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OPEC Ends Meeting With No Changes in Oil Production Saudi Oil Chief Khalid al-Falih Tells OPEC Changes Are Coming
(about 5 hours later)
VIENNA — OPEC countries decided at their meeting here on Thursday to make no change in their levels of oil production, citing the recent rise in prices and signs that the global petroleum glut might be easing. VIENNA — The new oil minister in Saudi Arabia, the de facto leader of the OPEC countries, had a message for the global market: Don’t expect us to influence the price of crude oil by adjusting supplies.
But the markets apparently took the news as a signal that the 13-nation Organization of the Petroleum Exporting Countries remains unable to coordinate its policies. The price of West Texas Intermediate oil, a global benchmark, was down more than 1.6 percent on the news, to about $48.23 a barrel. It had recently been trading above $50. “I think managing in the traditional way that we tried in the past may never come again,” the minister, Khalid al-Falih, said on Thursday. “Certainly we will not go with certain price targets.”
The group did select a new secretary general, Mohammed Barkindo, a Nigerian oil official. He replaces Abdalla Salem el-Badri of Libya, who had long served in an interim capacity. The message — which came after the decision on Thursday by the 13-nation Organization of the Petroleum Exporting Countries to maintain high levels of oil production — is central to the changing strategy of the Saudi crude-oil complex. And it could foreshadow a period of volatility for oil prices because OPEC’s policies and the Saudis’ sway have long helped guide the markets.
“We chose a new secretary general — that’s pretty good,” the Venezuelan oil minister, Eulogio Del Pino, said sarcastically. Venezuela is among the OPEC members urging the group to freeze or lower production levels, to shore up prices. In a sweeping directive last month, Saudi Arabia set forth plans to diversify its economy, reduce its dependence on oil and pull back on its government handouts. And what Mr. Falih does with Saudi Arabia’s oil — how much the kingdom decides to pump and where the money goes — is the biggest piece of the puzzle.
But the new oil minister of Saudi Arabia, considered the de facto leader of the OPEC countries, said on Thursday that the cartel needed to rethink its longstanding approach and its assumptions that the group can manage global oil supplies and prices. The global markets received a sneak peak at Thursday’s OPEC meeting, Mr. Falih’s first since his appointment last month as the head of an expanded energy, industry and mining ministry.
“I think managing in the traditional way that we tried in the past may never come again,’’ said Khalid al-Falih, a longtime Saudi oil executive who became oil minister in May and was attending his first OPEC meeting in that capacity. While other OPEC members have been urging the freezing or lowering of oil production, Mr. Falih is pushing to keep it high and plow the money into other industries that might prove profitable for Saudi Arabia. He wants the cartel to rethink its longstanding approach and assumptions that it can manage global oil supplies and prices.
“Certainly we will not go with certain price targets for OPEC,” Mr. Falih said, speaking to a small group of reporters in his penthouse hotel suite. He said oil producers should “let the market forces continue to seek and find that equilibrium price between supply and demand.” It runs counter to the longtime stance of his predecessor, Ali al-Naimi, who presided over an era when OPEC was largely content to restrain production to try to drive prices up.
Analysts had already been saying that the cartel’s trying to agree to a production ceiling would be of limited value in regulating OPEC output and setting market prices. That is because many of the biggest producers, including the Saudis, are already pumping near top capacity. The Saudis’ shift is easier to justify because price pressures have abated of late. While oil initially dipped on Thursday, it recovered to around $50 a barrel, about twice what it was in January.
And unless individual countries are assigned production quotas, members might have little incentive to alter their output. Oil producers should “let the market forces continue to seek and find that equilibrium price between supply and demand,” said Mr. Falih, speaking to a small group of reporters in his penthouse hotel suite.
“Without a quota system, there is no way to assess each country’s contribution to the total” said Bill Farren-Price, chief of Petroleum Policy Intelligence, a market research firm based in Winchester, England. “It is, therefore, pretty meaningless.” The Saudis can increasingly afford to go their own way. Along with a wealth of oil reserves, Saudi Arabia invested tens of billions of dollars in building a competitive oil business at a time when other OPEC countries like Venezuela and Iran allowed their industries to deteriorate.
The new Saudi oil minister’s main purpose at the meeting appeared to be trying to mend fences with fellow OPEC members. Mr. Falih has been at the core of those moves.
Mr. Falih arrived here on Monday, before the OPEC gathering got underway. He spent the ensuing time meeting at his hotel with officials from other members of the cartel, including Mr. Del Pino, the Venezuelan oil minister. Mr. Falih a 1982 graduate of Texas A&M, jumped onto the international oil scene in the early 2000s. Hoping to inject life and competition into the economy, King Abdullah, Saudi Arabia’s ruler at the time, invited overseas companies to look for natural gas after shutting them out in the 1970s.
Mr. Falih has apparently been trying to calm members’ fears about recent comments by Saudi Arabia’s deputy crown prince, Mohammed bin Salman. The prince had raised the specter of a further oil glut by saying the kingdom could easily raise production. To the surprise of Western oil executives, the king tapped Mr. Falih, then a young executive at Saudi Aramco, to manage complex negotiations for a series of joint ventures with Royal Dutch Shell of Britain, Total of France and Lukoil of Russia. Although the ventures didn’t find much gas, Mr. Falih garnered credit for deftly juggling conflicting interests.
To the broader global audience, Mr. Falih’s goal appeared to be the restoration of at least some credibility to OPEC. The group had seemed to stumble into disarray at an April meeting in Doha, Qatar, when it failed to reach a deal with major players outside the organization, including Russia, to freeze production. “After a year or so, I had to accept that he was really good at what he was doing,” said Floris Ansingh, who was the head of Shell in Saudi Arabia at the time. “He understood the different trade-offs.”
That was the last OPEC meeting with the previous Saudi oil minister, Ali al-Naimi. Mr. Falih’s international focus set the stage for the evolution of Saudi Aramco.
Mr. Naimi had initially supported such a freeze. But he was told by his bosses in Riyadh not to pursue the deal because Iran — a fellow OPEC member and a bitter geopolitical rival of the Saudis — had refused to participate. After he was named chief executive of the company in 2009, he pushed for modernization, trying to turn the state-run oil company into a global competitor that rivaled the private giants in the West. He expanded areas like oil trading and acquisitions and tried to lock up demand by investing in China and in other growing economies.
As a result, the Saudis now sometimes appear to have conflicting objectives. They seem no longer to want the role of central banker to the oil markets, attempting to balance supply and demand. But despite the recent rally in oil prices, they were apparently shocked by the consequences of their refusal to impose market discipline, which led to crude’s dropping below $30 a barrel in January. Saudi Aramco has recently developed three giant oil fields, sharply increasing the amount of oil it can produce. The company earned an estimated $200 billion from oil production last year, according to the commercial intelligence firm Wood Mackenzie.
“The Saudis are optimizing for a world in which prices go through big swings, ” said Robert McNally, a former White House energy adviser who is now the president of Rapidan Group, a Maryland-based market research firm, “Yet they want to retain some sense of stability provided by OPEC.” “The view in the industry is that Aramco is one of the best oil companies in the world,” said J. Robinson West, a senior adviser on energy at the Center for Strategic and International Studies, a research firm. “Khalid has been important in building that.”
Mr. McNally said those two objectives were “completely contradictory” and that “boom and bust cycles” were the likely outcome “when there is no one balancing the markets.” Mr. Falih also seems unafraid to tread on sensitive ground.
Since late 2014, the Saudis have adopted a strategy of leaving prices to the market, to the dismay of some other OPEC members. The Saudis, who have very low production costs, calculated that lower prices would squeeze out some of their higher-cost rivals including shale oil producers in the United States. As the head of the national oil company, he warned that fast-rising domestic fuel consumption risked eroding the crude-oil exports that are the kingdom’s main source of cash.
In a sense, the strategy has worked. Oil companies have slashed or postponed hundreds of billions of dollars of investment in new oil and gas projects, and shale oil production in the United States is beginning to decline. “We need to make sure that we use our precious oil and gas resources efficiently, wisely and minimizing waste,” Mr. Falih said at a dinner in 2010.
“It has taken longer and involved a lower price than they would have thought, but it is working,” said Jason Bordoff, a former White House energy adviser who is now director of the Center on Global Energy Policy at Columbia University. At the time, rethinking the country’s energy use at home was a politically fraught issue. Government subsidies that kept fuel cheap were considered an untouchable piece of the Saudi social contract. And with oil prices surging back then, the kingdom’s oil wealth, it seemed, would only grow.
Now, his warning is part of the new Saudi mind-set.
“He is a very astute political player,” said Valérie Marcel, author of “Oil Titans,” a book about national oil companies. “He has been able to push back and create space to debate issues, while still keeping himself in good position with the ruler.”
Mr. Falih also recognized early on that growing concern for the climate could reduce demand for Saudi oil, creating a risk that a large portion of those resources might be left in the ground.
On Thursday, Mr. Falih said that Saudi Arabia was now preparing for the worst case by moving aggressively to spur growth of nonoil-based industries. While he said he thought that demand for crude would last for generations, Mr. Falih added that “we as human beings cannot be complacent and assume that oil will continue to fuel the world forever.”
In recent years, Mr. Falih has taken on the role of trusted confidant, serving as adviser and troubleshooter for Prince Mohammed bin Salman. In 2015, the prince put Mr. Falih in charge of the kingdom’s troubled Health Ministry, which was struggling to contain a deadly respiratory virus called MERS.
In his new role, Mr. Falih has significant oversight of a huge portion of the Saudi economy. The Oil Ministry absorbed the Ministry of Electricity and was renamed the Ministry of Energy, Industry and Mineral Resources. He has also been appointed head of the government-owned mining company, a state-run industrial fund, the geological survey, the atomic and renewable energy program and a number of other state-run economic bodies.
Mr. Falih faces a huge set of objectives, some in areas where his predecessor came up short. Despite its oil wealth, the kingdom struggles to produce sufficient natural gas to meet the fast-growing needs of electricity generators and industry. Efforts to develop solar power and other renewable energy sources have also lagged some of Saudi Arabia’s neighbors, like the United Arab Emirates.
Mr. Falih is part of the plan to refocus the country’s financial firepower to invest in areas other than oil. In a sign of the shifting strategy, the kingdom, traditionally conservative in its investment approach, recently invested $3.5 billion in the ride-sharing start-up Uber. It was one of the largest investments into a privately held start-up.
Mr. Falih is also in charge of the effort to sell a small stake in Saudi Aramco to investors with a target of 2018. He said the idea was to make the company more global as it looks to add investments in natural gas.
A public listing might also improve the company’s performance.
“If you have to face the analysts every quarter,” he said, “it gives you a bit of competitive tension.”
To make it all work, Mr. Falih will have to persuade the country’s stubborn constituents to adopt a more commercial focus and to participate in joint ventures with international companies. While some doubt whether Mr. Falih is the right person to lead this transition, others say only an insider has the credibility to do so.
Either way, the oil market will be watching.