The Fuse

A New Hand on the Wheel: Changes in the Saudi Energy Leadership

by Gregory Brew | September 09, 2019

There’s been a shake-up at the top of the world’s largest oil exporter.

On Sunday, September 8, Khalid al-Falih stepped down as Energy Minister in Saudi Arabia.

His replacement, Prince Abdulaziz bin Salman bin Abdulaziz al-Saud, takes over after a long tenure serving as a member of the Kingdom’s delegation to OPEC.

The appointment of Prince Abdulaziz, the second change in Saudi energy leadership in three years, illustrates the challenges facing the Kingdom

The move was prompted by Crown Prince Mohammed bin Salman (MBS), son of King Salman and de facto premier, who seeks a new head of Saudi energy policy as he prepares for the IPO of Saudi Aramco. The appointment of Prince Abdulaziz, the second change in Saudi energy leadership in three years, illustrates the challenges facing the Kingdom as it navigates a fraught international landscape, uncertainty over future oil prices, and a slow transition towards a more diversified economy.

Al-Falih took on the energy portfolio in May 2016, after the 20-year tenure of Ali al-Naimi. As energy minister from 1996 to 2016, al-Naimi steered Saudi Arabia through a tumultuous period, one marked by frequent price shocks.

Al-Naimi’s largely successful efforts to maximize oil revenues came to an abrupt end in 2014 amidst a crash in oil prices—one that Al-Naimi may have engineered, as Saudi production increased as a way of pushing U.S. shale producers out of business. Prince Abdulaziz was one of several Saudi oil officials who objected to al-Naimi’s strategy. MBS, consolidating power within the Saudi government, organized Al-Naimi’s removal in 2016, once it became clear that the supply glut had failed to eliminate the new U.S. competition.

He replaced Al-Naimi with al-Falih, who focused on maintaining oil prices through a cut in OPEC production and close cooperation with Russia.

Al-Falih’s policy prevented another crash, and the OPEC cuts were somewhat successful at maintaining prices above $50/barrel. But as U.S. production continued to surge, OPEC’s efforts to push prices back up to $80/barrel, where they need to be in order to balance the Saudi state budget, were unsuccessful.

The cautious Al-Falih was known to be against the Saudi Aramco IPO, originally scheduled for 2018 but had to be postponed over fears of U.S. anti-OPEC litigation and concerns that the estimate of a $2 trillion valuation was a little too optimistic.

Once seen as the third most-powerful man in the country, after the King and the Crown Prince, Al-Falih lost his industry ministry portfolio on August 30 and was removed as chairman of Aramco on September 2.

Al-Falih suffered a swift fall from grace. Once seen as the third most-powerful man in the country, after the King and the Crown Prince, Al-Falih lost his industry ministry portfolio on August 30 and was removed as chairman of Aramco on September 2.

Prince Abdulaziz has already indicated that official policy will remain unchanged: he will maintain the OPEC cuts set during Al-Falih’s tenure. The IPO is set to go ahead, with major banks like JPMorgan and Morgan Stanley in talks to manage the transition, as Saudi Arabia plans to sell 5 percent of the company by 2020-2021.

Still, the personnel shift is significant. It’s the first time in Saudi history that a member of the Royal Family has held the energy portfolio—reserved by custom for a dedicated civil servant and professional technocrat, like Al-Naimi, Al-Falih, or Ahmed Zaki Yamani, the legendary oil minister who steered Saudi policy from 1962 to 1986.

Prince Abdulaziz, a half-brother of MBS, has a technocratic background and years of experience working on the Saudi delegation to OPEC, so the appointment is not particularly shocking. But it does mark a major break with tradition, in a country undergoing some rather abrupt changes, many of them instigated by MBS.

The new chairman of Saudi Aramco, Yasir Al-Rumayyan, runs the sovereign wealth fund and is a close advisor of MBS. Together with Al-Rumayyan’s appointment at Aramco, the change in leadership is a sign that the Crown Prince is looking for further shake-ups in advance of the IPO, a moment that could carry monumental significance for the petro-state, in its attempt to move towards a more diversified economy.

The environment remains unstable. The IEA has released a demand outlook that ranks amongst its gloomiest: the agency expects demand to rise only 500,000 bpd in 2019, the slowest rate since 2008, the year of the Great Recession. Production from the United States—now the world’s largest oil producer—continues to rise and shows no signs of slowing down.  Output could reach 13 million bpd by the end of 2019—an astonishing development, considering production had sagged to 4.5 million bpd in 2005.

After a historic policy of leaving the energy portfolio in steady hands, MBS has handed off the Saudi energy portfolio twice in three years.

After a historic policy of leaving the energy portfolio in steady hands—Al-Naimi served for more than 20 years, Hisham Nazer 11 years, and Yamani 24 years before that—MBS has handed off the Saudi energy portfolio twice in three years. It may be a sign of the Crown Prince’s impatience, or an indication that Al-Falih’s efforts to boost prices were inadequate.

But if MBS is waiting for his new energy chief to accomplish a miracle, he may be waiting for a while. Even with heightened regional tensions and fears of a war with Iran, prices have barely budged above $60 this year. A global recession looms in 2020, the demand forecast looks weak, and U.S. production is getting a boost from a government obsessed with achieving “Energy Dominance.”

Prince Abdulaziz will face all the challenges of his predecessor. Not only that, he will have to deliver on the postponed promise of the IPO. Facing such obstacles, it will be interesting to see how he fares—or how long he lasts in his new position.

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