The New York Stock Exchange has emerged as the front-runner for the global IPO of Saudi Aramco — widely predicted to be the biggest initial public offering in history. But political, regulatory and legal challenges may discourage Riyadh from pursuing a U.S. listing, despite the commercial merits.
On the surface, the Trump administration appears to have reset relations with Saudi Arabia after the Kingdom announced a $200 billion investment program during deputy crown prince Mohammed bin Salman's visit to Washington earlier this month.
Riyadh called the meeting a "historical turning point" in U.S.-Saudi relations, and while that bodes well for stronger commercial ties in general, political perceptions, stringent U.S. disclosure rules and 2016 legislation allowing 9/11 victims to sue Saudi Arabia may stand in the way.
The New York Stock Exchange declined to comment when contacted by CNBC about the planned the Saudi Aramco IPO.
A NYSE listing would be "too legally and politically risky," said Robin Mills, CEO of Qamar Energy and a former Shell executive, adding that the most likely outcome for a global Aramco listing would involve London, Saudi Arabia's Tadawul stock market and possibly an Asian exchange.
"They (Aramco) seem to be creating a beauty parade and talking to everyone," said Fereidun Fesharaki, founder and chairman, of Facts Global Energy. "New York is absolutely out due to regulatory restrictions. It is not a maybe, it is definite."
An international stock market listing means opening up its books to regulators — and ultimately to greater investor scrutiny. That would be a first for any Saudi state-owned behemoth, none of which are accustomed to sharing information about financial accounts and oil reserves. Some doubt Riyadh would be prepared to meet such transparency demands, despite plans to float only 5 percent of Aramco.
"The Aramco IPO is a great PR stunt," said Gal Luft, co-director of the Institute for the Analysis of Global Security, a Washington-based think tank focused on energy security.
"How can one establish a valuation for a company that has thus far kept its reserve data a state secret? Tearing a 5 percent piece of the company and throwing it into the market while the other 95 percent is a black box will not fly with prudent investors."
Aramco has appointed international auditors to independently assess its massive oil reserves, in a process that's expected to be completed by the end of the year. The result of that audit — and whether it undershoots or overshoots the official Saudi figure of over 261 billion barrels — will have a direct impact on the all-important valuation and could influence the choice of where the listing takes place.
Firms that list in New York are also required to go through a U.S. Securities and Exchange Commission audit. On balance, a key issue for Saudi Aramco's New York considerations "is having to reconcile to its extensive reporting and disclosure requirements," said one former investment banker.
Additionally, the continued political and diplomatic fallout from the Sept. 11, 2001 attacks stands to complicate the picture further.
Saudi Arabia has denied longstanding suspicions that elements linked to Riyadh backed the hijackers who attacked the U.S. in 2001. Fifteen of the 19 hijackers were Saudi nationals.
The U.S. Congress on September 28 overrode President Barack Obama's veto of the Justice Against Sponsors of Terrorism Act, or JASTA, which made it possible for victims' families to sue the government of Saudi Arabia.
At least seven lawsuits alleging Saudi government support and funding for the 9/11 attacks have landed in federal courts in the six months since Congress opened the door to such litigation over the fierce opposition of Obama, NBC reported on March 20.
Such unwanted legal attention may dissuade Riyadh from a U.S. listing, one banker said. "New York is less likely because of the JASTA action. New York … is a bit of a risky option."
Ultimately, Aramco and the global exchanges will be betting that the sheer size of the IPO, which is expected to raise up to $100 billion, will eclipse the politics, and not the other way around. Steen Jakobsen, chief economist & CIO at Saxo Bank, said Saudi Arabia's $17.5 billion bond issue last year was a "lead indicator" for the Aramco IPO: "Politics is a concern, but the bond offering shows the capital market doesn't have a political persuasion."
Alastair Newton, a political analyst and former British diplomat, added: "The problem with equity is that it is higher profile than bonds as far as the general public (in which I include Congress) is concerned."