Handelsblatt Exclusive

Saudi Arabia's Uncertain Oil Future

Khalid Al Falih_Marko Priske for Handelsblatt
Khalid al-Falih in Berlin.
  • Why it matters

    Why it matters

    As Saudi Arabia’s energy minister and the chairman of Saudi Aramco, the world’s largest oil company, Khalid al-Falih is among the most important players on the global oil markets.

  • Facts

    Facts

    • As part of its “Vision 2030” plan to revitalize its economy, Saudi Arabia is planning an IPO for state oil company Aramco.
    • Details are still uncertain and will “require a great deal of internal preparation,” al-Falih said.
    • He also emphasized that despite doubts from abroad, his country will “completely adhere” to climate protection goals reduce oil dependence.
  • Audio

    Audio

  • Pdf

Times are changing in Saudi Arabia, where Energy Minister Khalid al-Falih told Handelsblatt that the leadership wants to reduce its dependency on oil and modernize its economy.

German companies will play a crucial role in this process, he said, citing this week’s announcement of a major deal with industrial giant Siemens to produce gas turbines for the country.

Another key aspect will be the “Vision 2030” economic initiative, which aims to privatize state companies like oil giant Aramco, where Mr. al-Falih also serves as chairman. Mr. al-Falih was cagey on the progress towards an IPO for Aramco, which is valued in the trillions and could become the largest-ever public offering.

Mr. al-Falih outlined the country’s plans in an exclusive interview with Handelsblatt.

 

Handelsblatt: Mr. al-Falih, how will the price of oil develop in the near future?

Khalid Al-Falih: (laughs) It’s always dangerous to predict the price of oil, no matter who you are. The price is formed in the market and is influenced by many factors. Ultimately, market fundamentals, or supply and demand, are the primary determinant of the oil price, and at the moment we see healthy demand for oil. That said, there are economic headwinds in some important markets and we hope this does not trigger a slowdown in global demand. On the supply side, the recent decrease in prices has led to reduced investment and a considerable drop of oil supplies from unconventional sources.

You mean the oil from fracking in the U.S. and from oil sands in Canada?

Yes, we have seen a decrease in supply by roughly one million barrels of crude oil per day. At the same time, demand has recovered, meaning that supply and demand are now more balanced again. But there are still excess stocks on the market – hundreds of millions of barrels of surplus oil. It will take a long time to reduce this inventory overhang.

The size and complexity of an initial public offering of Saudi Aramco will require a great deal of internal preparation. The actual IPO timeframe will also be subject to a number of external factors.

But we have to consider not only the physical barrels present in the global oil market, but also the “paper barrels” traded in the financial community that also impact on prices. In addition, disturbances or incidents in producing countries can result in supply disruptions, as we saw recently in Nigeria and Canada. All these factors affect the oil price and make it impossible to answer the question about future prices. I will say this, however: The market is coming into balance again and the oil price is now moving in the right direction.

But can Saudi Arabia live with an oil price that is currently around $50 per barrel?

It is not about Saudi Arabia. Oil prices at their current levels lead to insufficient revenues being generated by the oil industry, and consequently result in limited investment in future production. This means that in the future, higher levels of demand cannot be satisfied. We need a price higher than $50 to achieve a balance in oil markets in the long term.

How many dollars per barrel would suit Saudi Arabia then?

The whole industry needs more income to sustain investment. And just as $50 is too low to sustain investment, prices in excess of $100 are too much. The optimum lies somewhere in between.

But what oil price does your country need to manage its national budget?

That’s not the question. The market does not reach a price to compensate for the Saudi budget. We have to manage this issue ourselves. And that is one of the drivers of Saudi Vision 2030: a decoupling of our state budget from the oil market. Let me also state that the Vision is not driven by low oil prices, as we would also implement it even if the oil price rises above $100 again.

Is the Organization of the Petroleum Exporting Countries still leading international oil markets, or is it now just a marginal player?

OPEC was and remains an important institution in the oil market. Many believe OPEC just wants a high price for oil – but that’s not true. Rather, OPEC plays an essential role in bringing together key producing countries and in coordinating with other major producers around the world. Thus, it limits the volatility of the oil market and ensures the steady flow of oil to supply the global economy.

 

12 p06 Saudi Arabia’s Oil Dependency

 

How big do you want the share of oil to be in global energy consumption?

Oil will remain an important part of the international energy mix, even though its share will decrease over the years due to renewable energy, greater energy efficiency and increases in other energy sources. This does not mean that the absolute amount of required crude oil will drop. On the contrary: the overall demand for oil is increasing, especially for oil from emerging countries, even as its share in the global energy mix decreases, simply because there is such significant growth in overall energy demand.

Some Western industrialized countries, like Germany, are committed to massively reducing the share of fossil fuels they use. How realistic is this, and what does it mean for oil exporters like Saudi Arabia?

It’s not my job to assess the energy policy objectives of individual states. However, I have great respect for the German government and the German people. They are determined to achieve their energy policy and meet ambitious targets for decarbonization. Germany is an extremely competitive country –and if any country in the world manages to reduce carbon emissions while maintaining economic competitiveness, it’s Germany.

Do you see a blueprint for other countries in this?

The rapid expansion of renewable energy in Germany is admirable. However, it must be affordable if a country’s total competitiveness is not to be jeopardized. That may work in Germany but not everywhere else in the world. One couldn’t use the German model for Saudi Arabia or China, for example. Each country has its own very specific conditions and must find its own way.

What are Saudi Arabia’s key energy goals?

We committed ourselves to ambitious carbon reductions during the Paris climate conference late last year. We are convinced that we can achieve these goals and will strive for further progressive reductions when we do.

The strong dependence of the Saudi Arabian state budget on Saudi Aramco has long given me worry. It is right that the government wants to gradually disengage from this dependence,

The impression that Saudi Arabia is isolating itself from the climate protection goals is completely wrong. Saudi Arabia today depends heavily on oil and accordingly any global agreements that impact this commodity will disproportionately impact the Kingdom. And so, while we completely adhere to the climate protection goals and plan to continue reducing our dependence on oil and transforming our economy, we will need the cooperation of the international community and consideration for our special economic situation.

That would mean reducing the use of oil in your own country. What are the alternatives? Natural gas or solar energy?

We will replace oil with natural gas, while simultaneously increasing the share of renewables in our energy supply. Wind and solar power are a priority in the first step, though in the medium term we may also rely on nuclear power.

Saudi Arabia has huge energy consumption per capita, largely due to air conditioning.What needs to change?

We need a significant increase in energy efficiency. This starts with production and ends with energy consumption. The government’s Saudi Energy Efficiency Program has already implemented new standards to curb inefficient consumption of energy in the utilities and transportation sectors as well as in electrical appliances. Such standards will preserve precious resources for future generations and help us meet our commitments for carbon emissions reduction.

In recent years, your country has promoted the expansion of solar power and building nuclear power plants to reduce the dependence on oil. What are the results of this?

There are a number of pilot projects that have been launched. Saudi Aramco has a number of smaller photovoltaic parks in operation and this is just the beginning. The Saudi Electricity Company (SEC) has started a tender for a photovoltaic project with 300 megawatts of capacity, and we are advancing into the field of large-scale plants.

 

The Middle East map-01 Iran Saudi Arabia Iraq

 

That sounds rather modest. At one point, 40,000 megawatts was the goal.

Yes, that’s true. We set this ambitious goal at first and the objective still remains. But it is a long-term one and we want to go step by step. In the first phase, we are striving to build photovoltaic plants with an installed capacity of 9,500 MW.

As Chairman of Saudi Aramco, are you saddened that your country aspires to a budget without the influence of oil by 2030?

On the contrary, that makes me happy. The strong dependence of the Saudi Arabian state budget on Saudi Aramco has long worried me. It is right that the government wants to gradually disengage from this dependence.

Saudi Arabia wants establish itself a location for energy-intensive industries. How does that fit your climate protection targets?

We see energy-intensive industries such as basic chemicals, steel and aluminum as a starting point for further economic development and industrialization of our country. We have optimal factors for energy-intensive industries, but do not want to be over-reliant them. Our aim is to extend and diversify the value chain beyond the starting point, which will gradually reduce our energy intensity while leveraging our excellent infrastructure like ports, railways and highways. To that end, we are also working hard to train the young people in our country and to motivate them to be an active part of this development process. All of this is part of Vision 2030. We want to transform to a highly developed industrial country similar to Germany, Japan or the Republic of Korea.

What role do Western corporations play in this?

Western corporations play a key part in this economic transformation. We are convinced that we can achieve our goals much faster and at a lower cost if we partner with foreign corporations and leverage their technologies, expertise and global networks. Saudi Aramco is an excellent proof point in this area, as it has become the most valuable corporation in the world, in large part because we have worked together with partners.

How is the cooperation with German corporations doing?

Siemens is a good example of mutually beneficial partnership with a leading German firm. They have just invested in the manufacturing of gas turbines in Saudi Arabia and we have an interest in repeating commitments like this.

What does the schedule for privatization at Saudi Aramco look like?

The size and complexity of an initial public offering of Saudi Aramco will require a great deal of internal preparation. The actual IPO time frame will be subject to a number of external factors including equity market conditions, oil price outlook, and domestic capital market readiness.

Which banks will accompany the IPO? Rumor has it that Deutsche Bank has been chosen. Is that true?

No decision on the selection of banks has been made at this stage.

With regard to “Vision 2030,” the complete rebuilding of your country’s economy, when will Saudi Arabia’s budget no longer depend on oil? 

Even very advanced economies use oil as source of revenue. Germany does this by imposing taxes on fuels, for example. In a similar fashion, the Saudi government will not turn its back on the revenue generated from the oil business. Oil is our main commodity and we are blessed with abundant resources at a competitive cost. In addition, the world’s well-being and economic prosperity rest on having stable access to energy, including oil. Therefore, our Kingdom will not reduce revenues from oil. It will continue to be substantial even as we create new industrial sectors and new sources of revenue.

 

12 p06 Saudi Arabia's Economy-01

 

But how realistic are these plans in the light of only 1.5 percent economic growth in the first quarter? The non-oil sector even closed with minus 0.7 percent, in fact.

In Germany people love good cars and driving fast. But when you leave the Autobahn to get onto another highway, you need to step on the brake. This is the same for us. We had to step slightly on the brake in order to accelerate fully after coming out of the curve, so to speak. Looking at Saudi Arabia’s gross domestic product today, one recognizes a tremendous development. But building new industrial sectors needs time and the first steps are cutting state expenditures and introducing budgetary discipline. For an economy that depends heavily on public investments, this naturally leads to a slight cooling down of the economy. But within a short time, growth will be sparked by the successful remodeling.

What does this rebuilding mean for Saudi society?

Our society is very young. My generation is in the minority. Young people rely on knowledge and technology and are skeptical of the ways of the past. They dream of a future where one will not have to look at the daily movement of the oil price. They want to be in control of their own destiny. Vision 2030 makes this possible and is popular especially among young people.

Although much of it is about infrastructure projects?

Vision 2030 is mainly about macroeconomics, some of which involves the construction of railways, ports and industrial cities. All of this is important and necessary, particularly for private sector growth, enhanced productivity and economic diversification. But essentially it is about developing Saudi Arabia into a country worth living in for the young people and improving the quality of life. Many people around the world consider Saudi Arabia to be out-of-date, and we want to change this view entirely. We want talented young Saudis and young people from all over the world to live in the Kingdom, to enjoy a high quality of living, and to build bright futures for themselves and their families.

But there are strict rules.

With proper consideration for our heritage, our culture and our religion, we want to enable people to relax there, to raise their kids, to enjoy entertainment, to go shopping and to spend their hard-earned money there.

You talked about spending. One of the aims of the part-privatization of Saudi Aramco is to build the world’s biggest sovereign wealth fund with the received money. Where will this money will be invested?

This Public Investment Fund (PIF) is currently located at the Ministry of Finance and will be made into an autonomous fund. It will be the biggest sovereign wealth fund in the world.

With $2 trillion in capital?

That is the size we are targeting. It could become even more. The PIF will target new strategic investments to realize Vision 2030, and will also be active in investments abroad to generate income and diversification. The introduction of taxes and duties also serves the goal of diversifying government revenue.

This is completely new to Saudi Arabia.

Yes, so far there have been almost no taxes in Saudi Arabia. Now a VAT will be introduced as quickly as possible without hindering our competitiveness. This will generate additional revenues and make the Saudi budget less dependent on oil revenues.

Does the decision on the Brexit in Great Britain have an influence on your considerations for investments?

Of course the Brexit is a serious development for Great Britain and the European Union. But both will remain great economic powers. After the initial market reaction, I hope that the markets will get in order again. We have full confidence in the leadership of Europe and Great Britain to deal with Brexit in a manner that minimizes negative economic and financial consequences.

 

Mathias Brüggmann is the head of Handelsblatt’s foreign affairs desk. Klaus Stratmann is the deputy bureau chief of Handelsblatt in Berlin and covers the energy market. To contact the authors: brueggmann@handelsblatt.com and stratmann@handelsblatt.com

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