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Saudi Arabia replaces Falih with king's son as energy minister

Dubai — Saudi Arabia on Sunday replaced its highly respected energy minister, Khalid al-Falih, with Prince Abdulaziz bin Salman, a son of the king and a veteran OPEC insider, as it grapples with stubbornly low crude prices ahead of a much anticipated public listing of its state oil company.

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The decree by the Saudi king places a royal in charge of oil policy at the world's largest crude exporter for the first time, with the prince's half-brother, the powerful Crown Prince Mohammed bin Salman, appearing to accelerate plans to sell shares of Saudi Aramco, which could happen as soon as later this year.

Just last week Falih lost his title as chairman of the state oil company to Yasir al-Ramayyan, head of the country's sovereign wealth fund and a close ally of MBS. That was mere days after Falih's portfolio as energy minister was downsized significantly with the shifting of industry and mining responsibilities into a new ministry.

But according to kingdom watchers, the move was not entirely unexpected, as Falih, a former Aramco CEO before becoming energy minister, had resisted the IPO — although he publicly supported it.

The 59-year-old Prince Abdulaziz, who is very well-regarded in oil circles in his own right and has been a fixture on Saudi Arabia's OPEC delegation, has long been rumored to take over the energy ministry at some point, though many observers figured that the kingdom would be reluctant to name a prince to the position to prevent the appearance of royal interference.

He becomes the kingdom's sixth energy minister and "comes to office with unprecedented experience, knowledge of oil market economics and politics,” said Anas al-Hajji, an independent oil analyst who has worked closely with the Saudi ministry before. "If I have to count the world's top five experts on the global oil market, he will be one of them.”

Falih had been scheduled to co-chair a key OPEC/non-OPEC ministerial monitoring committee on Thursday in Abu Dhabi, and now the market will be closely scrutinizing the proceedings to any signs of change to Saudi oil policy and its relationship with OPEC.

After two years of a bruising market share battle that tanked oil prices to under $30/b in 2016, Falih helped broker a groundbreaking alliance between OPEC and Russia to cooperate on oil production cuts that have largely been credited with revitalizing the industry. In recent months, though, prices have struggled to gain much traction beyond $60/b — well below the level Saudi Arabia needs to balance its budget without tapping its fiscal reserves or issuing debt — due to global economic concerns exacerbated by a US-China trade spat.

Several analysts said they expect Prince Abdulaziz to maintain Saudi Arabia's strategy of reining in production in concert with OPEC and its allies to prop up the market.

Under Falih, the OPEC kingpin has exceeded its required cut under the OPEC/non-OPEC supply accord at the expense of its market share, pumping 9.77 million b/d in August, according to the latest S&P Global Platts survey of OPEC output. That compares to its quota of 10.31 million b/d.

The prince's first public appearance as energy minister is scheduled to come Monday when he delivers a keynote speech at the World Energy Congress in Abu Dhabi, followed by Thursday's OPEC/non-OPEC monitoring committee meeting.

"I expect a continuation of oil policy with closer cooperation with OPEC and non-OPEC but with a different management style,” said Bassam Fattouh, director of the Oxford Institute of Energy Studies, on whose board the prince sits.

The prince is known by OPEC insiders to be a persistent and hard-nosed negotiator, and Thursday's committee meeting is expected to be contentious over the flouting by some members — notably Iraq and Nigeria — of their production quotas.

Fattouh said Prince Abdulaziz's extensive experience with OPEC will lend him credibility as leader of Saudi Arabia's delegation, noting that the prince played a key role in negotiating a 1997-98 OPEC/non-OPEC supply accord and in managing the sharp price swings during the financial crisis of 2008

But with the Aramco IPO preparations gaining steam, Saudi Arabia's continued commitment to the output cuts could be in doubt, some observers say.

The current deal calls for OPEC, Russia and nine other allies to cut a combined 1.2 million b/d from October 2018 levels through March 2020. Saudi Arabia's production is some 860,000 b/d below that October benchmark, meaning the kingdom is carrying more than half of the 24-country coalition's burden.

"This magnanimity could raise eyebrows among Aramco's potential investors,” said Vandana Hari, who heads the oil consultancy Vanda Insights.

The Aramco IPO is the centrepiece of Crown Prince Mohammed bin Salman's ambitious plan for economic and structural reforms aimed at weaning the kingdom off its dependency on oil revenues.

Despite slumping oil prices, the listing is expected to affirm Aramco's status as the world's most valuable company, with its exclusive rights to pump all of the kingdom's crude.

Preparations for the listing, which appeared stalled last year amid internal disagreements over the IPO venue and disclosure requirements of the secretive state oil giant, have reportedly accelerated in recent weeks, indicating that the royal court may be growing impatient waiting for oil prices to turn the corner.

In his role as state minister of energy affairs, Prince Abdulaziz had been heavily involved in developing a new concessions system to manage the relationship between the government and Saudi Aramco, according to OIES' Fattouh.

Aramco's independence is a major question for investors, and the company has regularly paid the kingdom a massive dividend each year without disclosing its payment formula.

Now in his new post, the prince will be the face of Saudi Arabia's energy policy and its lead global oil diplomat as the kingdom gears up to transform its economy and open up Aramco to public scrutiny.


--Herman Wang, herman.wang@spglobal.com

--Edited by Claudia Carpenter, claudia.carpenter@spglobal.com