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Saudi shake-up has oil world wondering what’s next

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The sudden replacement of Saudi Arabia’s oil minister Saturday set off fresh speculation over whether the kingdom might shift tactics amid one of the largest oil busts in history.

Longtime minister Ali Al-Naimi refused to maintain Saudi Arabia’s traditional role as a swing producer and lower crude production, even as oil prices have remained at historic lows since late 2014. This position had been widely viewed as an attempt to put shale producers in Texas and other oil rich states out of business.

The new minister Khaled Al-Falih, the chairman of state-owned Saudi Aramco and a Texas A&M graduate, offered no signs Saturday he would shift course. But the unexpected nature of the move raised question about what Saudi Arabia’s next play might be.

“There was a group of us talking about it at Starbucks this morning, and we were all scratching our heads,” said Larry Oldham, an oil financier in Midland. “You just don’t know what these young guys are going to do.”

The replacement of the 80-year-old Al-Naimi was just one in a series of sweeping royal decrees on Saturday, as King Salman replaced a number of top ministers and restructured government bodies in the first moves of an ambitious plan to chart a new direction for the kingdom and decrease its reliance on oil revenues.

The decrees were among the first concrete steps in the plan, which was announced late last month to great domestic fanfare by the king’s son Mohammed bin Salman, who is about 30 years old and oversees economic policy and runs the Defense Ministry.

The prolonged slump in oil prices has forced Houston-based companies to layoff tens of thousands of people, it has rattled real estate markets, and has brought the city’s growth to a near standstill. But few market observers said they expect significant swings in oil prices from the news when U.S. markets open following the weekend.

Difficult times

In the short term, Saudi oil exports are unlikely to change, said Praveen Kumar, executive director of the University of Houston Global Energy Management Institute. But he said the fact Al-Naimi’s strategy to push out U.S. shale production has largely failed so far weakened his position within the kingdom.

“He totally underestimated the resilience of the shale producers and their ability to achieve cost efficiency. They thought it would take six months and that timing was completely off,” Kumar said. “Al-Naimi’s been there for decades. Getting him out allows the new power centers in Saudi Arabia to devise the long-term strategy for production and its role in OPEC.”

The shift in leadership comes at a difficult time for the kingdom. The regional order over which Saudi Arabia has long prevailed is in tatters, with wars raging in Iraq, Syria and Yemen, and with its regional nemesis, Iran, extending its influence. Also, low oil prices have shaken the Saudi economy, causing the government to run huge budget deficits and leaving government contractors falling behind in paying salaries.

Al-Naimi’s oversight of oil policy for the kingdom, the world’s largest oil exporter, had made him a towering figure in world oil policy, whose mere utterances were closely scrutinized by traders seeking to understand the country’s thinking.

Jim Krane, a fellow at Rice University’s Baker Institute for Public Policy, joked even a misplaced comma by Al-Naimi could send the world’s oil markets rising or falling.

“His word was the closest thing to gold,” he said. “Whether or not (Al-Falih) is going to cut the same figure as Al-Naimi, entrusted with so much power and decision making, we’ll have to wait and see. He’s a technocrat in the vein of previous Saudi energy ministers and is considered a safe pair of hands inside and outside the kingdom.”

Texas A&M Chancellor John Sharp offered kudos: “Our heartiest congratulations to Khalid,” he said. “All part of the Aggie plan to take over the world! Seriously, the education he got here and his success makes all of us very proud that Khalid is a member of the Aggie network and family.”

‘We’re optimistic’

After graduating from Texas A&M with a degree in mechanical engineering in 1982, Al-Falih went on to spend his entire career at Aramco before being appointed CEO in 2009.

While pundits downplayed the impact of Saudi’s move Saturday, in the heart of West Texas’ oil fields producers were of the mind any change was good news.

Oil prices have rebounded since the beginning of the year and are now trading around $45 a barrel. But some companies in Midland are carrying so much debt even a rise to $60 a barrel was unlikely to be enough to save them, Oldham said.

“All Saudi Arabia has to do is change production 1 (million)-to-2 million barrels a day and oil will pop significantly,” he said. “We’re optimistic this could cause a price rise.”


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