Summary
Saudi Arabia is positioning itself to move forward with its Vision 2030 plans, the kingdom's recently announced long-term economic roadmap. A brief message from King Salman on May 7 announced a major government shake-up, emphasizing the Saudi leadership's determination to enact economic reforms. A total of eight economics-related portfolios were shifted, all closely in line with Vision 2030 imperatives.
Analysis
The sparsely detailed but highly ambitious set of reforms known as Vision 2030 was announced by Deputy Crown Prince Mohammed bin Salman on April 25. The imperatives are designed to reassure Saudi citizens that the kingdom has their best interests at heart, even as it seeks to lessen its deep dependence on oil. Yet the king's recent message — which announced the retirement of the internationally known Saudi oil minister as well as major changes to the kingdom's financial leadership — resonated more with an international audience, one coming to terms with the fact that the Saudis are serious about reform.
A New Minister at the Oil Helm
Markets have responded with uncertainty to the news that the country's oil ministry is undergoing major changes. Specifically, Khalid al-Falih, a career man at the state-owned energy giant Saudi Arabian Oil Co. (better known as Aramco), has replaced 21-year-veteran Ali al-Naimi. Within Saudi Arabia, this move neatly provides optimal leadership for the way ahead, underlining the need for a more comprehensive energy ministry, one that can move the kingdom toward a future that is less dependent on oil and more reliant on a wider variety of resources. The renaming of the Oil and Petroleum ministry as the Energy, Industry and Natural Resources Ministry attests to efforts to group the country's energy and utility resources under one umbrella. The move also underlines how the deputy crown prince is prioritizing a wider assortment of resources, including mining, petrochemicals and desalination. Al-Falih, who was recently named chairman of the Saudi state mining company Maaden, is well-groomed to grow out the kingdom's capabilities in this direction. In recent years, he has steered Aramco deeper into petrochemicals and refining ventures.
Of course, hydrocarbon revenues will continue to fuel any diversification and Riyadh will race to capitalize on those funds while they are still flush with petrodollars. For his part, al-Naimi will be remembered for carrying Saudi Arabia through two decades of oil market turbulence. And, though unprecedented dips into reserves and projected deficits have made the past two years difficult, his removal is less an indictment of his policies and more a reflection of the tough work ahead to tackle reforms in the kingdom.
Additionally, it is rumored that al-Naimi has long been ready to step down, even before perceived oil policy differences surfaced between him and the deputy crown prince. He is in his 80s, and reportedly wanted to resign as early as 2010, and again in early 2015, but was kept on to provide continuity during unstable political and economic times. Now, with a new generation of Saudi leaders installed in 2015 and comprehensive vision communicated to the public, al-Naimi can retire. In his place, a highly experienced Aramco veteran who knows how to deal with international oil companies can chart the course forward.
The king's decrees included other interesting changes, all of which highlight the urgency to keep Saudi capital in the country and to generate revenue in new ways. A manager at financial powerhouse HSBC will take a position as the new deputy minister of economy and planning alongside Minister Adel al Fakeih, who is seen by the royal family as a pragmatic reformer. The formation of sports and recreation committees alongside a broader pilgrimage ministry should contribute to broader economic and social plans as well. The addition of new blood into Saudi Arabia's central bank, the SAMA, and the transformed Commerce and Investment Ministry (formerly the Commerce and Industry Ministry) will help the kingdom's efforts to court international capital.
The Way Forward
Al-Falih, who is 25 years younger than al-Naimi and respected in royal circles, will also focus on shaping the proposed idea of an initial public offering of 5 percent of Aramco's assets, an idea which contributed to the instability surrounding Aramco and the oil ministry's decisions. Al-Falih indicated May 8 that he intends to continue his predecessor's policy of keeping Saudi production levels high and allowing market forces to shape the oil price. But whether Riyadh will continue this policy is undetermined, at least in the long term.
All this sets the stage for an upcoming meeting of OPEC member states in June. Saudi Arabia has made it clear that Iran would need to join an output freeze or production cut for it to do so. Iran's current estimated production levels, between 3.3 million and 3.4 million barrels per day, are approaching its pre-sanction levels; somewhere between 3.7 million to 4 million barrels per day. Russia, for its part, appears ready to hold its current high production levels.
As OPEC's face to the world, the head of the Saudi oil ministry has long functioned as more than just the leader of Saudi Arabia's oil sector. June's meeting will be the first time al-Falih is representing Riyadh during an OPEC meeting, a role in which his predecessor excelled for most of his career. If there is a deal to be made, al-Falih will be the one to make it. And, like al-Naimi, his words will be followed by international and regional watchers alike. While al-Falih may not have the personal relationships with world oil ministers that the long-serving al-Naimi enjoyed, he is ideally positioned and has the experience to add to what al-Naimi built. In what could be the start of a new era for OPEC, the world should be watching the Saudi energy minister.
