Market Insider

Inside the drama gripping Saudi Arabia's energy sector as it pushes to take Saudi Aramco public

Key Points
  • The shakeup in Saudi Arabia's energy sector is seen as an effort to consolidate the industry under Crown Prince Mohammed bin Salman, as the kingdom moves forward to take its crown jewel, Saudi Aramco, public.
  • Newly named energy minister Prince Abdulaziz bin Salman, half brother to MBS, is well regarded and has been minister of state for energy affairs since 2017.
  • The undoing of highly regarded former energy minister Khalid Al Falih may be that he wasn't quick enough to support the Aramco offering and other reforms.
Saudi Arabia's new Energy Minister, Prince Abdulaziz bin Salman speaks during a panel discussion at the 24th World Energy Congress in Abu Dhabi, United Arab Emirates September 9, 2019.
Satish Kumar | Reuters

Saudi Arabia's new energy minister is expected to be fully behind the expedited IPO of the kingdom's oil company, replacing a highly regarded minister whose downfall may be that he was too slow to embrace the Saudi Aramco offering and other reforms.

Oil markets were surprised over the weekend when King Salman replaced Energy Minister Khalid al-Falih with his the monarch's son Prince Abdulaziz bin Salman, older half brother of Crown Prince Mohammed bin Salman and minister of state for energy affairs since 2017.

"The long tradition of the oil minister as a technocrat non-royal has been broken, and the best theory is that departing minister Khalid Al Falih was too resistant to the pace of change pursued by Crown Prince Mohammed Bin Salman," wrote Paul Sankey, energy analyst with Mizuho.

Aramco CEO Amin Nasser said Tuesday the company is ready to list on the Saudi stock exchange "very soon" though he declined to say how much of Aramco would be listed on the Tadawul exchange or when the company would list internationally.

Prince Abdulaziz, a respected energy official in his own right and former deputy energy minister, is just one of a half dozen Saudi energy ministers, going back to the early 1960s. The new minister was at the World Energy Congress in Abu Dhabi on Monday, and he will be participating in a meeting there Thursday between OPEC and Russia on oil production.

Abdulaziz made it clear Monday he will support the production cuts agreed to by the "OPEC plus" group. The cuts have largely been shouldered by Saudi Arabia, and while they did drive prices higher, some speculate, perhaps not high enough to help the IPO valuation.

The public offering of Aramco has been seen as a cornerstone of the crown prince's Vision 2030 plan to transform the Saudi economy and make it less dependent on fossil fuels. Sources say that Al-Falih was not always on the same page as the crown prince on some policy and did not fully embrace the public offering, which has recently been accelerated.

Saudi's crown prince is said to be looking for a $2 trillion valuation for Saudi Aramco, but some bankers have found the value to be closer to $1.5 trillion, according to industry sources. The gap in those valuations would narrow if oil prices were to rise.

The appointment isn't expected to have much impact on oil policy in the near term, but some analysts say the move consolidates control over the energy sector in the hands of the crown prince, who is known as MBS.

Saudi Aramco will be listed once shareholders choose location, CEO says
VIDEO0:2400:24
Saudi Aramco will be listed once shareholders choose location, CEO says

"Abdulaziz bin Salman probably has no intention of changing Saudi Arabia's oil stabilization policy for now. The production restraint policy and working with OPEC and Russia is key to Riyadh's efforts to lift oil prices and generate more revenue for the state. It is also a key part of his brother's plans to bolster the valuation of Aramco. The long-term oil market strategy is less certain given the changes in Saudi Arabia's decision-making structure," wrote Ayham Kamel, Eurasia Group practice head, Middle East & North Africa.

Industry sources said Al-Falih may have become too powerful, with a rock star like persona in the energy world. He was an energy minister who had responsibility for broad policies, including OPEC production quotas. He was also chairman of Aramco, where he had his finger on the production operations, pricing and exports, until he was suddenly replaced in that position.

The shakeup in the kingdom's energy sector became more apparent last week, when Al-Falih was replaced by Yasir al-Rumayyan as chairman of Aramco. Al-Rumayyan is head of the Public Investment Fund, the country's primary sovereign-wealth fund, which will invest the proceeds of the Aramco offering. Last month, the king had restructured the energy ministry by giving a new ministry oversight of some of its operations, including mining and industry.

Al-Falih was also seen as hard-driving, a much different personality than Prince Abdulaziz, who has worked behind the scenes at OPEC gatherings and elsewhere.

"He's known as a consensus builder. I see him playing that role at OPEC," said Helima Croft, head of global commodities strategy at RBC.

The prince is also expected to stand behind his brother in pushing his reform agenda. "This team is absolutely in sync with the position of the crown prince. I think they're absolutely in sync with his vision," she said.

Croft said the prince has been involved in renewable energy and in reducing energy intensity. "He's championed the domestic energy reform agenda. It's a very important effort domestically," she said. "He's given his life to the energy sector, to the ministry. He is the ultimate technocrat."

Al-Falih's forceful personality was surely a benefit when he helped forge the relationship between OPEC and Russia and other non OPEC members. The collaboration did drive up prices, from depressed levels. As Saudi minister, Al-Falih had been the most closely watched and authoritative voice when it came to prices and production.

Russia's Energy Minister Alexander Novak, Saudi Arabia's Energy Minister and OPEC conference president Khalid al-Falih, and OPEC Secretary General Mohammad Barkindo attend a meeting of the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC producing countries in Vienna, Austria, May 25, 2017.
Leonhard Foeger | Reuters

Analysts said oil prices have been higher for the past two days as investors await the outcome of Thursday's meeting of oil producers.

Despite the production cuts, OPEC plus has not been able to consistently drive prices much higher because of increasing competition from the U.S. and other producers who keep adding oil to the world market. Brent crude futures gained $1.31, or 2.3%, to $62.58 a barrel Monday, while U.S. West Texas Intermediate crude futures rose $1.33, or 2.4%, to $57.85 a barrel. Brent is trading in a range it has been locked in since early August and is well off its 2019 high of more than $74 per barrel.

Bank of America Merrill Lynch Middle East strategists said it appears there will be policy continuity, following the appointment. "Beyond the immediate-term, there could be potential for greater focus on supporting oil prices. However, global energy supply and demand dynamics remain challenging," the strategists said. "The continuing Iran nuclear crisis may still eventually boost geopolitical risk premium."

The anticipated offering for 5% of Aramco would be the world's largest initial public offering, and efforts have progressed to the point where J.P. Morgan could soon be named lead banker, sources told CNBC. The company is expected to follow this year's local listing on the Tadawul exchange, with an international IPO next year, though no decision has been made on which exchange will host the listing, sources said.

U.S. President Donald Trump, speaks with Mohammed bin Salman, the Kingdom of Saudi Arabia's deputy crown prince and minister of defense, left, in the Oval Office of the White House in Washington, D.C., U.S., on Tuesday, March 14, 2017.
Mark Wilson | Pool via Bloomberg

Kamel said the most important takeaway from the changes is that MBS appears to be "doubling down on his vision of transformation and diversification."

"Mohammad bin Salman has probably come to believe that the change momentum might have slowed down in the last 12 months. The personnel changes are only part of a broader set of changes designed to revive the vision," he wrote.