Saudi Arabia’s Minister of Energy Khalid Al-Falih is considered to be one of the most influential individuals on the global oil market. Traders, investors and officials keep close tabs on his comments, which can spark serious price changes to the world’s ‘black gold’. Al-Falih, who has worked his entire life in the oil sector, has gone through all corporate hierarchy levels of the Saudi Aramco oil giant and naturally, after having served as the company’s chief executive, he took over the leadership of the country’s oil sector.
Under Al-Falih, relations between Russia and OPEC started developing by leaps and bounds and resulted in a deal being reached between OPEC member-states and oil producing countries, which are not part of the cartel (OPEC+), and this made the situation on the oil market more predictable. It is also mainly thanks to Al-Falih’s efforts that Saudi Arabia has been actively working with the Russian Direct Investment Fund and its head Kirill Dmitriev. Al-Falih said RDIF is “an important bridge” between the two countries.
In his interview with TASS, the Kingdom’s Minister of Energy Khalid Al-Falih spoke about what the future holds for the OPEC+ deal in 2019, whether oil prices in 2019 will surpass $100 per barrel, and whether Saudi Arabia will use oil as political leverage in the case of Saudi journalist Khashoggi, who went missing in Istanbul. In addition, he will also talk about working with the Russian Direct Investment Fund, and Saudi plans for investing into Russian companies, and a joint venture with Rosneft and meetings with Igor Sechin.
— Over the last year and a half, Saudi Arabia has been widely mentioned in the Russian media because of the OPEC+ deal, signed by OPEC and Russia that helped to stabilize the market quite significantly. Are you happy with how this agreement has been working out so far and what was the main outcome for the global oil market from this deal?
Allow me to go back a few years back. At the beginning of this decade oil prices were $100 per barrel and many people thought that this was the new normal. Demand was growing, slower than now, but still growing, supply and demand in balance. But in reality the balance was due to outages in some countries due to geopolitical issues. High oil prices were hurting demand and we saw that demand slowing down considerably by 2014. It takes time for demand to respond, but it ultimately responds. We saw it in 1980s, in 2000s, we are seeing it now. In a period of 3-4 years after the price hike we see the demand response. And also, which is more significant, we saw the supply respond in a form of expensive oil from offshore and most notably from US shale coming on strongly. And ultimately the oil caused an oversupplied and unbalanced market. In 2013-2014 it was obvious to us that market was not sustainable under those conditions. And as a result we saw the price crash from $100 to $25-30 per barrel. Consequently we started our discussions with our Russian colleagues, most notably there were discussions at the leaderships level in 2016 during the G20 meeting in China, where president Putin met with His Highness The Crown Prince.. And they agreed that Russia and Saudi Arabia needed to help the world to get out of the slump. Because the slump was hurting the world, not only the producers, but even the consumers, who were affected by the slowdown of industrial growth, inflation, negative interest rates. After that first meeting we met later. And not the two of us agreed, but 24 countries in Vienna in December 2016 agreed to create the OPEC+ alliance to manage production . We did not shock the market by constraining supply. We did it very gently. And the result was that by early this year the market was returning to balance. Excess inventories, which were very high and depressed the market, disappeared. We are now close to 5 year normal average of oil stocks. Supply and demand are close to each other, and the market is balanced. Of course, it helped producing countries like Russia and Saudi Arabia. But, also it helped consumers a lot. Returning the oil markets to balance was the lubricant for the global economy to return to the growth to the very healthy rate we are seeing now. All the parameters of the global economy are healthy. So, in a nutshell, we appreciate Russia’s role. What we want to do? This cycle is ending, and oil market will ultimately go through another cycle. We want to keep supply and demand balanced in the long term. In last three to four month we have coordinated with minister Novak to increase supply, because by May this year there was a lot of stress in the market about the shortage of oil, especially with sanctions and with reductions in some countries like Venesuela and Mexico . There were concerns, that there would be a shortage of oil. And if we continued the same policy that we had had in the previous 1.5 years, we would see the oil above 100 again. So we intervened. We had discussions with minister Novak during the Saint Petersburg Economic Forum in May and we met in Moscow during the opening of the World Cup. Finally we agreed that it was time to change the course. The policy of withdrawing supply has accomplished its mission, and now it is time to gradually release supply. We have managed to convince the OPEC+ group. And from June till now we see the market has relaxed. So we have proved to ourselves that we can work with Russia and keep the markets balanced whether there is the shortage or oversupply. So I want to emphasize that given the success of two years coordination between KSA and Russia, we need to establish the framework for the long-term coordination. . Oil market is always cyclical, and without cooperation that cyclicity causes the severe volatility. And it is important to help moderate the volatility so that all participants and especially investors know that big producers like Russia and Saudi Arabia are working together to balance the markets.
— When you talk about long-term stability what do you mean in particular? What will be the future of the OPEC+ deal given that the current deal expires at the end of the year? Do you plan to extend this agreement for the long term?
We have started OPEC+ as a six month agreement. And we saw that six month is not enough to bring inventories down. Partially because US shale had continued to increase and partially because it took Russia almost four months to reduce its production by 300,000 bpd because there were many oil producing companies in Russia. So it took us some time to achieve that. But we extended the 6 months deal, and now it has been working for almost 2 years. In practice we only apply production reduction for Russia for 1.5 years, because for the last few months we agreed for Russia to produce as much as it can.
But nevertheless we want to sign a new cooperation agreement that is open-ended. That does not expire after 2020 or 2021. We will leave it open. And what we would like to do is continue for OPEC and non-OPEC to work together. And the difference is that there will be no fixed term for the agreement, which allows us to bring production up or down. It should not have fixed production target. But it allows us to perform regular coordination and sharing information on what are our views on the market, supply and demand, how healthy the market is, what kind of intervention we need, if any, and when. Another new aspect is to create a secretariat for OPEC+. For now there is no secretariat. Only OPEC secretariat both serves OPEC and OPEC+. For non-OPEC countries from OPEC+ we will offer to them to create a secretariat in Vienna to work closely with OPEC. Of course, if any of OPEC+countries wants to join OPEC, we have a process in OPEC to consider membership. But many countries expressed the desire to work closely with OPEC, but not to join OPEC. And we respect this approach. Russia is one of those countries. But there are many variations on how to cooperate. The latest discussions we had in June showed that OPEC+ countries want to continue to work within a longer-term framework.
— When do you expect to finalize this new deal?
I hope, when we meet on Dec 7 in Vienna we will be able to sign it.
— Will it be an open-ended agreement?
Yes, it starts in January 2019 and it will allow us to intervene to rebalance the market in any appropriate time from January onward.
— And who do you believe will be the driving force for organizing this new secretariat?
I think, Russia will have to take the leadership. Total non-OPEC participation is 20 mln bpd, but Russia’s alone gives 11 mln bpd. So obviously Russia is a heavy weight both in terms of production and in terms of political influence. So Russia’s leadership for OPEC+ is indisputable. That’s why I expect Russia would play a key role. Of course, we are keen to work with Mr Novak and Russian team to invite other countries from outside OPEC to join OPEC+. We have started some quiet contacts with some countries to join and hope we will succeed.
— Will the principles for OPEC+ be the same as for OPEC: one country – one voice?
Yes, we ultimately want everybody to be on board. But my experience is that countries like Russia and Saudi Arabia with bigger scale and bigger impact ultimately carry more weight. It is not through voting and through formal process,but through convincing. Because people know that if we agree to cut five percent , as we did, our volumes are huge. Our production cuts were close to 600,000 bpd every month through the duration of the agreement out of 1.8 mln bpd of total OPEC+ cut. So when we sit around the table, our voice carries more weight. The same with Russia, which cut 300,000 bpd out of 560,000 for total non-OPEC cuts. And all OPEC+ countries are very respectful of Russia. So I think we should not hang on voting and formal process, but focus more on alignment and objectives. Once you get the trust of other countries and understand their objectives and you are serving those objectives with your actions, formal voting becomes irrelevant, most decisions are made by consensus very fast. This is how it works.
— You have mentioned that the new agreement will be signed in December. Do you have any objectives in mind already? Will you cut or increase the supply for a certain period? And what will this period be?
I think there are many uncertainties about 2019 that it is very premature for us to say what we will do. The only certainty for 2019 is that we need to be ready to act promptly and effectively. You have got uncertainty with the demand for many reasons. There are trade frictions that affect major trading countries. You have developing countries like Turkey, Argentina, India, which have a lot of pressure on their currencies. As a result you have strong dollar and weak emerging economies. So potentially a world economic slowdown could hurt oil demand. And if demand is low, we know oil markets will respond. On the supply side we could have problems with disruptions of production. First, we have sanctions on Iran, and nobody has a clue what Iranians export will be. Secondly, there are potential declines in different countries like Libya, Nigeria, Mexico and Venezuela. If any of these countries’production is significantly impacted, it will have an impact on the balance in the market. Then there is uncertainty about the US shale oil. Also many people say that in 2019 there will be pipeline constraints on moving oil production in the US. So we need to be ready to look at the balance. And if supply is too long, we should be able to cut. If supply is short, we have to be able to respond. We would like to do it in a coordinated way. We do not want to confuse the market and surprise the market. 2019 is a very critical year to keep the market in balance , which we have achieved after a lot of hard work, and we should not lose this hard work. If the Group [OPEC and OPEC+ – TASS] works together, we can quickly act to adjust production.
— In a worst case scenario with Iran do you have enough spare capacities in OPEC and OPEC+, and particularly in Saudi Arabia to fill this gap?
Obviously, since June we increased our production a lot. We were at 9.9-9.8 (mln bpd) in April and May, and now we are at 10.7. At the same time our friends from Russia and UAE have increased production as well. So our spare capacities for the entire globe at the moments are much less today than they were back in the past. We have relatively limited spare capacities and we are using a significant part of them. For now we in Saudi Arabia have 1.3 mln bpd of spare capacity, UAE has assured me they have over 200,000 bpd remaining. But we do not know what is going to happen in other countries. We know Kazakhstan plans to increase production with Kashagan and Tengizoilfields., Brasil is expecting to increase production. And US shale could bring additional volume of oil. So it may happen that we may not need to use spare capacities. But if you have other countries to decline in addition to the full application of Iran sanctions, then we will be pulling all spare capacities.
— So do you think you have enough opportunities, and enough capacities to keep the oil market balanced, to avoid sending prices soaring to over $100 per barrel?
I cannot give you a guarantee, because I cannot predict what will happen to other suppliers. Saudi Arabia now in October produces oil at the level of 10.7 mln bpd. I can say that we can go up, if necessary, to 12 mln bpd. This I can assure. But if 3 mln bpd disappears, we cannot cover this volume. So we have to use oil reserves. But it is very important for the world to support Saudi Arabia, because it is the only country that invest heavily in spare capacities. We invest tens of billions of dollars constantly to in-build capacity we do not use, only in shortage situations. It does not work for us; money is parked as insurance for the rest of the world. Today we are using some of it, tomorrow we will be using most of it, if disruptions in other countries will take place. We see there were disruptions in the past like Gulf War, but there were no shortages of oil because of our spare capacities. That requires us to continue our policy of investing. But Saudi Arabia needs to be appreciated and supported, recognized for doing very honorable duty for the rest of the global community. It is important for us to highlight that our production is likely to go up in the near future to 11 mln bpd on a steady basis. So we have to make a decision do we increase our total production capacities from currently 12 to 13 mln bpd. And this decision requires incremental investments from $20 bln to $30 bln. This is the capital cost for each one million barrels of additional capacity.
— You say that the world should support and appreciate Saudi Arabia. But now we are weathering a difficult period of turmoil because of the case of the Saudi journalist that has disappeared in Istanbul. Some analysts, based on comments from the Saudi media, say that because Riyadh is unhappy with the treatment by the West in this case, Saudi Arabia could cut supplies by up to 0.5 mln bpd. What sort of response can you provide to these predictions?
I think that rational people in the world know that oil is a very important commodity for the rest of the world. If oil prices will go too high, it will slow down the world economy and would trigger a global recession. And Saudi Arabia has been consistent in its policy. We work to stabilize global markets and facilitate global economic growth. That policy has been consistent for many years. We suffered in the past from political crises, this is not the first time. This incident will pass. Of course, this is not my mandate to speak about it. Our government through political channels is addressing this issue. But Saudi Arabia is a very responsible country, for decades we used our oil policy as responsible economic tool and isolated it from politics. So lets hope that the world would deal with the political crisis, including the one with Saudi citizen in Turkey, with wisdom. And we will exercise our wisdom both in political and economic fronts. My role as the energy minister is to implement my government’s constructive and responsible role and stabilizing the world’s energy markets accordingly, contributing to global economic development.
— So can people relax? There won’t be a repetition of 1973, correct?
There is no intention.
— Let’s then move on from global oil market issues to more specific matters regarding the Saudi oil industry. Saudi Aramco’s IPO was supposed to be one of the largest in modern financial history, but recently it was postponed. What were the reasons behind this decision? Were they only business reasons? Did you need to finalize planned M&As? Or are there some political reasons as well – say you want to avoid US legal risks, if you launch a listing on the NYSE?
First of all let me emphasise that when we list in any particular jurisdiction the. world is wide open for us to choose where to list. We can list only in Saudi Arabia or we can choose another friendly safe jurisdiction. However the listing itself, regardless the venue has been deferred because of the reasons you know - Aramco is overly weighted on the upstream and it has to be re-balanced by building in its downstream, which is less developed. By far Aramco is the world’s largest upstream company with the production of around 14 mlnbpd of oil equivalent – oil and gas. And also the reserves of Aramco are by far the largest of any company in the world: 260 bln barrels of low cost high quality conventional oil. And we have over 300 TCF (trillion of cubic feets – TASS) of gas reserves. This is huge portfolio of reserves with huge potential of production, that will last at a very high level until the next century. But if you look at the downstream of Aramco it is significant, but is not at the same level as upstream. Our petrochemical portfolio also is not so large, and is not so strong in terms of technology and global reach. So the decision was made that Aramco needs to balance its portfolio, such that it also gives us more revenues from the downstream. If in the next oil cycle the prices for the upstream go down, the downstream will be able to create a very healthy return. As a result we look at the opportunities globally and domestically. One has been announced - - the aquisition of 70 percent of Sabic (petrochemical giant Saudi Basic Industries, owned now by Public Investment Fund, the national sovereign fund of Saudi Arabia– TASS). And this deal will take at least 18 months for closing the transaction, getting the regulatory approvals from antitrust agencies globally. Only after that we could share the information about the financial benefits of the deal with the investors. We are looking at 2021 as potentially the year of IPO. If all goes well, IPO will be more successful in 2021 compared to 2018.
— What other assets do you see for Aramco? And do you have any particular interest in including Russian assets into Aramco’s new downstream strategy?
Aramco continues to grow, petrochemicals in particular. Sibur is an interesting company, we have talked with Novotek (the main shareholder of Sibur) and Mr Mikhelson (Leonid Mikhelson, CEO of Novatek). There is a potential project in Jubeil (petrochemical JV with Aramco and Total in Saudi Arabia) for Sibur. Aramco has a target of 3 mln bpd to convert into chemicals, and part of it could be Russian oil, it does not necessarily have to be all Saudi oil. So JV between Sibur and Aramco is one possibility. As well as buying equity in Russian companies, especially in the companies with technologies. Sabic will not be the last deal that Aramco does in chemicals. Aramco continues to look for the right companies. We are doing a lot of projects in many countries – Malaysia, China, and recently in India. But in addition to the mega projects we are looking for the large, medium and small companies to acquire.
— You have expressed your interest in the Arctic LNG project. Do you have any particular terms?
I have attended the inauguration of Yamal 1 and it was very impressive just to see that Russian companies can operate in such difficult environment. It was also impressive to see president Putin, his vision, his leadership, his determination to open new frontiers for Russia. At that time we had initial understanding that we will look at the next project[Arctic LNG-2 - TASS]. Early indications are positive, reserves are there. We expressed interest, now what we have to do is to agree on the terms and negotiate them with Novatek. We hope to be the second largest investor in [Arctic LNG-2] after Novatek. We not only want to come in, we want to come in with the substantial stake. Hopefully our terms will be accepted. But regardless of what happens with [Arctic LNG-2], Aramco will be a major player in the global LNG market. That decision has already been taken.
— So when can we expect any decisions on the next project?
The sooner, the better. I think with Aramco the project will also benefit. We have good upstream and project management capabilities. Arctic climate is not our expertise, but we will learn very quickly.
— Aramco is also mulling over buying some oil and manufacturing services from Russian companies. Could you provide some details on that?
Thanks to Russian Direct Investment Fund we are looking at this opportunity. There is also PIF, with whom as partner we are looking to do this. PIF allocated 10 bln dollars for investment in Russia, out of which 1 bln are for oil and gas fields services. We are very close to invest into Novomet. And we are also looking to EDC. These are two companies we hope to invest. But this is not final.
— What is your general view of Russia’s investment climate?
Extremely positive. I am very bullish on Russia. I think president Putin and Russian government are focusing on developing the country for the people, and they are doing it by working with the business community. You have friendly regulatory system, which promotes private business. My only complaint is that every time I go to Russia I need to get a visa, so my passport is running out of pages. But I say it in a friendly way, because it indicates the frequency of my visits to Russia. The more we see, the more we like.
— In July, you met with Igor Sechin from Rosneft. Do you have any projects with this company in the pipeline?
We talked to Mr Sechin about global cooperation. We will grow our downstream, and soon we will have over 10 mln bpd of downstream capacity. And there is no way we can supply it only with Saudi oil. We need other crude, and Russia is number 2 exporter after us. And Rosneft is the biggest Russian company. So swapping crudes and products is the natural area of cooperation. We have noticed that Rosneft and Lukoil have started to invest into refineries around the world. So together with Russian partners we could form joint venture with this refineries. We could supply oil to these refineries. Mr Sechin is also very important leader for the Russian industry, and having a constant dialog with him is a good for us.
Interviewed by TASS Editor-in-chief Maxim Filimonov and energy correspondent Iuliia Khazagaeva