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2018 Saudi reforms oil risk


Opponents could derail reform program

Aramco IPO key for revitalizing economy

King Salman key to Crown Prince's authority

Crown Prince Mohammad bin Salman looks set to continue consolidating his position against Saudi Arabia's traditional power-sharing structures, but the risks of a backlash remain high, which could throw the kingdom's oil policy -- and key Aramco IPO -- into doubt.

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Saudi Arabia's ambitious plans for revitalizing its oil-based economy are partly dependent on the success of its upcoming public offering of shares in Saudi Aramco.

Saudi oil output vs exports

The crown prince, credited with masterminding the Saudi Arabia Vision 2030 economic plan, has talked up the value of Aramco, pushing for a valuation of $2 trillion.

The long-mooted public listing of 5% of Saudi Aramco is slated for 2018, though speculation is rife that it could be delayed or even replaced by a private offering, amid doubts the company could achieve the crown prince's lofty valuation.

Riyadh will have to answer the question of what kind of company it wants Aramco to be.

Until it can do that, and justify the crown prince's valuation, it is hard to see how it will move forward.

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But before that, investors looking to grab a piece of the country's state-owned oil monopoly will also have to consider a range of new risks as MBS continues to consolidate, or faces challenges to his vision.

Saudi Arabia abandoned its market share policy towards global oil markets in December 2016 after watching crude oil prices continue to plummet, before finally marshaling OPEC and other major non-OPEC producers to agree to cut back output.

Riyadh has now regained its status as leader of the producer group, with an extension to the production cut deal through to the end of 2018.

And the Saudis have led the way in their commitment to the deal, cutting output to significantly below the country's 10.058 million b/d allocation.

The outcome of the planned IPO could determine whether Saudi Arabia returns to the market share policy soon rather than later.

"The Saudis are playing the long game on the market share front while attempting to get prices up in the short run to balance their budget and external accounts," said Fareed Mohamedi, an analyst with Rapidan Energy. "Unfortunately for them the short term boost to prices will make their longer term play more complicated because it will give a boost to US and other non-OPEC supplies."

As well as economic planning, MBS was already firmly in control of Saudi military strategy and foreign policy, with analysts remarking on his heavy-handed, confrontational approach in the Middle East.

While appearing focused on structural reforms, over the last two years Saudi Arabia has embarked on a protracted war in Yemen, and in June cut diplomatic, transport and logistical ties with Qatar.

Its stance towards its regional rival Iran has also hardened. Both countries appear intent on testing the boundaries of their influence in the wider Middle East, so the risk of miscalculation appears to be much higher than any time in the last few years.

"Saudi Arabia has never been an absolute monarchy where power is concentrated in one person before," a Saudi source close to the royal family told Platts on the condition of anonymity. "The risk is if he doesn't live up to his promises. There is only one person to blame."


already consolidated his power in early November in a purge that Saudi officials called an anti-corruption sting.

Rumors swirled around the kingdom at the time that the 82-year-old monarch, King Salman bin Abdulaziz al-Saud, was set to abdicate in favor of MBS.

It didn't happen, however, and without officially sitting on the throne, Saudi watchers warn that MBS has a relatively short window, perhaps only a few years, to make progress on his reform program.

"MBS really needs to become king while his father is still alive. His father retains a great deal of residual respect and loyalty that MBS has yet to accrue," said Kristian Coates Ulrichsen, Middle East fellow at the Baker Institute for Public Policy at Rice University in Houston.

Even before becoming monarch in January 2015, King Salman has gained a reputation for decades as the Al-Saud family's "enforcer" of discipline, somewhat akin to a chief whip in a parliamentary system.

"There is a danger that the glue might come off the royal family once Salman is no longer around," Ulrichsen said.

Abdication would certainly give MBS a stronger hand to implement his much touted Vision 2030 structural reforms, aimed at reducing the country's reliance on oil revenues and diversifying its economy.

"If his father is not around and if he fails to deliver early results on his economic policies, one could begin to see opponents casting around for someone to unify behind," Ulrichsen added, before noting that it is still unclear who that could be.


Nick Stadtmiller, Medley Global Advisors' lead analyst for Saudi Arabia and GCC macro coverage, agreed the chances of a power play against MBS look limited, with the serious players already emasculated.

"Give it a couple of years, however, and if his reforms fail to generate an improvement in the lives of 'ordinary' Saudis, I think there's a good chance that some marginalized groups take a shot at a power grab," Stadtmiller said.

Some of the reforms planned for 2018, such as allowing women to drive and opening cinemas, are opposed by the kingdom's conservative clerical establishment.

But the power structure of the clerics, or ulama, is now relatively passive.

"The serious rebels have already been thrown in jail. And it's not likely they are popular with the people, especially not the urban and young," Stadtmiller added.

Relations with the king's traditional allies -- the ulama and wider royal family which gave it legitimacy -- have clearly been weakened.

"Through his reforms, MBS is trying to build the required institutions to be able to manage the key issues in the kingdom. The Aramco IPO and campaign against the domestic corruption are all the initial steps to lay the ground for building 'independent' institutions," said Sara Vakhshouri, head of consultancy SVB Energy International and a fellow at the Atlantic Council who follows Saudi policy closely.