would help the kingdom to raise extra money if prices climb

Aramco chief Amin Nasser said its investment in India formed part of its global downstream strategy. Simon Dawson/Bloomberg
Aramco chief Amin Nasser said its investment in India formed part of its global downstream strategy. Simon Dawson/Bloomberg

Saudi Arabia plans to link the most important tax paid by state-owned energy giant Aramco to the price of oil, a significant move ahead of the company’s initial public offering this year.

Adjusting the 20 per cent royalty on oil revenue Aramco currently pays would help the kingdom to raise extra money if prices climb. While not unusual in commodities industries, the move may not prove popular with potential investors. It would protect them from downturns, but also reduce their gains at times of rising prices.

The royalty will remain "for the time being" at 20 per cent, said Amin Nasser, the chief executive officer of Aramco, at the World Economic Forum in Davos, Switzerland. Later on "there will be some alterations that would happen when the price changes in the market”.

The comments are the first confirmation of a possible price-linked royalty, which was reported by Bloomberg last year. Mr Nasser cautioned that all the tax details would not be revealed until the company publishes its IPO prospectus "in due course." On top of the royalty, Aramco pays a 50 per cent income tax.

The CEO reiterated his company’s readiness to conduct the IPO in the second half of this year, pending a government decision on the venue for the listing. Aramco will attract a lot of investor interest and offer competitive dividends, he said.

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Saudi Arabia relies heavily on oil for its finances. While Crown Prince Mohammed bin Salman has an economic programme, dubbed Vision 2030, intended to break free from hydrocarbons, the government still gets most of its revenue from the industry today. The sale of 5 per cent of Aramco, which could raise as much as $100 billion, is part of the diversification plan.

It is not unusual for commodity producers to take a larger share of the pie during boom times. The UK, for example, uses a similar model for oil producers in the North Sea. Russia also varies tax rates with oil prices and the Australian government has proposed in the past price-linked rates for iron ore producers.

Separately, Aramco’s trading unit started swapping the kingdom’s crude oil for products refined in other countries, according to its chief executive officer.

The company has swapped crude with refiners in the Mediterranean in return for products, said Ibrahim Al Buainain, CEO of Saudi Aramco Products Trading. The refined products have been sold in Europe, North Africa and the west coast of Saudi Arabia, and the aim is to do more, he said.

“In the Mediterranean there is plenty of spare refining capacity,” Nr Al Buainain said. “That’s creating opportunities for trading.”

Aramco Trading previously bought and sold mostly fuel like petrol or diesel and last year started trading crude produced by other countries.

Aramco Trading handles about 1.5 million barrels a day of refined fuels, and wants to increase that to more than 2 million barrels, Mr Al Buainain said in May. It also plans to buy crude from other producers to supply some of Saudi Aramco’s joint-venture refineries globally, he said on Wednesday.