saudi arabia: new directions and riskseneken.ieej.or.jp/data/8447.pdf · – net value generated in...

油田秋浓 (Oil Facility in Autumn), ChangqingPhotography by 许兆超 (Zhaochao Xu)

SIA-Energy Presentation: IEEJ 17 May 2019

Saudi Arabia: New Directions and RisksFareed Mohamedi, Managing Director, SIA-Energy International

IEEJ：June 2019 © IEEJ2019

SIA-Energy International / Key Geopolitical Issues ◦ sia-energy.com

It is all about the Al-SaudLessons from history: Stay united, adapt and reshape

Saudi rulers and their effective strategic objectives* 1964-1979 Faisal era - Modernization 1979-1995 Fahd era - Americanization (and Islamization) 1995-2015 Abdullah era – Stabilization (and Re-legitimatization)

Understanding Saudi Arabia’s Strategic Drivers

* Periods do not match reign

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What Next? TransformationEnergy as a means towards development Oil Market share (within bounds): Price is still very important Accelerated Transformation Program of Saudi Aramco: Creating a global

energy company including gas, power and renewables

Economic change and growth The National Transformation Program: Short term adjustment and coping

with lower oil prices Vision 2030: IPO, PPP and FDI

Global diversification Using economic relations to forge new global relationships

Building new state: Centralization, efficiency and capacity Elimination of traditional fiefdoms and patronage systems Replaced by youth and technocrats – energy, accountability and skills Undergirded by popular constituency – youthful dynamism and nationalism

Security in the region Self reliance and greater activism to shape MENA

Understanding Saudi Arabia’s Strategic Drivers

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Saudi Aramco: At the Heart of MbS’ Transformation Plans

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Focus on meeting competition in Asia Pursue China Mega project Victory (Vietnam), RAPID (Malaysia)

and RDMP (Indonesia), India (Maharashtra)

Pursue owner/operator model Organic growth to integrate chemicals

manufacturing with existing and planned refineries

Acquisition of a large chemical entity to increase sales and competencies

Smaller acquisitions of petchemcompanies like LANXESS

Saudi Aramco: Downstream Plans

0

2000

4000

6000

8000

10000

12000

2015 2016 2017 2018

Saudi Arabia: Crude Oil PlacementThousand b/d

Domestic Asia North America Europe

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5000

10000

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2015 2016 2017 2018

Saudi Arabia: Petrochemical SalesThousand tons per year

Aromatics Polyolefins

Olefins Others

Revenue in billion US$ (RHS)

Refinery 2015 2016 2017 2018 2025Ras Tanura 550 550 520 550 550Yanbu 250 250 250 250 250Riyadh 125 125 125 125 125Jiddah 70 70 70 70Jazan 350 350Aramco-Sabic Crude to Petchem 400SAMREF 400 400 400 400 400SASREF 300 300 300 300 300Petro Rabigh 330 400 400 400 400SATORP 400 400 400 400 400YASREF 300 400 400 400 400Total Domestic 2725 2895 2865 3245 3575Motiva 250 200 600 600 600S-Oil 550 600 600 600 600Showa Shell 200 200 200 200 200Fujian 200 200 200 200 200Yunnan 180Hengli/Zhejiang 400Norinco 400Cilicap Indonesia 280RAPID 300Maharashtra 1400Total International JVs 1200 1200 1600 1600 4560Abu Safah to Bahrain 150 150 150 150 150Crude Burning 500 500 400 300 300BAPCO 230 230 230 230 360Total Other 880 880 780 680 810Total Dedicated Outlets 4805 4975 5245 5525 8945Crude Production 10260 10300 10000 10000 11000% of Dedicated Outlets 46.8 48.3 52.5 55.3 81.3

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Al Hasa Energy Industrial City (EIC): Eastern province hub for energy related manufacturing and services industriesRas Al Khair Maritime Yard: in association with Hyundai Heavy Industries includes ship repair and industries related to shipping such as ship engine assembly and manufacturingOil Gas Services Companies: Land and offshore rig manufacturing joint venture Platform manufacture Drilling operations and maintenance joint venture Forging rig components Well Heads and completion Down hole tools Drilling equipment rental Manufacture of proppants Third party sulfur handing

Saudi Aramco: Economic Development Plans

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Support educational and training institutions: providing investment, donating equipment, supporting running costs and seconding senior employeeso National Industrial Training Institute (NITI)o Support Saudi Petroleum Services Polytechnic (SPSP)

Data Centers and IT promotion: Alphabet and Google IKTVA – net value generated in Saudi Arabia

A=Spend with Company A from Saudi ArabiaB=Dollars spent to buy goods and services sourced In-KingdomC=Dollar spent by Company A to pay SaudisD=Dollars spent to train SaudisE= Dollars spent to develop Saudi suppliersF=Supplier IKTVA%G=Saudi Aramco contribution

Saudi Aramco: Economic Development Plans

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2013 2014 2015 2016 2017 2018

Saudi Arabia: Upstream Contractor Saudization

% of Employees

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Three Foreign Policy Schools of Thought

Interventionist▫ Republican: neoconservative + American nationalist --

George W. Bush abandoned multilateralism and pursued GWOT and invasion of Iraq

▫ Democratic: humanitarian interventionist – Bill Clinton attacked Serbia

Realist▫ Republican: balance rival powers and pursue interests –

George H. W. Bush and Henry Kissinger ▫ Democratic: deal with constraints and human values --

Obama withdrew from Middle East but wanted Pivot to Asia

Neo-Isolationist▫ Republican: America First – bundle of contradictions –

make deals, pick trade fights, insult allies and abandon multilateralism and collective security

▫ Democratic: American Values First – Bernie Sanders and “Democratic Socialists” call for morality in US foreign policy

US Has Difficulty Coping with a Changing World: Volatility in US FP Creates Problems For KSA

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Factors shaping US’ Iran policy▫ Long legacy of enmity▫ Cancel Obama▫ Make region safe for Israel and US▫ No more “grown ups in the room”

Converging views on Iran: “Maximum Pressure Campaign” could include violence▫ President Trump: Make a better deal

• Afraid of another US war in the ME

• His financiers and base want to punish Iran

▫ National Security Advisor Bolton: Bombing is the only language that enemies understand

• Iraq war was a success

• Manufacture crises and then attack

▫ Secretary of State Pompeo: Israel is necessary for the Second Coming

• Initially wanted to appease Trump

• Falling into line with Bolton

Trump’s Middle East Foreign Policy – Iran Focus

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Russia Creates A New “Order” in the Middle East

Russia

Turkey: Co-opts a NATO member and works to control Kurds

Syria: Return of European refugees and control Iran

GCC: Blocked interference in Syria by offering help with oil prices

Iran: Protection, cooperation, economic assistance

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US’ Past FP Mistakes and Their Consequences:MbS and MbZ Feel Activism is Necessary

Roll Back?

Iran, Iraq and Syria (Lebanon) – state to state support undergirded by local militias

Russia – filling regional vacuum in order to leverage influence on world stage

UAE, Saudi Arabia and Egypt –activism to restore dictatorships and regional influence

USA – from Obama’s retreat to Trump’s verbal support with OP’s money and men

New Reality

Turkey

George W. Bush’s invasion of Iraq gave opportunities to Iran – UAE and Saudi Arabia want to reverse that

Obama’s lack of support for traditional leadership during Arab Spring scared the dictators

Trump provides new opportunities for reviving US relations and settling old scores

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OPEC Dynamics in the 21st Century▫ Raw pursuit of market share is not achievable – constrained by revenue needs▫ Its actually been “dead” since the 1990s▫ But its been periodically revived to discipline other OPEC members

• Nigeria/Kuwait in the mid 1980s• The return of Kuwait in 1991• 1998 after the Asian crisis and Venezuela• 2014 after the US surge

▫ When global crises (2001 post 9-11/2009) occur OPEC is usually pretty cooperative

▫ Its when supply surges occur that OPEC is unruly and “market share” becomes necessary

Saudi Arabia and OPEC – Sole Operator

• OPEC and OPEC + provide cover• Trump’s interest in oil prices have to be managed• New alliance with Russia is useful for many reasons but not critical• Longer term Iraq has to be managed• Secondary oil producers are dying out• Saudi Arabia again is proving to be indispensable to global oil markets

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0102030405060708090

100110120

6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22

US$

per b

arre

lSaudi Arabia: Average Crude Export Price and

The Threshold Prices

Average Crude Oil Export Price Current Acct. Threshold PriceBOP Threshold Price

Saudi Arabia Needs Prices Above $60/b

• Current Account Threshold Price = Imports of G&S minus Non-oil Exports of G&S divided by Crude and Product Export Volumes

• BOP Threshold Price = Imports of G&S minus Non-oil Exports of G&S plus FDI/FPI, Net debt and other capital flows divided by Crude and Product Export Volumes

IPO

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Necessary Conditions to Maintain Stability in Saudi Arabia

Unity within ranks of ruling family Disunited opposition Sufficiently high oil prices

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S. Arabia’s “Adventures” Raise Stability Concerns

Crown Prince Mohammad bin Salman plans to transform the Kingdom have their dangers

Create a unitary leadership – less consensus, patronage and dissent –disunity at the top Encourage domestic and international private sector led economic

development – “new way of doing business” leads to capital flight and possibly new oppostion Bolder foreign policy with Trump’s unconditional support – heavy

human and material costs

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