Restructuring the oil sector in Saudi Arabia

Friday 12/06/2015

Changes in leadership in Saudi Arabia after the death of King Abdullah in January have been rapid and extensive — two adjectives that rarely are used when talking about Saudi Arabia.
As a result, there has been speculation about whether the lat­est changes in the oil sector mean that the young blood in the royal family is taking over an area that, until now, was seen as the domain of savvy technocrats, led by Ali al-Naimi, the hugely successful minister of petroleum and miner­als for the past 25 years.
There have been three main changes in the oil policy structure of the kingdom:
First, Prince Abdul-Aziz bin Salman was promoted to deputy minister of petroleum and miner­als with rank of minister. This may indicate that he would likely become full minister when Naimi, born in 1935, retires.
Second, the chairmanship of Saudi Aramco has been handed over to Khalid al-Falih, the former chief operating officer (COO) of Saudi Aramco and now minister of Health.
This promotion implies that the chairmanship of Saudi Aramco no longer is the preserve of the Min­istry of Petroleum and Minerals. A Saudi official even announced the ministry was no longer involved in the oil industry.
And third, Saudi Aramco was placed under the control of a Supreme Council for Saudi Aramco (SCSA), responsible for setting oil policy and supervising the activities of Saudi Aramco. The newly formed SCSA consists of ten members under the leadership of Prince Mohammed bin Salman bin Abdul-Aziz, a son of Abdullah who also serves as minister of defence and chairman of the new Economic Council.
The SCSA replaces the Supreme Petroleum Council (SPC) and was expected to set oil policy for the kingdom. The SPC was led by the king and included the crown prince, the minister of foreign affairs, the minister of defence, as well as the technocratic ministers of finance, commerce, and petro­leum and minerals.
In practice, the members of the royal family involved in the SPC had very little time or technical knowledge to establish oil policy and, because of his extraordinary knowledge of the industry and the capacities of the kingdom, Naimi led the SPC and policymaking.
The establishment of the SCSA is not truly changing the system of oversight of Saudi Aramco because the company and policymaking are still dominated by professionals, engineers and technocrats; that is, non-royals.
The board of directors as well as the whole staff of Saudi Ara­mco is composed of commoner technocrats. The new chairman is a dyed-in-the-wool Saudi Aramco alumnus, just like Naimi. The SCSA as a supervisory body is still influenced by the royal family in the sense that Prince Mohammed is its chairman.
However, the secretary-general of the new council, Majid al- Moneef, is a former Saudi repre­sentative to the Organisation of the Petroleum Exporting Countries (OPEC) and a highly respected en­gineer. The ten members include five members of the Saudi Aramco board, including the new chair­man and the new chief executive officer, Amin Nasser.
It is likely that the prince, because of his other extensive responsibilities, will have to rely on the technocrats of the SCSA, and especially Moneef and Falih, just as previous kings to relied on Naimi under the SCP.
At the same time, since the Min­istry of Petroleum and Minerals is no longer in charge of the oil in­dustry in the kingdom, Abdul-Aziz Al Salman, even if he does become the next minister, will not be in­volved in oil policy. Thus, rumours of the Al Salman clan taking over the oil industry are unfounded. It is very likely that the influence of the king and his kin will not be any more or less important that it has been in the past.
On the other hand, it seems that the establishment of the SCSA and the changes at the ministry will not change the supervision of oil production or the defining of policy, except perhaps in making it less bureaucratic than it had been in the past.
The present policy established by Naimi in 2014 aims to force non- OPEC members to cut production in order to raise prices to a reason­able amount, meaning less than $100 per barrel but more than $60 per barrel, while leaving Saudi Ara­bia as the lead market maker.
The main target of Saudi policy is most likely Russia, which has many inefficient and very high cost wells, rather than the shale oil pro­ducers of the United States, whose costs are declining well below $50 per barrel, making their production still profitable.
The Saudi policy of maintaining production of more than 10 million barrels per day does have a price: The Saudi budget deficit is balloon­ing to $39 billion in 2015 for regular expenses, plus $80 billion for military expenses. However, Saudi Arabia does have access to over $1 trillion in cash. This is three times more than Russia has and gives the kingdom a large stick to push its policy with non-OPEC producers.
It seems likely that non-OPEC producers will be forced to buckle under Saudi pressure sooner rather than later, provided Saudi Arabia, as it has hinted many times, matches their cuts, thereby allowing a relatively modest price increase.
The policy devised by Naimi in December 2014 is still the only one that makes sense for the kingdom regardless of the changes made in the overall management of the oil industry in Saudi Arabia.