Some smart guy once said that Russia is a riddle wrapped in a mystery inside an enigma. In comparison, Saudi Arabia is almost as puzzling though in a more material way, like a devout sun-baked crank wrapped in a fur coat in a gold Ferrari. Not dumb by any means, but playing poker with the world’s industries and a very big war chest. For decades, we’ve watched the country float along on a vast sea of petro-wealth, notable mostly for its hyper-religious society and somewhat incongruous displays of how to spend vast wealth in ridiculous ways (I wasn’t kidding about gold Ferraris). Then out of the clear blue sky, the Saudis have been taking so many left turns they look like Indy car racers.
These policy shifts are the geopolitical equivalent of a mid-life crisis. Not necessarily bad, but the seismic events they create in the energy world are pretty huge. First, in 2014 SA abandoned the long-time habit of supporting oil prices, or even pretending they were. Shortly after, they announced plans to begin privatizing Saudi Aramco, the world’s largest oil company. Then they recently unveiled their Vision 2030, which is pages and pages of rebirth jibber jabber that hardly mentions oil, other than to say the country is so much more than that. Which is technically true, in the same way it’s technically true that I’m more interested in beer than oxygen.
Saudi Arabia is synonymous with oil prices. They have achieved this reputation thanks to their huge oilfields, their machinations with OPEC, and their solitary claim to have millions of barrels per day of spare oil production capacity. It has been a good run for the Saudis, who have amassed incredible wealth and kept the world’s commodity markets dancing to their tune, all while keeping a lid on the smoldering powder keg of discontent at home. It’s been a remarkable feat actually, for a country that still doesn’t, for example, even allow women to drive. (If I was in a pickle, I’d rather have Jessie Graff in my corner than any Saudi male I’ve ever seen. But that’s another topic.).
Their odd antics of the past few years therefore indicate that the old blueprint has been tossed out the window. We should all pay attention because the ripples from these events are going to massively impact the petroleum industry, and everyone else for that matter.
In broad strokes, these decisions announce a colossal shift in the energy world. Foremost in importance is the privatization of Saudi Aramco. Initially, the plan seems to be to sell off 5 percent, though news recently surfaced that SA was contemplating selling up to 49 percent (which story was quickly quashed; the quashing doesn’t mean it wasn’t true, it means no one is supposed to say it. Yet.).
Why is selling off a small percentage a big deal? Because for the first time we will start learning the reality of Saudi Arabia’s oil fields and reserves. They’ve always told us whatever they wanted, never subject to any verification because only they knew the answers. SA always assured us they had millions of barrels per day of excess capacity, though when they really needed it (as prices headed above $140/barrel) it never seemed to materialize. Instead they started drilling for oil at a faster rate than they ever had in their history.
The fog even persists around their legendary reserves. SA’s stated oil reserves took a huge leap in the mid 1980’s despite no new major field developments, an event that happened suspiciously closely to OPECs decision to award production quotas based on reserve levels (other OPEC countries sharpened their pencils similarly in the same time frame). Since then, official reserves have held steady at around 260 billion barrels, despite producing 35 billion barrels per year. They’ve said this stuff with a straight face for years and no one even blinked, like they’ve discovered a new way to do math and the rest of us are idiots for even questioning it.
However, privatization plans apparently include Saudi Aramco’s production arm, despite initial speculation that they would be excluded. As a public entity, Saudi Aramco will have to provide much more detail on the juicy stuff they’ve been keeping secret forever.
Then there’s the fact that SA is looking to cash out on its national treasure at a time when oil prices have been hammered. For a country that can control prices at will (they could shut in 3 million b/d tomorrow and prices would skyrocket), that seems a very strange tactic, because the reserves would fetch a much larger sum if sold at a period of high prices.
The last big thing is the country’s “Vision 2030” master plan. No mockery here, it sounds like a brilliant direction for a country known mostly for oil wealth (although, from the preamble, the comment that “We are determined to build a thriving country in which all citizens can fulfill their dreams, hopes and ambitions.” doesn’t specifically address whether “all citizens” and their ambitions means “women” and “driving” but hey it’s a start for a conservative society). The vision mentions specifically selling off (at least part of) Saudi Aramco, diversifying the economy, and cutting down on bureaucracy.
Putting it all together – the decision to crater oil prices, the big new vision, the sale of Saudi Aramco – and it looks like the lords of oil see a pretty different future for the commodity. It’s hard to say exactly what that vision is, but it most likely is one of a few alternatives. The first is that the Saudis see green energy/technology coming fast enough to devalue the bulk of their reserves, hence the selloff and new master plan. Another alternative is that the country’s reserves aren’t all they’re cracked up to be, and that we’ll find that out soon enough.
The latter seems most likely, because oil demand continues to rise and green energy is nowhere near making a serious dent yet. SA’s 5 largest oil fields were discovered between 1948 and 1965) and they know an astonishing amount about their reserves (subject of a coming post). Nothing lasts forever, and public comments on reserves or production capability thus far have been strategic bluster. That’s about to change; trying to blow smoke up the butts of auditors and analysts is not in the same league as the relative ease of toying with the world’s media.
Whatever is going on behind the scenes, the shake up in Saudi Arabia is going to change the oil industry significantly. And maybe even the garish Ferrari market.
Read more insightful analysis from Terry Etam here