Drama involving Saudi royals helped raise the price of crude oil in the first week of November but might soon produce opposite effects. Under the certain direction of Crown Prince Mohammad bin Salman, authorities on Nov. 3 apprehended at least 200 wealthy Saudis, including 11 members of the royal family, and confined them to a hotel in Riyadh. Prince Mohammad is the 32-year-old son of King Salman promoting economic and cultural reform under a sweeping initiative called Vision 2030, pressing overt confrontation with Iran, and leapfrogging cousins to become king-in-waiting.
With the mass arrests of princes and other elites under allegations of corruption, the crown prince appeals to youthful Saudis whose support he needs for reform. He consolidates power atop a ruling family estimated to have 15,000 members with divergent views on matters such as modernization, security, and oil. And he serves notice that Saudi governance no longer waits on caution and consultation.
The money
Then there's the money. According to an article in the Nov. 7 Wall Street Journal, the Saudi government might confiscate assets worth as much as $800 billion from its new captives. Ramifications for the oil and gas industry are large.
The 22-nation effort Saudi Arabia has orchestrated to limit oil production is unprecedented in compliance and duration. The 12 members of the Organization of Petroleum Exporting Countries subject to quotas have achieved average compliance of 87% since their agreement took effect in January, according to the International Energy Agency. They have extended the agreement once and probably will do so again. Equally impressive is year-to-date compliance of 81% by 10 non-OPEC collaborators led by Russia. Results are positive but slow. Global oil inventories are receding from market-choking levels but remain high.
But the program must be testing Saudi patience. The kingdom is cutting production by more than the 486,000 b/d to which it committed in the OPEC agreement, which allowed rival Iran to increase output. Russia is slightly below compliance with an agreed cut 186,000 b/d less than Saudi Arabia's against a baseline 1 million b/d higher. The kingdom thus yields market share to producers with which it has grave differences. It's in open and escalating conflict with Iran and strongly at odds with Russia, which is allied with Iran in the Syrian civil war and elsewhere. The sacrifice cannot be pleasing in Riyadh, especially to the brazen Prince Mohammad.
Until recently, Saudi Arabia had a unique motivation to cooperate in supply restraint. The government plans to sell as much as 5% of Saudi Aramco in an initial public offering next year. Valuation of IPO shares, and implicitly of Aramco itself, depend greatly on the price of crude.
Riyadh originally hoped to raise $100 billion from the IPO, making Aramco implicitly worth $2 trillion. Analysts outside Saudi Arabia think those estimates are excessive, especially with crude prices stubbornly resistant to elevation. Riyadh, facing fiscal strain from the oil-price slump, needs money to balance accounts and fund Vision 2030, which includes withdrawal of generous consumption subsidies for Saudi citizens and movement of the economy away from dependence on oil.
Assets appropriated from Prince Mohammad's corruption suspects would more than compensate for IPO disappointment. Even at half the estimated $800 billion, proceeds would dwarf the hopeful IPO projection and be plenty to fund Vision 2030 initiatives. Indeed, Saudi officials are now busy denying rumors about abandonment of the IPO.
Changing course again?
The Saudi powerful might have reasons other than the IPO to want to continue sacrificing market share to defend the crude price. With $800 billion or so newly within reach, however, what might they be? Prince Mohammad and his backers might even see advantage in letting the crude price fall to weaken oil-producing enemies.
Saudi Arabia flipped strategy when it abandoned defense of market share in favor of production restraint 3 years ago. An oil industry charmed by supply management must confront the possibility it might change course again.
