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Nick Cunningham

Nick Cunningham

Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. 

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Oil Rises On Saudi Shakeup

In a dramatic reshuffling, Saudi Arabia replaced its energy minister, putting in place the son of the king and ousting Khalid al-Falih.

Prince Abdulaziz bin Salman will take over at the energy ministry, the son of the King and the half-brother of the powerful crown prince. He will be the first family member to run the powerful ministry.

Prince Abdulaziz bin Salman is not just a family loyalist. He has served as deputy petroleum minister for more than a decade and has long experience working with OPEC, negotiating and brokering agreements with other member countries, including with arch-rival Iran. As Bloomberg reports, he recently led negotiations on restarting the Neutral Zone oil fields that are situated on the Kuwaiti-Saudi border.

For now, there is no sign of any notable change in policy. Oil prices rose on the news. “The new energy minister is expected to continue his predecessor’s policy, i.e. to keep oil supply tight,” Commerzbank wrote in a note.

For his part, Prince Abdulaziz bin Salman also emphasized continuity. “There is nothing radical in Saudi Arabia, we all work for the government, one person comes, one person goes,” he said at a major energy conference in Abu Dhabi. “Fundamentally, Saudi Arabia’s energy policy is resting on few pillars. The pillars don’t change.”

Other analysts agreed. “I expect no policy change - the objective is to deliver higher prices and the IPO for Aramco,” Amrita Sen, co-founder of Energy Aspects, told Reuters.

At the same time, if nothing is to change, that raises some questions about why new personnel needed to be brought in. There have been some press reports that suggest that some within the Saudi government have been disappointed with al-Falih’s tenure. “[Mr Falih] is the victim of underperformance of a portfolio that was too big, and at same time people feel he was getting too cocky and too arrogant,” a source close to the government told the Financial Times.

The reshuffling of personnel also comes a week after King Salman separated Aramco from the energy ministry. That leaves the new energy minister with a smaller portfolio than al-Falih had. Related: This Field’s Production Record Says Much About Kurdistan’s Oil Potential

“This appointment is very important for what it signals for the balance of power in the royal family—or the nonbalance of power,” Robin Mills, chief executive of Dubai-based Qamar Energy, told the Wall Street Journal. “It’s part of MBS trying to stamp his control.”

According to the WSJ, it is in this context that the removal of al-Falih should be seen. Riyadh finds itself at a crucial juncture. With oil prices languishing at around $60 per barrel, despite significant production curtailments, there is ongoing pressure on the Saudi economy and the budget, which needs oil at around $80 per barrel to break even. Lower output and low prices are a double-whammy.

Al-Falih’s signature achievement was the establishment of OPEC+, bringing in a group of non-OPEC members to participate in market management. The Saudi-Russian alliance in particular characterized al-Falih’s time at the helm of the Saudi energy ministry. Getting Moscow on board with production cuts helped reduce the global supply glut.

However, the close relationship between Saudi Arabia and Russia seemed to have supplanted OPEC in terms of decision-making, irritating many within the oil cartel. Moreover, the OPEC+ arrangement, while it succeeded in reducing the impact of the supply glut, has not achieved a sustainable price increase. As the Saudi government grows restless amidst budgetary pressure, and with MbS anxious to press forward with an IPO and other economic reforms, stubbornly low oil prices may have become a point of contention with al-Falih.

On the other hand, one of the top priorities at this point is the staged initial public offering of Saudi Aramco. The move to put a royal family member atop the energy ministry is likely an attempt to bring more control and policy alignment ahead of some major strategic decisions.

While al-Falih publicly supported the IPO of Aramco, he also worked to delay it and shrink the size and magnitude of the offering, sources told the WSJ. With a royal family member now at the top of the energy ministry, crown prince Mohammed bin Salman will virtually have unchecked influence over the energy ministry and over Saudi oil policy.

And, of course, the IPO will need higher oil prices in order for it to be deemed a success. That may help explain a slightly bullish reaction by the market to the staff shakeup.

By Nick Cunningham of Oilprice.com

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