Saudi Arabia has long been the dominant force in oil. Now the kingdom must refresh its strategy to reflect a weaker hand — and in many ways, a different game.
The changing nature of the energy industry — the oil production boom in American shale fields, the persistence of lower crude prices, and the rise of natural gas — has transformed the geopolitical equation. While Saudi Arabia is a major energy producer, it must compensate for its lost revenue. And the US, China and Russia are all circling in hopes of gaining a financial advantage.
Russia, smarting from Western sanctions and lower oil prices, is moving to embrace Saudi Arabia for energy deals despite their rivalry in Syria, where the two countries support competing sides. China, with its domestic oil production in steep decline, seeks a stable flow not just of Saudi oil but of Saudi investment in its growing petrochemical and refinery industries.
And Washington is willing to overlook those flirtations in the hope that Saudi Arabia will continue to be a strategic bulwark against Iran. The desires of all three superpowers fit neatly into Saudi Arabia’s strategy to find new investment partners as part of a broader push to diversify its oil-dependent economy, trim large budget deficits and secure the future of both the kingdom’s welfare state and its monarchy.
The keystone to the project is the proposed initial public stock offering of Saudi Aramco, the national oil company, a deal that could be worth hundreds of billions of dollars. The changing geopolitical game was on full display in December when Saudi Arabia’s energy minister, Khalid Al Falih, braved the Russian Arctic cold as President Vladimir Putin’s guest of honour at the opening of a giant natural gas export terminal.
For Putin, it was an audacious embrace of a US ally as he moved to expand his nation’s energy riches despite the sanctions. For Al Falih, it was a chance to discuss future gas sales, attract investment in Saudi Aramco and coordinate efforts to prop up global oil prices.
“If we continue to work the way we do, we will turn from rivals to partners,” Putin told Al Falih at the public ceremony. The Saudi official readily agreed.
The ultimate success of the Saudi Aramco public offering and the entirety of the kingdom’s economic reform remain in question, and progress so far has been mixed. Nevertheless, US, Chinese and even Russian financiers are entwined in a complex dance around the initial public offering, promised later this year.
President Donald Trump has called for the IPO to be listed in New York. A Saudi listing now appears more likely, with additional trading in London or Hong Kong. Global financiers say they want a piece of the action wherever it occurs.
The interest in the IPO has given the kingdom greater leverage at a time when the Organisation of the Petroleum Exporting Countries, through which it has long wielded power, has lost clout. “The Saudis are compensating for their lost power in Opec and they are showing pure geopolitical pragmatism in their new energy and foreign policy,” said Bill Richardson, a former energy secretary and ambassador to the United Nations. “But they are not just compensating for lost power. They are adding to their power in world politics.”
Saudi Arabia has had a central role in global energy since at least World War II. When the kingdom created a global glut of oil to gain market share in the mid-1980s, it sent prices into a tailspin that contributed to the bankruptcy of the Soviet Union at the same time that it was financing Afghan rebels fighting the Soviets.
The kingdom was such a crucial supplier of oil to the US that Washington went to war in the early 1990s in part to protect it from a possible Iraqi invasion. And when China needed energy supplies for its expanding economy in the early years of the new century, Saudi Arabia was there with an ambitious oil exploration programme to meet the demand.
Opec can no longer control oil prices alone. A flood of oil from American shale fields has enabled the US to slash imports of Opec oil and begin exporting to markets that were once dominated by Saudi crude.
The Saudis, led by Crown Prince Mohammad Bin Salman, are seeking to link cuts in Opec production over the past two years with cuts by Russia, another oil-exporting powerhouse, to buoy prices. Over the longer term, the Saudis want to import natural gas to replace domestic consumption of oil for electricity, freeing more crude for export.
At the same time, the country is expanding its investments in refineries and petrochemical plants around Asia and the US to guarantee markets for its crude while making additional sales of higher-value gasoline, diesel and other refined products.
“Low oil prices have made the Saudi way of life unsustainable, so they have to find alternatives,” said Bruce Riedel, a former Middle East analyst for the Central Intelligence Agency. “Any partner they can find that can help them do that, they are going to embrace enthusiastically.”
The most surprising partner is Russia, which remains on the opposite side of the Syrian civil war and is also trying to build better relations with Iran, Saudi Arabia’s bitter regional rival.
In the fall of 2016, King Salman made the first official trip to Russia by a reigning Saudi monarch. Multiple cooperation agreements including military sales were reached, as well as a commitment by Russia’s largest petrochemicals company, Sibut, to build a plant in Saudi Arabia.
Kirill Dmitriev, chief executive of the state-run Russian Direct Investment Fund, recently expressed interest in the Saudi Aramco IPO, even suggesting that a group of Russian and Chinese investors could join in a bid.
Relationships between the Chinese and Saudi oil companies had already grown close in recent years. Saudi Aramco bought a 25 per cent stake in a refinery in Fujian province operated by the state-owned oil giant Sinopec, and the companies have joint refinery ventures in Saudi Arabia. China and Saudi Arabia also signed a preliminary agreement last summer to create a $20 billion investment fund for infrastructure, energy and mining projects.
“We might as well work with them,” said Sadad Ebrahim Al Husseini, a former Saudi Aramco executive vice president. “They desperately need energy, and we have a heck of a lot of energy, so the pieces fit.”
Such deals also promote Saudi Aramco’s efforts to become a global refining powerhouse. That can only increase the value of the proposed initial public offering of the company, which already produces more crude than any other in the world.
Many international banks, including JPMorgan Chase, HSBC, Goldman Sachs, Citigroup, Morgan Stanley and Credit Suisse, have been seeking a role in the eventual deal.
“Every global investment bank should be interested in a lead role given the quality of the company and the fact that it would be the largest IPO in history,” said Osmar Abib, global head of oil and gas at Credit Suisse Securities.
The kingdom has valued the company at $2 trillion, a number that investment bankers say would be realistic only if oil were worth $100 a barrel, nearly $40 more than the current price.
Many energy experts doubt that the stock offering will be completed. But Saudi oil executives say the issues of valuation and governance will be worked out in the end because the Crown Prince and his father view the public offering as central to remaking the economy with more foreign investment.
“There is no backtracking,” Al Husseini said. “The IPO commitment is driven by a central leadership, by people who are empowered to make decisions. It’s not a winding narrow road that comes to no conclusion.”