Saudi Oil Policy Could Become More Transparent

The appointment of Khalid al-Falih as Saudi Arabia's new energy minister to replace veteran oil minister Ali al-Naimi is likely to bring a big shift in style even if the substance of policy remains largely unchanged.

Naimi has served as the minister of petroleum and natural resources since 1995 and has long indicated a wish to retire ("Saudi considers Naimi's successor as oilmin", Reuters, 2010).

Plans to name a successor as part of a cabinet reshuffle in 2011 were postponed when unrest spread across the Arab world, including neighbouring Bahrain.

Now he has been replaced as part of a wide-ranging reorganisation of ministries and senior officials intended to implement Vision 2030, the kingdom's economic transformation programme.

Saudi Arabia has had just five ministers in charge of oil policy since 1960. In the past, changes in the ruler have normally been associated with a change in oil minister.

King Faisal replaced Abdullah Tariki (1960-62) with Zaki Yamani (1962-1986). King Fahd replaced Yamani with Hisham Nazer (1986-1995). Crown Prince and de facto regent Abdullah replaced Nazer with Naimi (1995-2016).

Naimi was identified with the previous administration led by King Abdullah so it was always likely King Salman and his son Deputy Crown Prince Mohammed bin Salman would want to make their own appointment to one of most important positions in the kingdom.

Naimi already appeared to have lost control over policy in recent months. He was sidelined at the Doha summit in April when the royal court scuppered an international agreement on a production freeze.

POLICY CONTINUITY
For the last two decades, Naimi has led Saudi Arabia's strategy on oil prices and production in consultation with the king and royal court.

The question arises whether Naimi's replacement by Falih will see a continuation of the existing policy or be used as an opportunity to adjust or evolve it.

Naimi was the principal architect of the decision to maintain output, defend market share and allow prices to find their own level in the second half of 2014.

The strategy has taken longer to work and proved much more costly than Saudi Arabia's policymakers seem to have anticipated.

But the strategy finally appears to be working, with production from U.S. shale and other non-OPEC sources in steep decline and oil prices up by more than $20 from their recent low.

Even if Naimi was the principal architect of the production policy, it has been enthusiastically supported by both Falih and Deputy Crown Prince Mohammed bin Salman.

If anything, the deputy crown prince has appeared to favour an even more hawkish approach to production and price policy.

In the run up to Doha, the prince appeared to want to use low oil prices as a weapon in the broader diplomatic confrontation with Iran ("Saudi Arabia turns oil weapon on Iran", Reuters, Apr 18).

In an interview, the prince claimed to be unconcerned whether oil prices were at $30 or $70 per barrel as "they are all the same to us" ("The $2 trillion project to get Saudi Arabia's economy off oil", Bloomberg, Apr 21).

Falih, too, has insisted the kingdom would defend its market share and allow prices to find their own level, a position he reiterated on Sunday ("Saudi Arabia says to maintain stable petroleum policies", Reuters, May 8).

So there is no reason to expect a significant change in the substance of Saudi production policy from either the new energy minister or the deputy crown prince.

But the style of policymaking seems set to change in a number of important respects.

MODERN COMMUNICATIONS
Falih is likely to enjoy far less autonomy than predecessors like Naimi and Yamani.

The deputy crown prince has made clear that he has overall control of oil policy and intends to take a more active interest than previous rulers. Falih will be a respected adviser but the ultimate decisions will be taken by the royal court.

In other respects, Falih is likely to usher in a more modern, technocratic and professional approach. Falih comes from a younger generation but modernisation is also very much in line with the new approach being pushed by consultants from McKinsey and encapsulated in the government's Vision 2030 plan.

One of the biggest changes, and most welcome, could come in the energy ministry's communications with the media and the markets.

For decades, the kingdom's price and production strategy have been communicated through non-attributable briefings given to favoured journalists and analysts by "a senior Gulf OPEC source".

The result of this selective briefing system, which is unlike any practiced in other commodity and financial markets, has been confusion and a lack of clarity, with much dissatisfaction on both sides.

An entire cadre of "OPEC watchers" has grown up to help interpret Saudi policy, similar to the old "Kremlin watchers" and "Fed watchers" of the 1980s, with all the attendant uncertainty and lack of clarity.

In the last two years, under Naimi and his advisers, the Saudis have already taken some tentative steps towards greater openness, for example releasing transcripts of important ministerial statements.

Falih will probably push this effort much further and bring a more modern and professional approach to communications, which could include the appointment of a proper press spokesman and upgraded website.

Falih has already proved to be more willing to speak openly and at length about oil market developments and Saudi strategy, offering a lengthy and candid analysis at the World Economic Forum in January 2015 ("Saudi Aramco CEO speaks at World Economic Forum 2015", Saudi Aramco, Jan 2015).

Under Falih, Saudi policies could become clearer and more consistent which should in turn improve confidence and remove one source of instability in oil prices.

As Saudi Arabia prepares for the part-privatisation of Aramco, more data on exploration, production and reserves will have to be published for investors.

Falih is likely to help accelerate that transition to greater openness and accountability.

By John Kemp