Will Saudi

Aramco Fall
Prey to a Prince’s
Politics?

(HASSAN AMMAR/AFP/GettyImages)
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Will Saudi Aramco Fall Prey to a Prince’s Politics?
• Crown Prince Mohammed bin Salman hopes
that his push for greater transparency and an
initial public offering of Saudi Aramco will boost
the massive firm’s efficiency.
• However, his consolidation of power and plans
for reform risk undermining the unusual inde-
pendence and competence that historically have
made the national oil company more competitive
than its peers.
• If Saudi Aramco does not preserve its apolitical
and technocratic nature, it will have difficulty
addressing the many challenges looming ahead.
It’s no secret that the engine of Saudi Arabia’s
massive economy is its energy giant, the Saudi
Arabian Oil Co. The company produces nearly all of
the kingdom’s oil and natural gas, which accounted
for 63 percent of the government’s revenue last year
even amid stubbornly low oil prices and an attempt
to diversify away from the energy sector. But a
lesser-known (and perhaps more interesting) aspect
of the firm is its competence, efficiency and skilled
internal management — characteristics that are
rarely found in most national oil companies.
The firm may not retain these traits for much longer,
though. Crown Prince Mohammed bin Salman has
begun driving fundamental changes in the king-
dom’s leadership and oil industry that could blunt
Saudi Aramco’s edge over its less effective peers
in the long run, especially amid the new challenges
arising as the company grows into an integrated
multinational firm.
January 2018
Isolated From Incompetence
With the mid-20th century came a wave of nation-
alizations in the oil and natural gas industry, which
spared few corners of the globe. The movement
reached the Middle East in 1951, when the Iranian
parliament voted to grant assets of the Anglo-
Persian Oil Co. to the state-owned National Iranian
Oil Co. Though lawmakers largely overturned
the decision two years later, nearly every Middle
Eastern country took steps to nationalize their oil
industries in some fashion over the three decades
that followed.
Saudi Arabia wasn’t immune to this trend, but it was
able to enact change more gradually than many of
its neighbors. For one, the kingdom didn’t have to
contend with the anti-colonialist sentiments that fu-
eled calls for nationalist policies throughout the rest
of the region. For another, the U.S.-based Arabian
American Oil Co. — what would later become
Saudi Aramco — controlled the Saudi oil industry
rather than Petromin, a rival national oil company
modeled off its cumbersome, politicized counter-
parts abroad. Nationalizing the Arabian American
Oil Co. would have endangered Riyadh’s deep ties
with Washington, which the kingdom was eager to
protect. Because of these factors, Saudi Aramco did
not become fully nationalized until 1988.
Even then, foreign executives remained on the com-
pany’s board. Moreover, many of the firm’s longtime
employees maintained that the kingdom hadn’t
unilaterally taken control of Saudi Aramco, but it had
legitimately bought it. In an effort to appease the
Saudi officials leading the nationalization charge, the
company spearheaded a program to increase
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vemployment among Saudi citizens. But to avoid the
brain drain that had plagued so many of the king-
dom’s neighbors, Saudi Aramco trained promising
young Saudi workers and sent them overseas to
receive their education, hoping to someday move
them into leadership positions back home.
This gradual shift toward state control left Saudi
Aramco with a strong corporate culture not unlike
that of international oil companies — a legacy that
lasted well beyond the firm’s nationalization. Today
the company’s budget is separate from the govern-
ment’s finances. Beyond taxes and the dividends
it provides to its shareholders (now Riyadh), Saudi
Aramco also keeps its revenue. That move is a
relic of its past in the private sector and a means of
insulating the company from rampant corruption
among the kingdom’s political officials. By contrast,
the nationalizations of most other countries’ energy
sectors left behind hollowed-out firms with a notori-
ous propensity for graft and inefficiency.
More important, the Saudi state has taken a hands-
off approach to the operation and management
of the oil sector. Rather than reserving control of
the company for a particular branch of the House
of Saud, as it has with other ministries and busi-
nesses, the government has left the firm in the
hands of professional technocrats. (The royal line
of former Crown Prince Nayef bin Abdulaziz, for
instance, held the Interior Ministry from 1975 to
2017.) Saudi Aramco’s isolation from the patron-
age-based fiefdoms that make up the complex
mosaic of the Saudi state has enabled it to remain
competent against all odds.
A Source of Princely Power and
Patronage
It’s unclear how much Salman’s recent consolidation
of power and plans for reform will undermine the
energy behemoth’s independence and capabilities.
While the crown prince hopes that his push for
greater transparency and the impending initial
public offering (IPO) of the company will boost
Saudi Aramco’s efficiency, the firm won’t continue
to enjoy the same success if it becomes more politi-
cized — as many fear it might.
Concerns about the oil industry’s autonomy arose
when King Salman ascended to the throne in
January 2015. With one of his first decrees, the
monarch consolidated the Saudi bureaucracy and
placed rising star Mohammed bin Salman at the
head of the Council of Economic and Development
Affairs. Then in May of that year, the king created
the Supreme Council for Saudi Aramco to oversee
the company, granting its chairmanship to the
crown prince.
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In one fell swoop, the king had split off Saudi
Aramco from the technocratic Oil Ministry and
placed it under the direct control of a single branch
of the royal family. (Prior to Salman’s decision,
the company submitted its plans to the Supreme
Council for Petroleum and Minerals, chaired by the
king, for approval, but that move was only a formal-
ity.) It wasn’t long before the crown prince made
clear his intention to take an active role in the
firm’s decision-making by announcing preparations
for the IPO.
Salman’s new responsibilities further stoked anxiety
about the politicization of the energy sector in April
2016. At the beginning of the year, oil prices had
bottomed out at about $25 per barrel, and sanc-
tions against Iran had lifted, leaving Saudi Arabia’s
regional rival poised to double its oil exports. The
kingdom’s technocrats, led by longtime Oil Minister
Ali al-Naimi, began to seriously consider striking
a deal to implement production freezes in OPEC
in order to stave off a steeper decline in prices. All
signs pointed to the bloc reaching an agreement that
excluded Iran during its meeting in April.
But at the last minute, Saudi Arabia balked at the
deal. The unexpected turn of events signaled that
al-Naimi — the most powerful voice in the Saudi
oil industry for more than two decades — was no
longer calling the shots. Instead the crown prince
had intervened, hoping to force the negotiation of an
agreement that included Iran. Soon after the inci-
dent Khalid al-Falih replaced al-Naimi at the head of
the Oil Ministry. (Notably the king chose al-Falih, a
technocrat, for the post rather than one of his sons,
as many expected.)
Since then, Saudi Aramco’s IPO has become the
centerpiece of the crown prince’s Vision 2030
reform package. On paper, the proceeds of the IPO
are intended to fill the kingdom’s nascent Public
Investment Fund, as will any unsold shares of Saudi
Aramco. But because the fund is under the control
of the Council of Economic and Development Affairs
— and, by extension, Salman — its coffers and the
company’s earnings could become the lifeblood of
the crown prince’s patronage networks.
The Risky Business of Reform
Salman’s intentions for Saudi Aramco’s IPO may
be good, and he could still choose to maintain the
hands-off approach to corporate management of
his predecessors. Nevertheless, the crown prince
is taking a risk by removing a technocratic element
from the company’s leadership — particularly
during a transformative period in the kingdom’s
energy industry.
First, the IPO itself will be a fraught endeavor. Since
Saudi Arabia announced the project’s aggressive
timetable, it has had to negotiate with a number of
different stock exchanges, including those of the
United States and United Kingdom, to hash out the
details of the IPO’s international portion. Though
Salman has advocated listing the IPO on the New
York Stock Exchange, especially as his relationship
with the White House deepens, most Saudi officials
seem to prefer using the London Stock Exchange
because it is one of the largest in the world and it
would be able to manage an offering for a company
of Saudi Aramco’s size. Moreover, the London Stock
Exchange would bring less scrutiny of the company’s
oil reserves than its U.S. counterpart would; in New
York, the IPO would raise a litany of questions about
Saudi Aramco’s corporate strategy, long-term goals
and financial obligations to shareholders. Not only
would this scrutiny reduce interest among poten-
tial investors, but it would also call into question
whether the costs of an IPO outweigh the economic
benefits. Despite these pressing questions that have
yet to be answered, Saudi officials insist that the IPO
is on track to take place in 2018. But more and more
figures have raised the possibility of delaying the
offering’s international component and the prelimi-
nary private sale of a stake in the company.
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kingdom isn’t cheap. Although the country’s natural
gas output is considerable, most of it is merely a
byproduct of producing crude oil. Tapping into Saudi
Arabia’s most plentiful natural gas reserves — which
are either sour (tainted with hydrogen sulfide),
offshore or trapped in the shale formations of the
Rub al-Khali desert — is an expensive proposition.
Coupled with the kingdom’s price controls on natural
gas, these factors have made projects dedicated to
natural gas production uneconomic by international
standards. That said, those projects (along with LNG
imports) would become viable if prices were to rise
more than threefold. Investors will therefore expect
the kingdom to take steps to normalize prices ahead
of any IPO.
A Slippery Slope
The shifts underway within the halls of Saudi
Aramco suggest four new changes lie ahead. First,
the IPO — should it materialize — will bring greater
oversight to the company’s balance sheets and
performance. Second, Saudi Aramco will increas-
ingly become a multinational firm in its own right
that boasts upstream, midstream and downstream
investments worldwide. Third, the company will
become more involved in downstream and petro-
chemical projects with massive price tags, such as
the $20 billion joint venture with chemical manufac-
turer Sabic it announced in November 2017. Fourth,
Saudi Aramco’s new upstream projects won’t look
like its typical efforts to tap cheap, easy oil reserves,
because as the company tries to produce sour and
shale natural gas, it will have no choice but to har-
ness more sophisticated technologies.
Saudi Aramco’s apolitical and technocratic nature
will be critical to its success in managing each of
these developments in the years ahead. But given
the signs of politicization that have already emerged
in its corporate policy under Salman’s rule, the
company’s days as an independent and competent
national oil company may be numbered. □
STRATFOR • 7
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