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The Saudi purge and Aramco: how the kingdom's oil policy may play out

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Listen: The Saudi purge and Aramco: how the kingdom's oil policy may play out

Saudi Arabia, with its anti-corruption purge, has been much in the headlines lately, as has kingdom's state-owned oil company, Saudi Aramco, with much speculation over its long-mooted public listing.

Discussions are underway as to how best to proceed with the IPO, which the kingdom hopes will fund a significant portion of its Vision 2030 economic reform plan. The reforms are being shepherded by the country's crown prince, Mohammed bin Salman, who is making some dramatic changes to the power structure of Saudi Arabia.

S&P Global Platts senior writer, Herman Wang, talks with Sara Vakhshouri, a fellow at the Atlantic Council and also founder and head of consultancy SVB Energy International, on what all these moves mean for the kingdom's oil policy going forward.

They also discuss Saudi Arabia's geopolitical foe Iran and its oil outlook, as it faces ratcheting tensions with Saudi Arabia and the threat of US sanctions.

Apologies for the audio quality of this interview. See below for the full transcript.

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Podcast Transcript

The Saudi purge and Aramco: how the kingdom's oil policy may play out

With Herman Wang, senior writer EMEA oil and OPEC specialist

HERMAN WANG: Hello, and welcome to the Platts Global Oil Markets podcast for November 16th, 2017. I'm Herman Wang, a senior writer and OPEC specialist based in London. Well, Saudi Arabia, with its anti-corruption purge has been much in the news lately, as has been the kingdom's state-owned Saudi Aramco, with much speculation over its long-mooted public listing. It's all being shepherded by the kingdom's crown prince, Mohamed bin Salman, who is making some dramatic changes to the power structure of Saudi Arabia.

I talked with Sara Vakhshouri. She's a fellow at The Atlantic Council and also founder and head of consultancy SVB Energy International, who follows Saudi Arabia closely, and here's what she had to say about what all these moves mean for the kingdom's oil policy going forward. We also discussed Saudi Arabia's geopolitical foe Iran, and its oil outlook, as it faces ratcheting tensions with Saudi Arabia and the threat of US sanctions. Well, Sara, thanks for coming on the podcast.

Obviously this purge or consolidation of power under MBS is a potential gamechanger for Saudi Arabia and for Saudi Aramco. There’s been a lot of talk about how this raises the investment risk for the IPO. What is your take on how the events of the past week will impact Saudi oil policy going forward?

SARA VAKHSHOURI: Well thanks for having me on your program. From one side, of course, MBS has more power and is able to in a more effective way implement Vision 2030. On the other hand, all of these current activities in this campaign on corruption or the current purge has increased uncertainty and investment risks for investors.

The current crackdown on the corruption that many in the royal family and investors and rich people in the kingdom had been captured, increases the risk in ownership and investment in assets. If it’s so easy to immediately freeze assets and investments of people in the kingdom, that’s going to create concerns for investors, especially for domestic investments in Saudi Arabia.

On the other side, you have ministers and you had members of the royal family that have been captured, the minister of economy who was promoting the Vision 2030 the week before he was captured. All of this also creates uncertainty in investors that if the corruption is so high or deeply rooted in the kingdom, this will require further investigation or further due diligence to make sure they are not going into any investment or financial relatinoships that involve corruption.

HERMAN WANG: So some uncertainty regarding Aramco’s IPO, but in terms of actual oil production policy, how is this going to impact Saudi Arabia’s position heading into the November 30 OPEC meeting when they’re going to discuss this output cut agreement?

SARA VAKHSHOURI: We think the production cut agreement will go forward. Because at the current moment, unless there is geopolitical risk and the prices are going to go up, but at the current market environment and prices, it is still in the benefit of all OPEC members to stay in compliance and to continue the cuts. For Saudi Arabia, primarily for its budget but also for the Aramco IPO, keeping prices high is important. Aramco’s CEO and the minister of oil have given indications that they’re going to continue market management and they’re going to try to maintain the prices at the current level or higher.

HERMAN WANG: Saudi Arabia has also ratcheted up its rhetoric against Iran, its geopolitical rival, in recent days. The conventional wisdom is that OPEC sets aside geopolitics when it comes to oil policy, but given what’s happening in the Middle East, do you see these tensions impacting the upcoming November 30 meeting, when the coalition is going to decide on the production cut extension?

SARA VAKHSHOURI: The reason for that is when everybody is sitting at the table in the OPEC meetings to decide production, everybody is thinking about their pockets. Of course, political and geopolitical environment and rivalries are important, but everybody at the end of the day is thinking about how much the price of oil is going to be and what’s the impact on their economy. At the current moment, most of the OPEC members need to have at least current prices or higher. They’re not looking for the prices to collapse.

But looking into Iran and Saudis, it seems to be the benefit of both to continue these OPEC cuts. Looking at Iran, we don’t expect that by middle of next year, Rian’s production will go higher significantly. They may have maybe 15,000-20,000 b/d extra that could come. But this would only be sustainable with further investment. So on the Iranian side there’s not much expectation of a huge production rise.

Whatever disagreement that they might have with Saudi Arabia, we think that continuing this production cut agreement would be in the best interest of both countries, Saudi Arabia and Iran.

HERMAN WANG: You mentioned the investment that Iran needs. The deadline for Congress to pass legislation that could step up sanctions on Iran ends just after the November 30 OPEC meeting. How is the threat of sanctions impacting Iran’s ability to attract the investors it needs? I saw that Iran expects to sign some $20 billion in new oil contracts in 2018. Will that be possible if the US abandons the nuclear deal?

SARA VAKHSHOURI: On the side of sanctions and US policy, unfortunately I don’t see a good environment for investment in Iran unless what Congress plans to do with the potential upcoming sanctions is clear.

Before the last [Iranian] presidential election, the Iranian oil ministry signed many MOUs with different companies, but only one of those MOUs turned into a contract with Total. All of these MOUs and contracts had a force majeure clause that if the sanctions on Iran, either the UN or US sanctions, the companies could get out without a penalty.

In the case of Total, it only covers UN sanctions, not the US sanctions. If there are sanctions on the US, this will create problems for Total. It could create costs of investment, it could create problems for companies to finance and complete projects on the agreed timeline.

Also looking at potential sanctions on Iran or prospects for investment, even though the EU keen to maintain the JCPOA…this will not happen unless they’re going to give strong indications to Iran that investment flows are going to Iran.

The current relations between Iran and France –- Total is of course a French company -- is now in the past few weeks has been not on a smooth path. The French president and foreign minister talked about potential sanctions on the missile program. All of this started when the Houthis launched a missile into Saudi Arabia.

So since the French government was really important in encouraging Total and other French companies to invest in Iran, and this is what is happening in Europe. This is unlike in Japan. Japanese companies are every hesitant to invest in Iran.

The French government was really important in encouraging total and other French companies to invest in Iran. Japan companies are reluctant to invest. When it comes to Europe, like Chinese companies, like Indian companies, the governments are encouraging these companies.

If the companies lose the support of their hosting government to invest in Iran and…they’re going to see higher investment risk and lose their interest in Iran.

If the governments indicate there are going to be sanctions, they’re going to be higher investment risks and lose their interest in Iran.

HERMAN WANG: So, some uncertainty for Iran's oil industry; and also some uncertainty in Saudi Arabia as the dust settles on all the turmoil that's been going on there the last couple weeks.

We'll have to leave it there. Thanks a lot Sara for coming on the program and that's a wrap for this edition of the Platts Global Oil Markets podcast. Thanks for listening.