Riyadh plays hardball on oil
Washington - Two weeks after the Saudi government announced its Vision 2030 reform agenda, King Salman bin Abdulaziz Al Saud issued a series of royal decrees that were an extension of the overall plan being championed and directed by Deputy Crown Prince Mohammed bin Salman bin Abdulaziz.
What overshadowed the ministry restructurings and cabinet reshuffling was the dismissal of long-serving oil minister Ali al-Naimi and the timing of his removal just weeks after the so-called “Doha debacle”, in which Naimi’s support of a production freeze agreement between independent oil producers and members of the Organisation of the Petroleum Exporting Countries (OPEC) was countermanded by Mohammed at the 11th hour, causing the deal to collapse.
Following Naimi’s departure, the Saudi government confirmed that it would maintain its current energy policy of sustaining elevated crude production until it feels that higher-cost producers have ceded enough market share. Saudi Arabia’s tense political relations with Iran no doubt are mixed into this equation.
That Naimi has left the post he had held since 1995 was not a great surprise. The proverbial writing had been on the wall since King Salman ascended to the throne in January 2015. In April 2015, the Saudi monarch replaced Naimi as chairman of Saudi Aramco with Khalid al-Falih, who had been the state oil firm’s president and chief executive officer. Falih was also named Health minister.
Falih has now been made Naimi’s successor, though he will be responsible for an enhanced government organisation called the Energy, Industry and Mineral Wealth Ministry.
The new ministry is part of reforms intended by the deputy crown prince to pull together key business sectors under one roof for more efficient management. For example, now that electricity and oil production are being overseen by one ministry, the government should be better able to meet peak domestic power demand that requires crude as feedstock, thus avoiding routine brownouts during the summer months.
For decades, the Saudi government has relied on the expertise of technocrats such as Naimi to stay attuned to the oil markets and recommend domestic and international energy policies. Now the deputy crown prince has an unprecedented direct hand in the kingdom’s energy policies, both in how oil is to drive domestic economic growth as well as how Riyadh views its oil role in international markets.
Mohammed may have surmised that Naimi would not have been an enthusiastic backer of his ambitious reform plans and preferred a more dedicated lieutenant in Falih, with whom he reportedly has a good relationship, to help him realise his goals. Falih, a technocrat with 30 years of experience at the state oil firm, has worked closely with the Al Saud family over the years, particularly on natural gas issues.
Naimi may not have avidly supported the limited international public offering (IPO) of Saudi Aramco, the proceeds from which will fund a sovereign wealth fund that will in turn grow through non-oil investments. It will be Falih’s job to oversee this major component of the planned economic reforms.
Naimi led the charge in the summer of 2014 when Saudi Arabia and its Gulf allies within OPEC decided to reclaim lost market share at the expense of oil prices by boosting crude output to curb increasing volumes from higher-cost producers. Naimi also knew when it was time to compromise and rein in output and allow the markets to rebalance before basement-level oil prices began to have broader global economic implications.
Prince Mohammed has suggested that oil prices are not a driving concern to the Saudi leadership, saying in a recent interview: “We don’t care about oil prices — $30 or $70, they are all the same to us.”
In addition to claiming that OPEC’s largest producer could bump oil production from its 10.2 million barrels per day (bpd) by more than 2 million bpd within nine months, Mohammed has said that with more investment Saudi production capacity could reach 20 million bpd.
Such rhetoric has political overtones that are directed towards Iran, which is attempting to restore its own market share since winning partial Western sanctions relief. The Saudi government has demonstrated that regional politics affect its decision-making within OPEC, as evidenced by the deputy crown prince’s involvement in derailing the Doha accord after Riyadh demanded that Iran freeze its production along with other OPEC members and independent producers that were willing to participate in a group plan.
What this means is that Falih should expect a chilly reception at his inaugural OPEC meeting in June from those members hoping to reach an agreement that would support higher oil prices. Riyadh, for now, appears more focused on its own game plan than on accommodating others.