Saudi Arabia's oil plans face early test of credibility

Saudi Arabia’s new oil regime will need to show early that it plans to act on deputy crown prince Mohammed bin Salman’s pledge to be more transparent to establish credibility for the grand plans that have been laid out.

Already this year there have been signs that the newly appointed oil minister, Khalid Al Falih, is the explainer-in-chief of the new policy, at the centre of which is one of the most complex privatisations ever to be proposed (assuming that comes to fruition some time in the next two years).

It has fallen to Mr Al Falih to put some flesh – limited though that has been so far – on the bones of the general outline for transformation of the Saudi energy sector which Prince Mohammed has offered.

For example, Mr Al Falih has on two occasions this year followed Prince Mohhamed interviews with western press outlets by subsequently clarifying that any initial public offering of shares in the state oil company Saudi Aramco will exclude title to Saudi oil reserves. They are and will remain constitutionally the property of the kingdom, he has said.

If he does take a more open approach, it will contrast sharply with the style of his predecessor, Ali Al Naimi, who had also risen through the ranks to the top of Aramco before being named oil minister in 1995.

During his time in the job, Mr Al Naimi, who turns 81 this year and had long been looking to retire, was famed for his inscrutability and cryptic pronouncements.

Mr Al Naimi’s tenure was punctuated by periodic attempts to reassert Opec’s influence on the world oil market. However, oil prices were rescued in the first decade of this century only by the rise of China, a factor that was being overshadowed in recent years by the emergence of US shale and other supply that was consistently eating into Opec market share.

The new market-driven policy in place since late 2014 is clearly favoured by Prince Mohammed, who scuppered the recent attempt at Doha to get a broad oil producer “freeze” deal even before the talks began, leaving Mr Al Naimi looking redundant.

The next Opec ministerial meeting in June will put Mr Al Falih in the spotlight.

But as Edward Bell, a commodities analyst at Emirates NBD points out, oil policy is not likely to change and is, in any case, determined above Mr Al Falih’s head by Prince Mohammed.

“It’s clear that the broad oil policy strategy is being set by [Prince Mohammed], so [Mr Al Falih] is there as minister of domestic energy, industry and minerals,” he says.

In his first comments since being appointed, Mr Al Falih said yesterday in Riyadh via a statement: “We remain committed to maintaining our role in international energy markets and … meeting existing and additional hydrocarbons demand from our expanding global customer base, backed by our current maximum sustainable capacity.”

Assuming the Opec meeting in June will offer nothing but bland status quo statements on broad oil policy, Mr Al Falih could seize the opportunity to spell out in more detail what Aramco’s strategy will be.

“There are many questions to answer,” said Jean-Marc Rickli, a Gulf government policy specialist and assistant professor at King’s College London.

Chief among these is opening up the “black box” that has been Aramco and all of the key numbers that it will be required to share with the market before it can contemplate offering shares to the public. But the company must go through a cultural and structural change before it can even start to to do that.

Prince Mohammed “wants to reform the system from the inside towards an increased role of privatisation,” said Mr Rickli. “This requires a huge cultural change from government to corporate organisational culture. It will require pressure from the top leadership and imposing some key people to do this; as with any transformations, internal resistance have to be overcome.”

Aramco’s chief, Amin Nasser, was put in place last autumn as the transition to new leadership began. His key people are of the same newer generation, including his downstream head Abdulrahman Al Wuhaib, who last week noted that Aramco’s “most significant achievements in recent years have been in developing new international and domestic partnerships in the downstream space…[and the transformation plan] can deliver further opportunities to help us consolidate those downstream relationships.”

Mohammed Al Qahtani, head of upstream at Saudi Aramco, emphasised the company’s focus on maximising domestic recovery rates for existing oilfields, as well as a move toward gas to expand Saudi’s domestic power sources.

All of Aramco’s executives emphasised the “In-Kingdom Total Value Add” localisation programme, which is the effort launched last autumn whereby the oil and gas industry supports locally-sourced industry, such as steel products and petrochemicals-related businesses such as plastics.

That points to the most essential part of the plan that needs to be put in place.

“You also need change at the bottom,” says Mr Rickli. “You have to train a new generation of young people who no longer see their future in government positions but as entrepreneurs in the private sector.”

That is a long-term objective that needs to be supported by changes in the education, finance and other sectors.

Meanwhile, Aramco is not short of advisers, including McKinsey, which provided a blueprint for energy sector diversification at the end of last year. The company counts among its top board members Mark Moody-Stuart, a former chief executive of Royal Dutch Shell and Andrew Gould, who ran BG.

But a solid step towards privatising some or all of Aramco would include some restructuring of the company and the appointment of a top executive with experience of dealing with public investors. Prince Mohammed has said he expects to see Aramco become a company (or companies) that reports to the market on a quarterly basis.

That is a tough test even for practiced executives of much smaller public companies.

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