Saudi Arabia Cuts Tax For Oil Producers Ahead Of Aramco IPO

Labourers work at the construction site of Saudi Aramco's Al Khurais central oil processing facility in the Saudi Arabian desert east of the capital Riyadh

The valuation of Saudi Aramco heavily depends on the tax regime, and how profits are being split between the government-from taxes and royalties-and the owners.

The government aims to sell up to 5 percent of Aramco, listing the shares in Riyadh and at least one foreign exchange, to raise cash for investment in new industries, as the kingdom seeks to diversify its economy beyond oil exports in an era of cheap crude.

Saudi Arabia has set a range of income tax rates for producers of oil and hydrocarbons, the official Saudi Press Agency reported on Monday, quoting a royal decree.

"Assuming long-term oil prices averaging USD 75 per barrel, the valuation of the company increases from USD 0.4 trillion to USD 1.4 trillion", he said in a report.

He described the Royal Decree to reduce taxes on oil and hydrocarbon producers in the Kingdom as a positive step that will boost State's policies of diversification of income sources.

"This tax change has a huge impact on the valuation of Saudi Aramco, said Espen Erlingsen, vice president of analysis at Rystad Energy, in a statement".

Saudi Aramco claims that it has 261 billion barrels of oil in reserves, more than all of North America's oil reserves.

Saudi Aramco is planning to go public next year.

Aramco now pays a 20 percent royalty and 85 percent tax to the government, Saudi officials have said.

"This move carries strategic benefits for Saudi Arabia, its citizens and future generations", Finance Minister Mohammed al-Jadaan said in a statement about the tax cut.

85% on companies whose total invested capital in the Kingdom does not exceed SR225 billion.

Using a different valuation method, enterprise value per flowing barrel, suggests a figure in the range of United States dollars 1 trillion to USD 1.5 trillion, though the expected long life of Aramco's reserves compared with other companies means Aramco could command a premium to those numbers, Bernstein said.

"Any reduction in tax revenues arising from this Royal Order is replaced by stable dividend payments and other sources of revenue from hydrocarbon producers to the government".