New Saudi oil minister faces daunting task

Falih had fallen afoul of the Saudi leadership by not being supportive enough of the Aramco IPO process.
Saturday 14/09/2019
New Saudi Energy Minister Prince Abdulaziz bin Salman bin Abdulaziz speaks at the World Energy Congress in Abu Dhabi, September 9. (AP)
Eminently qualified. New Saudi Energy Minister Prince Abdulaziz bin Salman bin Abdulaziz speaks at the World Energy Congress in Abu Dhabi, September 9. (AP)

Within a dizzying 10-day span, the government of Saudi King Salman bin Abdulaziz Al Saud split one critical ministry into two and reshuffled key players in its energy management team. Riyadh’s latest move involves the unprecedented replacement of a civil servant at the head of the Energy Ministry with the king’s son.

The dramatic changes not only highlight the swift fall from grace of former Saudi Oil Minister Khalid al-Falih but also the Saudi government’s strong desire to elevate oil prices ahead of a seemingly expedited initial public offering (IPO) of state oil and gas giant Saudi Aramco.

However, the kingdom’s new oil minister will face the same challenge that Falih had in trying to push up oil prices to help Riyadh with its budgetary needs and support a higher valuation of Saudi Aramco amid increasing signs of a weakening global economy.

King Salman’s decree removed Falih from his post overseeing the Energy Ministry and installed his son, Prince Abdulaziz bin Salman bin Abdulaziz, as oil minister. The appointment of Prince Abdulaziz to head the Energy Ministry breaks a nearly 60-year tradition of a commoner holding that job, with the kingdom’s five previous oil ministers all civil servants. The new oil minister sought to reassure oil markets, saying there would be “no radical” change in Saudi oil policy.

The Saudi leadership traditionally has had a commoner who was an oil technocrat leading the Saudi Energy Ministry to avoid upsetting the balance of power within the Al Saud family by allowing a prince from one royal branch to direct that significant and powerful portfolio. The Salman doctrine, however, has proven to be untraditional both in economic and foreign policy and in solidifying power through control over key ministries and institutions.

There has been an implicit understanding that a civil servant in the job of oil minister could be easily sacrificed should the Saudi government decide its energy policy was not being implemented correctly or when Riyadh wanted to signal to oil markets that it was taking a fresh approach with new blood. The appointment of Prince Abdulaziz, an elder son of King Salman and half-brother to Crown Prince Mohammed bin Salman bin Abdulaziz, throws an interesting wrinkle into the relationship that the oil minister typically has with the top Saudi leadership.

The prince is eminently qualified to serve as the Gulf country’s oil minister. He is an oil technocrat with more than three decades of experience in the Saudi Energy Ministry. In 1985, he was appointed an adviser to Oil Minister Ahmed Zaki al-Yamani and subsequently to Yamani’s replacement, Hisham Nazer, before being named deputy oil minister in 1995 under the era of Ali al-Naimi.

In 2005, Prince Abdulaziz was named assistant oil minister, a position he held until April 2017, when King Salman appointed him Minister of State for Energy Affairs. He was rumoured as a potential replacement for Naimi in 2016 but the job went to Falih. The prince holds a master’s degree in business administration from King Fahd University of Petroleum and Minerals.

Prince Abdulaziz takes over an Energy Ministry that has been substantially downsized by his father. In late August, King Salman issued a decree that separated the Energy, Industry and Mineral Resources Ministry into two ministries. The split will go into effect January 1, with the prince overseeing the Energy Ministry and Saudi private sector investor and businessman Bandar Alkhorayef running the new Industry and Mineral Resources Ministry.

Falih had fallen afoul of the Saudi leadership by not being supportive enough of the Aramco IPO process, failing to move oil prices beyond current levels of around $60 a barrel and his inability to draw foreign and domestic investment into the country’s non-oil sector — a key element of the country’s economic restructuring programme, Saudi Vision 2030.

The new oil minister has been attending OPEC meetings as a member of the Saudi delegation for 30 years and is well-regarded as a skilled negotiator. He was instrumental in helping convince other OPEC delegations to participate in a production-cutting agreement along with independent producers that went into effect in 2017 to help drive up oil prices.

The OPEC+ group has extended its initial agreement to withdraw 1.2 million barrels per day (bpd) from oil markets several times. Riyadh has continued to produce far lower than its assigned quota in a bid to push up oil prices, with Saudi output consistently less than 10 million bpd. Prince Abdulaziz said on September 9 that the OPEC+ alliance was “staying for the long term.”

The International Monetary Fund has suggested that the kingdom needs $85 a barrel oil to balance its budget and ideally, Riyadh wants at least $80 a barrel for a higher-valued IPO. However, there is weaker global oil demand growth being felt this year and that is expected to spill over into 2020.

The US Department of Energy’s Energy Information Administration revised downward its 2020 average price forecasts for UK benchmark crude Brent and US benchmark crude West Texas Intermediate (WTI) by $3 a barrel each, with Brent expected to average $62 a barrel and WTI to average $56.50 next year, which means the new Saudi oil minister faces a daunting task.