The Saudi Prince of Oil Prices Vows to Drill ‘Every Last Molecule’
(Bloomberg Markets) - The Boeing 767 soared over the Red Sea and turned east into Saudi Arabia. A commercial version of the aircraft can carry around 260 passengers. In this, the Saudi energy minister Prince Abdulaziz bin Salman and about a dozen adjutants had gone home from a turbulent meeting at the OPEC headquarters in Vienna the day before.
For most of the journey, the jet had followed its planned route over Eastern Europe, the Mediterranean and Egypt. It was a route that Abdulaziz had flown many times. As oil minister since 2019 and previously a royal deputy, he had attended almost every OPEC meeting in the past 35 years.
But that March 7, 2020 flight was not typical. What happened after that wasn’t either.
The decisions that Abdulaziz made over the next 24 hours revealed a new Saudi oil policy - bolder, less constrained by Washington, despite a growing global consensus on climate change, and more centrally controlled by the royal family, including one of his half-brothers, Crown Prince Mohammed bin Salman .
They also reflected what Abdulaziz saw as his calling: to ensure that the last barrel of oil on earth comes from a Saudi well. As he said in June during a Bank of America Corp. organized private event said, a person familiar with the meeting said, "We'll still be the last man left, and every hydrocarbon molecule will come out."
All of this is having a huge impact on the world's energy markets at a time when Abdulaziz and Saudi Arabia seem to be on the wrong side of history in building a fortress to protect oil. Abdulaziz, the first member of the royal family to become the kingdom's energy minister, is now the most important individual in the oil market. Influential on a global economic level like some central bankers, he has repeatedly taken bold and successful steps to control the markets, manage the flow of oil, and prop up prices.
But a bitter OPEC + meeting in July showed how difficult it will be for Abdulaziz to assert himself at a time when oil-producing nations - whose self-interests often conflict - are thinking about a future with falling oil consumption. When the OPEC + ministers met via video conference, the renewed demand this year had already pushed crude oil prices up by 50%. When talks failed, oil prices jumped to their highest level in more than six years.
It took Abdulaziz two weeks of behind-the-scenes diplomacy to break the impasse and eventually strike a deal that followed a classic blueprint of his: everyone involved kept face, even if some of the goals for future production overshadowed gullibility. "Consensus building is an art," he told reporters after the meeting, shyly declining to elaborate. "Why should I reveal it? It's an art and we keep it to ourselves. We call it a state secret. ”QuickTake: How OPEC + averted another crisis in the oil market
Abdulaziz's stint as Energy Minister since his appointment in September 2019 has been perhaps the most convulsive and momentous period in the history of the Saudi oil industry, only overshadowed by the first and second oil crises in the 1970s. Abdulaziz disagreed with a recorded interview for this article. Bloomberg Markets reconstructed his tenure as minister - and his rise there - through interviews with diplomats, advisors, traders, and current and former Saudi, OPEC + and US officials.
After the OPEC + meeting in Vienna in March last year, Abdulaziz and his entourage boarded their waiting jet, on the stern of which the registration number N767A was emblazoned, and took off. An oil geek monitoring the aircraft's radar signature on a real-time aircraft tracking website would have known something was wrong. The plane did not land in Riyadh, the capital, where the Ministry of Energy and Abdulaziz's residence are located. It flew on over the Saudi desert, the bleak tribulation occasionally interrupted by gas flares in the oil fields, and then on towards the coast of the Persian Gulf.
At 3:35 p.m. that Saturday, the jet landed at King Abdulaziz Air Base, a military complex near Dhahran in the heart of the kingdom's petroleum industry. Abdulaziz went straight to the headquarters of Saudi Aramco, the national oil company.
The reason for the surprising detour to Dhahran was what had happened the day before in Vienna. At a special OPEC + meeting, Saudi Arabia and Russia (the + since it is not an OPEC member) argued over the response to the coronavirus pandemic that was beginning to spread around the world.
Moscow, careful not to cut production, preferred a wait and see approach. Riyadh wanted to cut production - immediately. Through their association with refineries around the world, the Saudis recognized early on that the Covid-19 outbreak would cause economic havoc and wanted to prevent oil prices from falling.
The meeting ended without an agreement. Ominously, Alexander Novak, the then Russian oil minister, then said to reporters: "In view of today's decision, all OPEC + countries have no obligation to cut production from April 1st." Now all eyes were on Abdulaziz. When asked if Saudi Arabia would follow Russia's example, he told reporters, "I will ask you."
Not for long. The drive from the airport to the Aramco campus takes about 15 minutes. Abdulaziz ’entourage would have passed Dammam No. 7, known as the" Well of Prosperity, "because the day it encountered oil in March 1938 marked the commercial discovery of oil in Saudi Arabia.
Over the years, the Saudis had come to believe that they should always act in concert with other oil producers and not unilaterally. Now Abdulaziz had decided to override this rule, if only for a short time, to send a message - we are responsible for managing the oil market - and to teach Russia and its President Vladimir Putin, whose power depends, a lesson to be given partly from the oil revenues of his country.
Arriving at Aramco's main administration building, Abdulaziz did something shocking and counter-intuitive for someone who had suggested in Vienna that he was in favor of production restrictions: he ordered the world's largest energy company to bring production to the maximum level. The next day, when the oil market closed for the weekend, Saudi Arabia began an all-out price war. It announced it would pump 12 million barrels a day, up more than 20% from the previous month.
For the energy markets, this was equivalent to a nuclear first strike. In order to bring such large quantities to market, Aramco lowered the price of oil and offered refiners the biggest discounts ever. The price cuts were particularly large for European oil refineries and hit the traditional Russian market hardest.
When the oil market reopened on Sunday evening, Brent crude, the global benchmark, plunged nearly 25% in seconds - the largest one-day decline since January 1991 during the Persian Gulf War. The carnage extended beyond the oil market. The MSCI World Energy Sector Index - a basket of leading petroleum companies including Exxon Mobil, Chevron, Royal Dutch Shell, Total, and BP - slumped nearly 19%, its biggest one-day decline, dropping $ 330 billion in stock value. Over the next week, the index lost another $ 400 billion.
Panic gripped the White House. Saudi Arabia broke with decades of close collaboration and failed to inform Washington of its production bomb, which surprised the CIA and US diplomats in Riyadh, according to Victoria Coates, then Deputy National Security Advisor to the White House. President Donald Trump's administration, which saw the US oil industry as strategic and political capital, was in shock. “That was new territory,” says Coates.
The oil industry and the countries that depend on it stared into an abyss of collapsing prices. This of course also included the Saudis, who had just shown that they were ready to shoot themselves in the foot in order to bring production and prices back to what they believed to be sustainable levels. The scenario, risky and cynical as it was, unfolded exactly as Abdulaziz intended: causing enough pain to get everyone to the negotiating table - quickly.
Enter Trump. In the first week of April, he gathered senior US oil executives in the White House. "We'll sort that out and get our energy business back," he said. "I am 1,000% with you." Trump orchestrated a series of phone calls, including a critical talk with Putin and Saudi Arabia's King Salman - bringing together three countries that were producing more than 40% of the world's oil at the time.
On April 12, after 36 days of hostilities, Riyadh and Moscow agreed on the deepest cuts in oil production in history, calming markets and torpedoing Russia's refusal to cut production a month earlier.
Trump's intervention was a gift to the Saudis. As a presidential candidate, he had sometimes criticized the regime which, he said, treated women as "slaves" and "killed gays". But as president he had been on friendly terms with the world's largest buyer of US arms. Riyadh was the first stop on his first trip abroad as President. He supported the Kingdom's war in Yemen. He sided with Saudi Arabia after his own intelligence agency said Crown Prince Mohammed was involved in the 2018 murder of Saudi Arabia-born US citizen and journalist Jamal Khashoggi.
And now Trump had facilitated the oil deal the Saudis wanted. “What happened in April helps us,” said Abdulaziz of the pact via video link at the annual Robin Hood investor conference last October, according to a person familiar with the matter. The price war, said Abdulaziz, "is a good example of what free markets would do if the commodities market were ignored." The deal had brought order to the disorder that followed the collapse of OPEC + in Vienna.
Abdulaziz spent the last year trying to keep things that way, but the OPEC + bankruptcy in July exposed the barriers before him. At the meeting, Abdulaziz saw Saudi dominance under attack again. This time the rebellious member was Saudi Arabia's neighbor, the United Arab Emirates.
Backed by most of the OPEC + members, including Russia, Abdulaziz wanted the group to agree to a phased increase in production not only in the next few months but for stability reasons until the end of 2022, ”Abdulaziz told Bloomberg TV on July 4. But the UAE's energy minister, Suhail Al Mazrouei, rejected the longer extension as "unnecessary now".
The renewed increase in demand had already driven up crude oil prices this year at the time of OPEC +. When talks collapsed and blocked a supply hike, the stalemate threatened to turn into a conflict as devastating as last year's price war. West Texas Intermediate crude oil reached its highest price since November 2014 at USD 76.98 per barrel. Abdulaziz's diplomatic maneuvers managed to avert a deterioration in the spiral for the time being.
In his Bloomberg TV interview, Abdulaziz had said, "If I was to be called that, I'd love to be the Volatility Buster." And once again he was here as the representative of the largest producer of OPEC +, fighting to keep Saudi Arabia in control of the market and to maintain the reputation as a "volatility buster" that he had tried to appropriate for himself.
In January 2020, Abdulaziz was making his way down a busy corridor at the World Economic Forum in Davos, Switzerland when a television reporter and a camera team caught up with him. He had just finished appearing on a panel discussion entitled "The Future of Fossil Fuels". ITV News journalist Joel Hills from London was not interested in asking the oil minister about oil. He wanted to speak to Abdulaziz about a report in the Guardian newspaper that morning that claimed Crown Prince Mohammed authorized the hacking of a cell phone belonging to Amazon.com Inc. founder Jeff Bezos.
Abdulaziz had no intention of getting drawn into any of the many controversies surrounding his half-brother. Hills remained. Elegant in a chocolate-colored three-piece suit and a silk pocket square, the minister, who was usually imperturbable and always polite, said the question was "a mockery and a joke" and called Hills "stupid". When the reporter followed, Abdulaziz picked up the microphone. Judging from the footage, he appeared to be about to hand the microphone over to an assistant, but considered his actions and handed it back to Hills, saying, "I don't have to explain it to you."
Since King Salman's appointment of his half-brother as his half-brother's crown prince in 2017, Abdulaziz has never spoken in public about allegations of human rights violations made against Mohammed bin Salman. He anchors his public personality strictly within the confines of his oil portfolio. As he said at the beginning of his confrontation with Hills, “No, don't ask that. I'm the energy minister. ”In Saudi Arabia, oil is more a family business than ever. Two years after the King transferred the day-to-day business of Saudi affairs to the Crown Prince in 2017, he turned the energy empire over to Abdulaziz. For the first time, the oil portfolio was in the hands of a member of the royal family rather than a technocratic outsider.
Abdulaziz bin Salman Al Saud was not just any member of the 15,000-strong House of Saud. He is the fourth eldest son of King Salman. At 61, he is significantly older than his powerful half-brother, the Crown Prince, who will turn 36 in August. He is also a half-brother of Prince Khalid bin Salman, who is Deputy Secretary of Defense and a younger full brother of Mohammed.
Given the veil of secrecy that keeps prying eyes away from the House of Saud, it is difficult for an outsider to know whether Abdulaziz himself hatched the idea of a price war in 2020 for Crown Prince Mohammed. Whatever the truth, Abdulaziz took the tactic as his own.
"He's the ultimate insider," says Helima Croft, Global Head of Commodity Strategy at RBC Capital Markets. Croft, a former CIA analyst, has known Abdulaziz for many years. “He understands power better than anyone,” she says. "And oil is about power."
The power of Saudi Arabia - and with it that of Abdulaziz - is threatened as the world tries to move away from oil and other fossil fuels. Beneath the kingdom's desert are about 265 billion barrels of oil, valued at nearly $ 20 trillion at this summer's prices. It's a huge price to pay, but it could one day be worthless when the global economy figures out how to go on without oil.
"Saudi Arabia is not in a convenient location," said Karen Young, a senior fellow at the Washington-based Middle East Institute and director of the business and energy program. “In 10 and 20 years there will be customers for oil. But [every oil producer] will compete for fewer and fewer buyers. "
One day in June 1987, Abdulaziz, then 27, had settled in room 332 of the Vienna Marriott Hotel to prepare for his first OPEC meeting. His decades-long rise in the Saudi oil hierarchy had begun.
Abdulaziz was a very young member of the Saudi delegation led by Oil Minister Hisham Nazer, a non-royal technocrat who had been trained as a student and graduate at the University of California at Los Angeles. The official minutes of the meeting place Abdulaziz in 8th place in the delegation hierarchy.
His early days were instructive. In 1987, Saudi Arabia ended a price war. From 1980 to 1986, Riyadh had cut production to keep oil prices high while other OPEC members continued to pump out. When Saudi production plummeted so badly that it could not meet domestic consumption, Riyadh eventually reversed course, flooding the market and plummeting prices.
As with the price war that Abdulaziz was to wage in 2020, the effects of the 1980s campaign were felt around the globe: from Texas and Oklahoma, where the economy collapsed, to Moscow, where the damage played a role, to the decline to speed up the Soviet Union, whose hard currency needs were based on high oil prices.
The lessons were not lost with Abdulaziz. "The Saudis have decided never to cut back production on their own," says David Rundell, a US diplomat who spent 15 years in Saudi Arabia, including serving as head of mission at the embassy in Riyadh. "And that has been her guiding principle ever since."
If Abdulaziz were not a king, many of his critics and admirers say that he would be like any other extremely good-natured technocrat. As a young Saudi prince, he soon became interested in science and oil. From Riyadh he moved to Dhahran, where he studied at King Fahd University of Petroleum & Minerals, the elite school that trained most of the engineers who now lead Aramco.
After completing his studies in 1985 with a bachelor's degree in business administration and a master's degree in business administration, he temporarily headed a business think tank affiliated with the university. Shortly after marrying Sara bint Khalid bin Musa’ad, he decided to join the government against his father's initial advice.
In 1995 Nazer, the oil minister whom he had accompanied to Vienna in 1987, was replaced by Ali al-Naimi. With the support of his royal imprimatur, Abdulaziz practically became al-Naimi's deputy and then held the same role for the next oil minister, Khalid Al-Falih, from 2016 until he got the top job himself.
Today, with his 35 years of experience, Abdulaziz differs from his colleagues who go in and out of the OPEC headquarters in Vienna. "He knows the markets inside out," says Jeff Currie, Head of Commodities Research at Goldman Sachs Group Inc. "He's like none of the other oil ministers."
"I come with luggage," said Abdulaziz jokingly when he was talking about a video link with JPMorgan Chase & Co. clients earlier this year, according to someone familiar with what was said. "I have a long career and I've seen it all."
It was a tense meeting. In September last year, Abdulaziz chaired the energy ministers' meeting of the Group of Twentieth environmentalists, who have long accused Saudi Arabia of hampering global efforts to reduce carbon emissions. In the past few decades, the Saudis have moved from denying climate change to supporting the historic Paris Agreement of 2016 - but without giving up protecting their precious resource. The G-20 forum gave Riyadh an opportunity to get diplomatic maneuvers under control ahead of this year's key climate change conference, the COP26 meeting in Glasgow, Scotland, in November.
Hours of video-link conversations passed, but the ministers could not agree on the communiqué. European ministers wanted a greener declaration; Saudi Arabia doesn't. Eventually, Abdulaziz prevailed, arguing that if they ended the meeting without saying anything, they would all look bad.
The published communiqué endorsed several of Saudi Arabia's favorite solutions to the climate crisis. One of them is carbon sequestration, even if the technology has not proven commercially viable. Another, with no goals or schedules, is what the Saudis call "the circular economy of carbon" based on the "four Rs" - reducing, reusing, removing and reusing carbon to reduce emissions.
What all these measures have in common is that they ensure that the oil dies for another day. "We are sitting on a huge amount of hydrocarbon resources," said Abdulaziz at the meeting, "and we want to make better use of them."
Young of the Middle East Institute says Riyadh is moving too slowly to renewable energy, where the kingdom has a natural advantage in solar energy thanks to its sun-scorched desert. “Nothing happens overnight,” she says. "[But] if you look at the results so far, it's tiny."
One of Abdulaziz's predecessors as Oil Minister, the late Sheikh Ahmed Zaki Yamani, has issued a much-quoted warning: “The Stone Age did not end for lack of stones, and the Oil Age will end long before the world runs out of oil. “But he sounded the alarm more than 40 years ago, and the world is as dependent on oil today as it was then.
Yamani-like gloomy predictions are anathema to Abdulaziz, as his custody of his country's reserves suggests that he expects the much-vaunted global energy transition to take a long time.
A few years ago the International Energy Agency published one of its regular releases on how oil demand growth is slowing. "If I had to deal with IEA projections," said Abdulaziz in Abu Dhabi during a public forum at the 24th World Energy Congress in September 2019, "I would probably be [on] Prozac all the time."
Recently the IEA released a report halting all new fossil fuel investments to avoid global warming. Speaking to journalists at an OPEC + press conference in June, Abdulaziz described the document as "a sequel to the film La La Land".
Where Abdulaziz saw fantasy, climate activist Greta Thunberg saw the Saudis in retreat. "Wow," she said on June 1st on Twitter. “We are clearly seeing the beginning of the end of the fossil fuel era. You start to panic. Let's speed up the process. "
At some point, the demand for oil will reach a turning point. The signs are everywhere, from the explosion in renewable energy and the rampant adoption of electric vehicles to the US resumption of the Paris Agreement under President Joe Biden and the growing number of fossil fuel investors shy away from oil companies. It is a school of thought. The Saudis believe that peak demand is further out than green activists, a growing number of governments, and even some oil companies are forecasting. The Saudi view has received a boost in the past year and a half. After energy demand plummeted in 2020 during the pandemic, some forecasters thought that oil consumption was falling quickly. But the opposite seems to be the case: demand is growing rapidly and, according to the IEA, will reach an all-time high by the end of 2022.
Even so, Abdulaziz knows from personal experience that some things are beyond his control. Less than a week after he became oil minister, a drone attack on the oil processing center in Abqaiq, eastern Saudi Arabia, paralyzed half of the country's crude oil supplies for a few days. (The Saudi and US governments blamed Iran, the kingdom's great regional rival, for the attack. Tehran denied any involvement.) Then, within months, came the price war with Russia and, this year, the collapse of OPEC + talks.
Under pressure from shareholders to meet climate change targets, international oil companies like Exxon Mobil Corp. and Royal Dutch Shell Plc forced to cut spending on new exploration projects. Benefiting from some of the lowest cost of production in the industry, the Saudis believe there is a chance for them: invest now, if everyone else is not, and gain market share.
"Ironically, funnily enough, the more people stop investing elsewhere, the more our ability to increase our production increases," said Abdulaziz via videolink during the June event hosted by Bank of America, according to one person who worked with is familiar with what has been said.
Saudi Arabia's future as an oil superpower is all about control. What Abdulaziz did to Russia in the 2020 price war was proof of that. It worked, even if only temporarily: the Russians came back to the OPEC + table relatively tame, although the conditions - for production, for price - did not meet their wishes. But Abdulaziz's 2020 power play did little to prevent the producers' dispute in July.
One of Abdulaziz's strategies to consolidate Saudi control, as he put it in private meetings with analysts and investors, is to shape OPEC into a kind of central bank that regulates oil supplies in a way that the Federal Reserve regulates money. Of his thoughts, he told JPMorgan customers, "I copied and pasted what central bankers did." In this scenario, Abdulaziz is not just a regulator of the supply of a commodity; He is an oil industry sheriff who is crushing speculators who are messing up his territory. "I want the guys on the stock exchanges to be as nervous as possible," he said at an OPEC + press conference in September 2020. "I'll make sure everyone who plays in this market itches like hell."
He put it even more colorfully the month before at a closed-door event of the Oxford Institute for Energy Studies. “I don't like it that the market or the speculators or the media take us for granted; That's why I keep so many rabbits under my taqiyah, ”he said, referring to the traditional skullcap worn by Saudi men. "Those who are less predictable have more authority."
In the past year, Abdulaziz has achieved considerable success in his role. The price of US oil has risen above $ 75 a barrel for the first time in more than six years, and OPEC + has been able to pick up production. Oil-consuming nations are again asking the cartel to open the taps.
Yet Abdulaziz's complacent claims of dominance could haunt him. His turbulent two years as energy minister - from the drone attack on Abqaiq to the 2020 price war to the devastating collapse of OPEC + in July - show that, despite all the oil it sits on, Saudi Arabia cannot always count on the commodity to whom it stands the most strives for: total control.
Blas reports on energy for Bloomberg News in London.
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