Saudi Aramco is now suffering the consequences of failed oil price war

It was evident to anyone with even half a brain that the last Saudi-instigated oil price war would end in abject failure for the Saudis, just as the previous 2014-2016 effort did and for the very same reasons.

For Crown Prince Mohammed bin Salman (MbS), one of the masterminds behind the oil war – the economic and political problems that his country now face appear to come a very distant second to preserving whatever he thinks is left of his own reputation, with the most obvious public manifestation of this being the aftermath of the internationally-shunned omni-shambolic initial public offering (IPO) for hydrocarbons giant, Saudi Aramco (Aramco). Consequently, in order to stand by one of the inducements required to inveigle anyone to buy the shares – in the triple-locked guaranteed dividend payout – swingeing cuts to key projects for Saudi Arabia are now being announced.

Despite the 50 percent plunge in Aramco’s net profit for the first half of this year – a result of the Saudi-led oil price war at a time when demand was already choked off by the COVID-19 outbreak – the company is still obliged to hand over US$18.75 billion in this quarter alone to those who bought the Aramco shares during the IPO. This dividend obligation – and it will total US$75 billion for the full year – will have to be paid for through budget cuts over and above the US$15 billion in Aramco’s annual capital spending alluded to by Aramco’s chief executive officer, Amin Nasser, just after the profits figures. This will take the total down from around US$40 billion to around US$25 billion. Further reports have stated that even this US$25 billion figure is set to be reduced by another US$5 billion, taking the total capital spending in this year from US$25 billion to US$20 billion. 

Whatever the cuts, it remains a stark fact that the two dividends together for the first two quarters of this year – US$37.5 billion – far outstrips Aramco’s total free cash flow of US$21.1 billion for the same period. This looks even worse for Aramco – and Saudi Arabia as a whole – in light of the recent release of results showing that the smoke-and-mirrors ‘purchase’ by Aramco of a 70 percent stake in the Kingdom’s key petrochemicals company, Saudi Basic Industries Corporation (SABIC), for the originally-intended US$69.1 billion, looks increasingly like a bad decision. According to results collected by data firm Mubasher, based on the companies’ financial results disclosed to the Saudi Tadawul Stock Exchange, SABIC was responsible for 91 percent of the combined losses of SAR2.4 billion (US$639.89 million) made by Saudi Arabian listed petrochemical companies in just the second quarter of this year. Specifically, SABIC lost SAR2.22 billion in Q2 alone.

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Amongst the slew of projects to be indefinitely suspended is the once much-vaunted flagship US$20 billion crude-to-chemicals plant at Yanbu on Saudi’s Red Sea coast, according to various reports. The similarly high-profile purchase of a 25 percent multi-billion dollar stake in Sempra Energy’s liquefied natural gas (LNG) terminal in Texas is also apparently under threat, although Sempra for its part has said that it continued to work with Aramco and others “to move our project at Port Arthur LNG forward.” In the same vein, according to various news sources, Aramco has suspended its key US$10 billion deal to expand into mainland China’s refining and petrochemicals sector, via a complex in the Northeastern province of Liaoning that would have seen Saudi supply up to 70 percent of the crude oil for the planned 300,000 barrels per day refinery. In sum, it appears that all of Aramco’s principal projects aimed at diversifying Saudi Arabia away from the relatively zero added-value pursuit of just pumping and selling crude oil are now subject to review and/or outright suspension. 

All of this comes at a time when MbS’s grip on power at home has never been more tenuous. It should be remembered that just before the full onset of the latest Saudi-instigated oil price war, MbS had yet another round-up of his high-ranking opponents (the previous major one was at the end of 2017 in the notorious Ritz-Carlton round-up). The latest round-up included Prince Ahmed bin Abdulaziz, a younger brother of King Salman, and Prince Mohammed bin Nayef, the King’s nephew and the former crown prince. This followed numerous reports that the health of the 84-year old current king, Salman, is very poor, which has prompted a jostling of senior royal Saudis for the succession. It should also be borne in mind that MbS was not always the natural successor to King Salman: before June 2017 (when the succession was changed in MbS’s favour), the heir-designate was the aforementioned Prince Mohammed bin Nayef, whilst the also aforementioned Prince Ahmed bin Abdulaziz was one of three members of the Allegiance Council (the senior royal organisation that endorses the line of succession), to oppose MBS’s appointment as crown prince in place of his cousin bin Nayef in 2017.

MbS’s ability to rely on the support of Saudi’s longstanding core ally – the US – is also in serious question, following the second Saudi-instigated oil price war in less than five years aimed specifically at destroying or disabling the US shale oil sector. Since his ascent to effective power, MbS has been at least complicit in a litany of huge errors as far as the US is concerned, including – but by no means limited to - the Saudi-led war in Yemen, the cosying up of Saudi to Russia in the OPEC+ grouping, Lebanese President Michel Aoun’s allegation in 2017 that then-Prime Minister Saad al Hariri had been kidnapped by the Saudis and forced to resign, and the murder of dissident Saudi journalist, Jamal Khashoggi, which even the CIA concluded was personally ordered by MbS. Over and above all of these, though, in the US’s view, has been the breaking of the basic trust between the two countries that was established in the 1945 agreement made between the US and Saudi Arabia on the Bitter Lake segment of the Suez Canal. The agreement made between US President Franklin D. Roosevelt and the Saudi King at the time, Abdulaziz, was that the US would receive all of the oil supplies it needed for as long as Saudi Arabia had oil in place, in return for which the US would guarantee the security of the ruling House of Saud. After the 2014-2016 oil price war, this deal changed slightly to incorporate the US expectation that the House of Saud would ensure that Saudi Arabia not only supplies the US with whatever oil it needs for as long as it can but also that it also allows the US shale industry to continue to grow. If this means that the Saudi-led OPEC+ production cuts creates a situation in which Saudi loses market share to US shale producers then that is just the price that the House of Saud must pay for the continued protection of the US - politically, economically, and militarily. 

The surest sign that the US does not trust Saudi in general, or MbS in particular, anymore to uphold its side of the deal was shown in the fact that in order to end the latest oil price war at the beginning of April US President Donald Trump had to resort to an outright, clear threat. Trump had previously repeatedly made warning comments to the Saudis alluding to this 1945 deal, including at a rally in Southaven, Mississippi, in October 2018: “I said, ‘King [Salman] we’re protecting you. You might not be there for two weeks without us.’” This came shortly after a similar comment from Trump in a speech before the UN General Assembly, when oil prices were again being pushed higher after the Saudis reversed their oil overproduction/destroy US shale oil strategy: “OPEC and OPEC nations are, as usual, ripping off the rest of the world, and I don’t like it. Nobody should like it,” he said. “We defend many of these nations for nothing, and then they take advantage of us by giving us high oil prices. Not good. We want them to stop raising prices. We want them to start lowering prices and they must contribute substantially to military protection from now on.” After the Saudis had launched the latest oil price war, though, the warnings became a straight threat/promise, with Trump reportedly directly telling MbS on 2 April in a telephone call that unless OPEC started cutting oil production, he would be powerless to stop lawmakers from passing legislation to withdraw US troops from the Kingdom. 

By Simon Watkins for Oilprice.com