Saudi succession comes with consequence for the oil industry

Oil revenues are the foundation of the kingdom, but at the same time they have remained insulated from domestic political interference.

The rapid changes in the Saudi succession and government come with consequences for the energy sector too. Oil revenues are the foundation of the state, but at the same time they have remained insulated from domestic political interference.

Khalid Al Falih, the respected veteran of the state oil company Saudi Aramco, and its chief executive since 2008, has moved up to be chairman, replacing Ali Al Naimi, and – in a surprising move – also being named health minister.

Mr Al Naimi, oil minister since 1995, and now aged about 80, has made no secret of his desire to retire, and concentrate on his chairmanship of the King Abdullah University of Science and Technology.

Prince Mohammed bin Salman, now second in line to the throne, is to lead Aramco’s new 10-person board, giving him a position to consolidate power. Another of the king’s sons, Abdelaziz, assistant oil minister since 1995, was elevated to deputy oil minister in February.

Saudi Aramco itself will be separated from the Ministry of Petroleum – which as Valérie Marcel of the think tank Chatham House suggests, may weaken the minister’s role. The new Supreme Economic Council will replace the Supreme Petroleum Council.

Paradoxically, the very political strength of Saudi Arabia’s oil policy derives from being apolitical. The one major time the kingdom departed from this, in the 1973-74 oil embargo, proved disastrous in the longer run and permanently damaged its reputation. Despite speculation that Saudi oil policy in the mid-1980s was determined by a desire to hurt the Soviet Union, or from last year by opposition to Iran or Russia, the kingdom’s subsequent production decisions have always been explicable in purely market-driven economic terms.

There is no sign that a new oil minister, whether it will be Mr Al Falih, Prince Abdelaziz or another, will depart from the current policy of maintaining market share and tolerating lower oil prices. But there is a danger of political interference in Saudi Aramco.

The state oil firm, which inherited the traditions of its American forerunner, has been a capable and technocratic executor of policy: to supply world markets with oil, deter excessive expansion by competitors and maintain the world's only significant spare capacity in case of disruptions.

Of its peers, Kuwait Petroleum Corporation is undermined by continual changes of leadership and politicised delays to key projects; Nigeria National Petroleum Corporation is looted, with $20 billion missing from its accounts; Brazil’s Petrobras is mired in corruption scandals and loaded in debt; Petróleos de Venezuela is overburdened by paying for – and running – widespread social programmes.

Not everything has gone smoothly for Aramco. While its upstream oil sector is in a relatively quiet phase of maintaining current output, it has ambitious plans to build mega-refineries and power plants, enter the renewable energy sector, meet the kingdom's voracious need for new gas and build a world-scale petrochemical business.

The important new Wasit gas plant has been held up by technical problems, and the massive Jizan refinery, in the politically sensitive and underdeveloped south-west of the country, is suffering because of a dispute with the engineering contractor.

Perhaps more seriously, Aramco is being called upon to take on projects outside its core expertise, such as fixing Jeddah’s wastewater system after deadly floods, and building the Jizan industrial city and new sports stadiums. Mr Al Falih’s elevation to health minister, after a previous incumbent was sacked last year amid the Mers virus crisis, is one more sign of this trust in Aramco’s competence.

Oil policy may be clear, and personnel becoming clearer. But if Aramco or the oil ministry were to become a vehicle for political ambitions within the Al Saud family, or if the state oil company were overloaded with non-core projects, that could erode the formula of apolitical oil policy that has served the kingdom well for decades.

Robin Mills is head of consulting at Manaar Energy, and author of The Myth of the Oil Crisis

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