New Saudi oil era ignites old questions

Khalid al-Falih

Khalid al-Falih

The new Saudi administration under construction by Mohammed bin Salman, the monarchy’s young deputy crown prince, has been quick to jettison ministers deemed inefficient or out of line with a prevailing reformist tone in the royal court.

Ali al-Naimi, once Saudi Arabia’s most influential commoner and for decades the face of energy policy in the world’s largest oil exporter, has become the most prominent minister to be replaced so far. Khalid al-Falih, a fellow Saudi Aramco veteran, took over his role on Saturday as oil minister. He is playing an influential role in shaping Prince Mohammed’s reform plans, which include taking part of the state oil company public.

His appointment should provide some continuity in oil policy. Both the 30-year-old Prince Mohammed — known as MbS in western circles — and Mr Falih have indicated they believe that keeping output high is the best strategy in an industry transformed by unconventional resources.

“Saudi Arabia has never advocated that it would take the role of balancing the market against the structural imbalance that was emerging,” Mr Falih said this year at the World Economic Forum in Davos.

But the rise of Prince Mohammed to the top of the oil leadership has raised questions about future policy.

Daniel Yergin, author of The Prize, a history of the oil industry, and vice-chairman of data provider IHS, said Mr Falih would bring a “real strategic grasp” about the role of oil “in the overall reform programme”.

He will play a key role in the prince’s plans to privatise a stake in Saudi Aramco, helping to finance his plan of creating a $2tn sovereign wealth fund to speed the end of the kingdom’s reliance on oil by 2030.

The deputy crown prince’s aim of granting the state oil producer independence and shifting its assets under the sovereign Public Investment Fund were probably alien to Mr Naimi’s worldview, which was forged in the kingdom’s fight to nationalise its oil wealth. The 81-year-old oil minister had raised questions over plans to increase energy prices for citizens, arguing for the paternalistic status quo.

“Mr Naimi was too old. He didn’t manage to fit into the new way of thinking,” said one Saudi banker. “Naimi viewed Aramco as part of the oil ministry.”

But under Mr Naimi’s authority there were some certainties: Saudi Arabia would not politicise its oil resources and there was an expectation the kingdom would hold a buffer of spare capacity to prevent prices from escalating to dangerous highs.

The deputy crown prince has already indicated he is prepared to wield oil as a political tool, hinting that the kingdom could easily accelerate output to more than 11m barrels a day as its regional rival Iran tries to recoup market share after years of sanctions.

Last month he isolated his oil minister and scuppered the first big attempt to reverse the price slide when he insisted that Iran must be part of any deal to freeze output. Mr Naimi’s team had briefed other countries’ ministers that Riyadh’s participation was not contingent on Tehran.

In a statement on Sunday, Mr Falih said the kingdom would “maintain its stable petroleum policies”. However, he echoed recent comments from Prince Mohammed, by highlighting Saudi Arabia’s status as the only country with significant spare capacity and by positioning it as the natural beneficiary of rising demand.

This is a new era for Saudi oil policy and is fraught with uncertainty. There will likely be more volatility for oil markets.

– Amrita Sen, chief oil economist, Energy Aspects

“We are committed to meeting existing and additional hydrocarbons demand from our expanding global customer base, backed by our current maximum sustainable capacity,” he said.

There is expected to be little clarity by the next Opec meeting in June. The kingdom normally raises production to feed power plants in the summer months to help meet soaring air-conditioner use. Whether any production increase will be maintained after the summer remains to be seen.

But with Prince Mohammed’s economic vision planning for a less prominent role for Saudi Arabia’s oil industry, there may be an incentive to pump more crude and secure revenues to help the kingdom make the transition to a post-oil economy.

“This is a new era for Saudi oil policy and is fraught with uncertainty,” said Amrita Sen, chief oil economist at Energy Aspects, the research consultancy. “There will likely be more volatility for oil markets.”

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