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Simon Watkins

Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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Saudi Aramco Is Now Suffering The Consequences Of A Failed Oil Price War

Trump Saudi Swords

It was evident to anyone with even half a brain that the last Saudi-instigated oil price war would end in abject failure for the Saudis, just as the previous 2014-2016 effort did and for the very same reasons. 

For Crown Prince Mohammed bin Salman (MbS), one of the masterminds behind the oil war – the economic and political problems that his country now face appear to come a very distant second to preserving whatever he thinks is left of his own reputation, with the most obvious public manifestation of this being the aftermath of the internationally-shunned omni-shambolic initial public offering (IPO) for hydrocarbons giant, Saudi Aramco (Aramco). Consequently, in order to stand by one of the inducements required to inveigle anyone to buy the shares – in the triple-locked guaranteed dividend payout – swingeing cuts to key projects for Saudi Arabia are now being announced.

Despite the 50 per cent plunge in Aramco’s net profit for the first half of this year – a result of the Saudi-led oil price war at a time when demand was already choked off by the COVID-19 outbreak – the company is still obliged to hand over US$18.75 billion in this quarter alone to those who bought the Aramco shares during the IPO. This dividend obligation – and it will total US$75 billion for the full year – will have to be paid for through budget cuts over and above the US$15 billion in Aramco’s annual capital spending alluded to by Aramco’s chief executive officer, Amin Nasser, just after the profits figures. This will take the total down from around US$40 billion to around US$25 billion. Further reports have stated that even this US$25 billion figure is set to be reduced by another US$5 billion, taking the total capital spending in this year from US$25 billion to US$20 billion. 

Whatever the cuts, it remains a stark fact that the two dividends together for the first two quarters of this year – US$37.5 billion – far outstrips Aramco’s total free cash flow of US$21.1 billion for the same period. This looks even worse for Aramco – and Saudi Arabia as a whole – in light of the recent release of results showing that the smoke-and-mirrors ‘purchase’ by Aramco of a 70 per cent stake in the Kingdom’s key petrochemicals company, Saudi Basic Industries Corporation (SABIC), for the originally-intended US$69.1 billion, looks increasingly like a bad decision. According to results collected by data firm Mubasher, based on the companies’ financial results disclosed to the Saudi Tadawul Stock Exchange, SABIC was responsible for 91 per cent of the combined losses of SAR2.4 billion (US$639.89 million) made by Saudi Arabian listed petrochemical companies in just the second quarter of this year. Specifically, SABIC lost SAR2.22 billion in Q2 alone.

Related: The Start Of A New Oil Market Supercycle

Amongst the slew of projects to be indefinitely suspended is the once much-vaunted flagship US$20 billion crude-to-chemicals plant at Yanbu on Saudi’s Red Sea coast, according to various reports. The similarly high-profile purchase of a 25 per cent multi-billion dollar stake in Sempra Energy’s liquefied natural gas (LNG) terminal in Texas is also apparently under threat, although Sempra for its part has said that it continued to work with Aramco and others “to move our project at Port Arthur LNG forward.” In the same vein, according to various news sources, Aramco has suspended its key US$10 billion deal to expand into mainland China’s refining and petrochemicals sector, via a complex in the Northeastern province of Liaoning that would have seen Saudi supply up to 70 per cent of the crude oil for the planned 300,000 barrels per day refinery. In sum, it appears that all of Aramco’s principal projects aimed at diversifying Saudi Arabia away from the relatively zero added-value pursuit of just pumping and selling crude oil are now subject to review and/or outright suspension. 

All of this comes at a time when MbS’s grip on power at home has never been more tenuous. It should be remembered that just before the full onset of the latest Saudi-instigated oil price war, MbS had yet another round-up of his high-ranking opponents (the previous major one was at the end of 2017 in the notorious Ritz-Carlton round-up). The latest round-up included Prince Ahmed bin Abdulaziz, a younger brother of King Salman, and Prince Mohammed bin Nayef, the King’s nephew and the former crown prince. This followed numerous reports that the health of the 84-year old current king, Salman, is very poor, which has prompted a jostling of senior royal Saudis for the succession. It should also be borne in mind that MbS was not always the natural successor to King Salman: before June 2017 (when the succession was changed in MbS’s favour), the heir-designate was the aforementioned Prince Mohammed bin Nayef, whilst the also aforementioned Prince Ahmed bin Abdulaziz was one of three members of the Allegiance Council (the senior royal organisation that endorses the line of succession), to oppose MBS’s appointment as crown prince in place of his cousin bin Nayef in 2017. Related: Trump Hints At Saudi Participation In UAE,-Israel Peace Deal

MbS’s ability to rely on the support of Saudi’s longstanding core ally – the U.S. – is also in serious question, following the second Saudi-instigated oil price war in less than five years aimed specifically at destroying or disabling the U.S. shale oil sector. Since his ascent to effective power, MbS has been at least complicit in a litany of huge errors as far as the U.S. is concerned, including – but by no means limited to - the Saudi-led war in Yemen, the cosying up of Saudi to Russia in the OPEC+ grouping, Lebanese President Michel Aoun’s allegation in 2017 that then-Prime Minister Saad al Hariri had been kidnapped by the Saudis and forced to resign, and the murder of dissident Saudi journalist, Jamal Khashoggi, which even the CIA concluded was personally ordered by MbS. Over and above all of these, though, in the U.S.’s view, has been the breaking of the basic trust between the two countries that was established in the 1945 agreement made between the U.S. and Saudi Arabia on the Bitter Lake segment of the Suez Canal. The agreement made between U.S. President Franklin D. Roosevelt and the Saudi King at the time, Abdulaziz, was that the U.S. would receive all of the oil supplies it needed for as long as Saudi Arabia had oil in place, in return for which the U.S. would guarantee the security of the ruling House of Saud. After the 2014-2016 oil price war, this deal changed slightly to incorporate the U.S. expectation that the House of Saud would ensure that Saudi Arabia not only supplies the U.S. with whatever oil it needs for as long as it can but also that it also allows the U.S. shale industry to continue to grow. If this means that the Saudi-led OPEC+ production cuts creates a situation in which Saudi loses market share to U.S. shale producers then that is just the price that the House of Saud must pay for the continued protection of the U.S. - politically, economically, and militarily. 

The surest sign that the U.S. does not trust Saudi in general, or MbS in particular, anymore to uphold its side of the deal was shown in the fact that in order to end the latest oil price war at the beginning of April U.S. President Donald Trump had to resort to an outright, clear threat. Trump had previously repeatedly made warning comments to the Saudis alluding to this 1945 deal, including at a rally in Southaven, Mississippi, in October 2018: “I said, ‘King [Salman] we’re protecting you. You might not be there for two weeks without us.’” This came shortly after a similar comment from Trump in a speech before the U.N. General Assembly, when oil prices were again being pushed higher after the Saudis reversed their oil overproduction/destroy U.S. shale oil strategy: “OPEC and OPEC nations are, as usual, ripping off the rest of the world, and I don’t like it. Nobody should like it,” he said. “We defend many of these nations for nothing, and then they take advantage of us by giving us high oil prices. Not good. We want them to stop raising prices. We want them to start lowering prices and they must contribute substantially to military protection from now on.” After the Saudis had launched the latest oil price war, though, the warnings became a straight threat/promise, with Trump reportedly directly telling MbS on 2 April in a telephone call that unless OPEC started cutting oil production, he would be powerless to stop lawmakers from passing legislation to withdraw U.S. troops from the Kingdom. 

By Simon Watkins for Oilprice.com


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  • Mamdouh Salameh on September 11 2020 said:
    In the aftermath of the Cuban missile crisis, the former Soviet Leader Nikita Khrushchev was quoted as saying:” long grass bends to the wind but always bounces back.”

    Saudi Arabia might be financially down currently, but it will rise again like the phoenix when oil prices start to rise again which they will. I strongly believe that Saudi Arabia has learnt a costly lesson from its reckless oil price war against Russia.

    Meanwhile, Saudi Arabia should endeavour to manage its diminishing oil revenue better by taking the following measures: (1) delay or shelve some of its major projects temporarily until its finances improve; (2) cut Aramco’s dividends to only one quarter of earnings in any one quarter of the year; (3) cut all the energy subsidies immediately. This could save an estimated $50-$60 bn annually; (4) end the war in Yemen thus saving an estimated $72 bn annually; and (5) reach a rapprochement with Iran. This will save hundreds of billions of dollars in arms purchases from the United States and also ensure the safety of its oil infrastructure.

    However, the most important geopolitical lesson Saudi Arabia should learn is not to trust the United States. The United States has never ever been a true friend of Saudi Arabia or the Arab world. It has been playing Iran and against Saudi Arabia since the days of the Shah and persuading the Saudis and other Arab Gulf States that Iran is a threat to them in order to blackmail them for money under the pretext of defending them and their oil and sell them billions of dollars of weaponry. The United States has been arming Israel to the teeth to ensure its military superiority over the whole Arab world. Israel and America are the real enemies and they are one and the same: one is the greater Israel and the other is the lesser one.

    The other vital lesson the Saudis should learn is to adjust themselves to an emerging multi-polar order in the world. The days of the indispensable superpower are coming to an end with its indispensability eroding by the day. A new multi-polar order is emerging led by the strategic China-Russia alliance which will shape the world in the 21st century .

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Carlos Blanco on September 11 2020 said:
    I have never seen such self-destruction Saudi is currently displaying. The price was has been going on for a while and there has been no sign of Saudi even came close in winning. The world has changed. US will not rely on middle east oil as much as they did in the past and it seems that US has lost appetite for being in the region for too long. The US has China as their new rival and they would want to spend resources there. The US is also looking forward to secure their energy via shale oil. The continuation of price war that eventually will obliterate the US shale oil could further sour the US-Sauid relationship.

    For MbS to think that he can have the cake and eat it would be a grand delusion. Saudi will have to realize that there are possibilities that they could lose US as their staunch tradition ally.
  • Victor Kaiser on September 11 2020 said:
    Dr. Salameh's comments and recommendations are spot on. All he left out is some mechanism for ending the rule of the sclerotic Al Sa'ud and replacing it with something that would benefit all Saudis, instead of just this parasitic clan. Oh - and stop wasting your income on more and shinier weapons instead of infrastructure, food production and self-sufficiency in the production of medications.

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