As former chief executive and then chairman of state-owned Saudi Aramco, Khalid al-Falih has long been one of the most powerful men in the oil industry. Yet the level of scrutiny awaiting him in Vienna this week will be unlike anything Saudi Arabia's new oil minister has faced before.
While no deal to freeze or cut production is expected from the half-yearly Opec ministerial meeting, his every word will be parsed for meaning. Saudi energy policy has entered a new and uncertain chapter under Mohammed bin Salman, the kingdom's powerful deputy crown prince who has appointed himself ultimate head of oil affairs.
From the moment he touches down in the Austrian capital, Mr Falih will be pursued by a press pack hungry for his view on the oil market, as Brent crude trades near $50 a barrel after a rally since January.
Acrimonious
“The base case is that there will be no cut,” says David Hufton of PVM, a London-based oil brokerage. “[THE] uncertainties are more about whether the meeting will be acrimonious and whether the Saudis will talk about increasing production.”
Oil has rallied more than 80 per cent since it slumped to about $30 a barrel in January, in what some see as validation of Saudi Arabia’s refusal to address a supply glut by unilaterally cutting output.
While the two-year-old policy is starting to have an effect, with production from outside Opec headed for its biggest annual drop in more than a decade, the industry wants to know how the newly appointed Mr Falih plans to harness the kingdom’s oil might as Saudi embarks on a radical reform programme.
Prince Mohammed is driving plans to sell a small stake in Saudi Aramco, helping support a 15-year plan to radically change the kingdom’s economy. That, in turn, has stoked speculation it may eventually lift production substantially above the record 10.2 million barrels pumped last year.
“Oil has become both an international and domestic instrument of policy,” says Ed Morse, global head of commodities research at Citi.
Production
As chairman of Saudi Aramco – the world’s biggest oil company by output – Mr Falih defended the kingdom’s decision not to cut production. In doing so, he often proved more vocal than Ali al-Naimi, his predecessor as oil minister, where policy had to be gleaned through his Delphic utterances or from messages from people usually referred to as “senior Gulf Opec” sources in press reports.
His approach when at Saudi Aramco hints at a possible change in the way the kingdom will communicate with the oil market – and this week in Vienna will provide a first test. He will also have to navigate a 15-minute period of chaotic questioning when the international press corps are allowed to enter the main Opec meeting room before ministers start talking.
“Mr Falih appears to already be showing greater transparency and willingness to communicate what they’re doing,” says Jamie Webster, an independent oil consultant. “Now we’re all going to be watching to see how he acts in Vienna with other delegates.”
At the World Economic Forum in Davos in January, Mr Falih said Saudi Arabia had “never advocated that it would take the role of balancing market against [THE]structural imbalance that was emerging”.
“If there are short-term adjustments that need to be made, and if other producers will co-ordinate, then we will be happy to co-operate,” he added. “Saudi Arabia will not alone balance the market.”
Threat
Some industry analysts question if the kingdom’s hardline stance could ultimately lead it to increase production. Prince Mohammed made a veiled threat last month that output could easily be ramped up to 11 million barrels a day. Any sustained increase would require more drilling and investment, analysts say.
“Mr Naimi spent many years working co-operatively with Opec,” says Gary Ross, executive chairman at New York-based consultancy PIRA Energy. “The new policy is that it is Saudi first. We are going to see more of this.”
How his successor interacts with other members of the cartel, particularly its fierce regional rival Iran, which is driving up production and exports after years of sanctions, will also be closely watched in Vienna.
Opec’s inability to agree a production policy despite oil crashing to its lowest level in more than a decade has drawn criticism from other producer nations, including Opec members Venezuela and Nigeria, which face economic and political crises.
Mr Falih has spoken, however, in support of the group, saying at Davos in that Opec “is still useful” as a “co-ordinating agency”.
“Opec’s traditional role of balancing the market and looking after the interests of its members and those of the global community is very important,” insisted Mr Falih. “I wouldn’t say it is dead.”
Target
At its last meeting in December, Opec scrapped its output target of 30 mi barrels. An attempt to agree a production freeze with non-Opec countries in April foundered after Prince Mohammed ruled that Saudi Arabia would not participate as long as Iran insisted on continuing to raise its output to pre-sanctions levels.
Iran’s output has now risen close to that mark, but the chance of reaching any sort of agreement in Vienna remains slim. Even without a deal, oil’s recent rally may make for a smoother meeting than recent gatherings that have ended in acrimony.
“The bad blood between Iran and Saudi is quite real and makes it difficult to think about any co-ordination on oil policy,” says Jason Bordoff, director of the Center on Global Energy Policy at Columbia University.
“The new minister has been an advocate for the current policy and it is working. Oil prices are doing what oil prices do and we can see the end of the tunnel now.”
– Copyright The Financial Times Limited 2016
