May 13, 2016
A New Saudi Oil Minister: Tactical Continuation, Strategic Revolution
By Jean-François Seznec
According to some press reports, al-Naimi was replaced as retribution for the OPEC debacle in Doha in April. Certainly, the rumored Saudi oil production freeze agreement with Russia ran into an Iranian buzz saw as the Islamic Republic refused to limit its own production to its present low levels. There was little doubt going into the meeting that Iran would demand its market share back, and most likely al-Naimi and the Saudi leadership were aware of and expected that stand. Accordingly, the Saudi decision to abstain from a production freeze that doesn’t include Iran reflects the fact that the kingdom does not care if prices remain low or if a freeze ever materializes.
The change at the Saudi oil ministry is less about al-Naimi’s attitude toward market share and more likely due to the younger Saudi leadership’s priority to modernize the economy as prescribed in the Vision 2030 plan—an economic transformation plan issued by Deputy Crown Prince Mohammed bin Salman in April. Under this plan, industry will provide a bigger share of GDP than petroleum.
A new minister with added responsibility and emphasis on the rationalization of the kingdom’s industrial development gives the sense of urgency needed to rapidly force change. In fact, the change in ministers did correspond with major changes in the structure of the ministries themselves, especially the Ministry of Petroleum and Mineral Resources, which was transformed into the Ministry of Energy, Industry and Mineral Resources. The new ministry is also in charge of electricity, renewable energy, and development finance. The specific inclusion of industry reflects the kingdom’s elevated focus on mining, a sector with substantial potential for growth.
The logic behind the revamped ministry is to centralize and accelerate the kingdom’s downstream development. Oil is to be viewed as the base for development and value-added productions, which will provide a larger chunk of the GDP as rapidly as possible, all while creating jobs for Saudis.
Notably, shortly before al-Falih was charged with the new ministry he was made chairman of Ma’aden, the Saudi mining company that has grown into a large player in aluminum and advanced fertilizer production. As minister in charge of oil, natural gas, electricity, development finance, and chairman of Saudi Aramco and Ma’aden, al-Falih now controls the entire production chain.
Saudi Aramco has already built a very large downstream sector. It presently has 2.9 million barrels a day of refining capacity, soon to become 3.3 million b/d with the new Jazan refinery. It also has large refineries in Texas (the largest refinery in the United States), China, and, South Korea, as well as plans to develop others in South Asia and East Asia. While this local and foreign refining capacity controlled by Saudi Aramco will give a base load to Saudi crude production, much of it will undoubtedly find its way to the refined products markets abroad. More importantly, many of these, mainly naphtha and petroleum gas, are being used for growing large petrochemical lines, mostly in joint ventures with advanced chemical producers like Dow Chemical, Sumitomo, and Sinopec. Some of downstream production will be used by the private sector as feedstock for hundreds of products.
The deputy crown prince’s Vision 2030 plan is ambitious. It may be fought by various elements of the royal family, elements who fear the abolition of their privileges. It may also be fought by the religious establishment who will strongly disagree with the required inclusion of women in the workforce as well as the large-scale industrialization that the transformation plan is bringing to society. On the other hand, the deputy crown prince and most of the technocrats behind him have the support of the seventy percent of the population below the age of thirty. They also have the support of King Salman who knows he can save the royal family and the Wahhabi establishment from themselves only if the rest of the country feels properly treated and benefits from the kingdom’s wealth in a fully transparent manner as presaged by the upcoming privatization of Saudi Aramco.
Jean-François Seznec is a Nonresident Senior Fellow in the Atlantic Council’s Global Energy Center. He has published and lectured extensively on chemical and energy-based industries in the Arab Gulf and their importance in world trade.