A New Era For Saudi Oil

The Kingdom’s energy power sector, always attracting international media attention, has become the latest scene of the long-awaited power battle between conservatives and the MBS supporters. After a surprise announcement that the Saudi Ministry of Energy, Minerals and Mines will be split into two separate entities, leaving Saudi’s mediagenic oil minister Khalid Al Falih only as Minister of Energy, while appointing Bandar Alkhorayef as Minister of Minerals and Mines, further reshuffling has baffled analysts and media alike.

Late last week, Khalid Al Falih was removed as Chairman of Aramco, a position that was for decades combined with the position of Minister of Energy. Analysts tumble over each other, but were kept largely in the dark about the real surprise presented during the weekend. With a bang, Saudi’s energy sector was reshaped, as Khalid Al Falih was removed as Minister of Energy.  Prince Abdulaziz bin Salman, a half-brother of Crown Prince Mohammed bin Salman, was appointed as the new Minister of Energy. Without any doubt the major reshuffle has been instigated by Saudi Crown Prince Mohammed bin Salman and his advisors. After a long-internal power struggle, mainly focused on the Aramco IPO issue, the last hurdles seem to have been removed.

Since months rumors have been heard about a possible conflict between Khalid Al Falih (and others) and MBS supporters on the course to be taken for the Aramco IPO. Already short after the announcement of the IPO, a surprise move by Crown Prince Mohammed bin Salman, it was clear that conservative forces within the Kingdom and circles around Khaled Al Falih were not really amused about the whole venture. MBS’s approach of the IPO, without taking a more long term assessment, seemed to have surprised the old guard.

At present, the dice has been thrown, changes had to be made. Changes to the energy power structure had to be made. The struggling Aramco IPO caused strains within the Saudi government, while Khalid Al Falih’s strategy of an OPEC+ production cut agreement has not yet been successful enough. Main point of criticism on Al Falih has been that the successful OPEC+ strategy to remove millions of bpd of crude from the market not has resulted in higher oil prices. Even that Al Falih is not a Djinni, the latter put a dent in his shining armor.

The coming weeks, with a new minister of energy, supported by MBS, will have to make harsh choices. Prince Abdulaziz’s first target will be to decide if OPEC+ will continue with its strategy to remove additional barrels from the market or to end its current approach.  This week’s OPEC+ joint ministerial monitoring committee (JMMC) meeting in Abu Dhabi will be a litmus test. The market is looking at the latter with extreme anticipation, especially after the removal of Al Falih and the somehow surprise appointment of King Salman’s son, Prince Abdulaziz bin Salman, as the new energy minister, clearly a political choice as it is an historical break with tradition that members of the Saudi royal family are not appointed to that position.

Even that a political decision is clear, the appointment of Prince Abdulaziz, who is an energy ministry veteran, is a logical and possible strategically well placed choice. Prince Abdulaziz is the king’s fourth son and a half-brother of crown Prince Mohammed. He joined the energy ministry in 1987 as an advisor. He was promoted to deputy oil minister in 1995 and later became an assistant minister for petroleum affairs from 2004 to 2015. During that period he led a team responsible for Saudi Arabia’s oil strategy as well as long term OPEC strategy. In 2017 he was appointed as minister of state for energy affairs.

In contrast to the market, the appointment of Prince Abdulaziz should not cause more instability in the market. The new minister of energy will not only continue the OPEC+ strategy, but for sure is willing to renegotiate possible deeper production cuts, as the target is clear at present. Saudi Arabia, aka MBS, will want a stable healthy oil market, not threatened by a new oil glut, as the Aramco IPO will need to become a success story. Higher oil prices are needed to reach the “official” IPO targets the coming months. Saudi Arabia is clearly not happy with an US$60 per barrel situation.

Crown Prince Mohammed bin Salman’s master stroke also has put his Saudi Vision 2030 goals in place. By splitting up the Ministry of Energy, Minerals and Mines into two separate entities, he acknowledged that one person leading two totally different major programs of the Saudi Vision 2030 strategy the coming years is unfeasible. For the Ministry of Energy, now to be led by Prince Abdulaziz bin Salman, challenges are already staggering. He will need not only to address a successful oil price strategy to support the Aramco IPO, but also will need to counter international market threats coming from lower economic growth, renewables and the continuing US shale drive. At the same time, Prince Abdullah will need to step into the footsteps of Khalid Al Falih, who has been the front man not only for Saudi Arabia, but also leading the OPEC+ discussions.

At the same time, Crown Prince Mohammed bin Salman has also made clear that all opposition to the Aramco IPO has now been removed. Already before the weekend, MBS put the Aramco IPO future in the hands of the new chairman of the oil giant, Al Rumayyan, who is not only chairman of the Saudi sovereign wealth fund Public Investment Fund, but also a confident of the crown prince. The choice has been criticized by some, but the role of the PIF as leading the IPO process now is clear.

Analysts also should be looking at the timing of this almost with military precision organized power change. MBS’s move comes just before Future Investment Initiative 2019 in October in Riyadh. The so-called “Davos in the Desert”, still officially focusing on technology, innovation and food, will now become the first full-scale podium for MBS’s future Kingdom, with as headline the Aramco IPO, while the Crown Prince will be stepping back into the Sun.