For two months now, the world oil market has been closely following the negotiations between Russia and OPEC, which should determine their production policy by the end of 2019. The famous agreement of the OPEC + countries on the joint regulation of oil production has been in place for three years now, making a considerable contribution to the stabilization of oil prices. Thus, after the 2015-2016 oil crisis, the deal allowed Brent to rise above $60 per barrel, keeping it in within a comfortable range in the future. However, the impact of geopolitical factors makes one doubt whether the restrictive policy of OPEC + will be as effective in the future. 

Saudi Arabia’s Minister of Energy, Industry and Mineral Resources and Chairman of Saudi Aramco Khalid A. Al-Falih, one of the most influential people in global energy, took part in the St. Petersburg International Economic Forum and hashed over bilateral cooperation with the Russian President Vladimir Putin and his counterpart Alexander Novak on the sidelines of SPIEF. 

— Your Excellency, you said today that there is no decision yet about the level of production for OPEC+ for the second half of the year. But, yesterday you met with President Putin and with you counterpart Alexander Novak. So, is there a consensus between Russia and Saudi Arabia on what to do in oil production in the second half after these meetings?

— Well, first of all I think President Putin said that cooperation with OPEC needs to continue, that it is beneficial for the global economy, for the energy industry, and to recover from the problems we experienced especially in 2015-2016. I see him as a serious and thoughtful leader; he only speaks about things that he has already decided on. From my subsequent meetings with Novak, I have drawn the same conclusion that the oil market will need continued supply oversight, while making sure that we continue to guide the market towards stability. I think on the Russian side there are some questions about the impact of the sanctions on the actual exports from Venezuela and Iran and whether they would cause too much of a debate on the supply to be withdrawn from the market, and in such a situation what would be the best way forward. We agreed that we would continue to keep an eye on the market. I will have a chance to see Minister Novak most likely before we meet in Vienna, as we both may be in Japan for the G20 meetings, in which case we will have an opportunity to further calibrate our positions. I am fairly confident that from the OPEC side almost everyone agrees that we need to extend the Declaration of Cooperation. The Iraqi minister, for example, said this publicly yesterday and he has also told me the same privately. The UAE and Kuwait, and all the big producers in OPEC, as well as many non-OPEC countries like Oman, Kazakhstan, Azerbaijan have also supported the extension. So, I think the remaining country to jump onboard now is Russia. I will wait for the Russian dynamics to work themselves out. There is a debate obviously within the country about the exact volume that Russia should be producing in the second half. And we will look at the global market and discuss it when we meet in three weeks.

— If you have a deal with Russia and cuts will be extended, what if Russia is a bit under compliance. Would OPEC Plus feel comfortable with that?

— Russia is the biggest producer in OPEC Plus. They produce slightly more than we do, so obviously I always say that the big producers have to lead by example. We, as the biggest producer in OPEC, always lead by example, by demonstrating full commitment from day one. My expectations are that big producers like Russia, Saudi Arabia, Iraq, Kazakhstan and the UAE will demonstrate to the other countries in the group of 24 their commitment and lead by example. Russia did that reasonably well in 2017-2018 until we relaxed the cuts in June last year and I hope that in 2019, it will return to full compliance. In May and June, the compliance has been very good. I just care about the result. So, I hope that during the remainder of 2019, once we formalize the extension, Russia will continue to fully comply. I have heard very strong supporting statements from many Russian companies, including Lukoil, very publicly, so I think the benefits of participation are quite clear.  A small volume, 2% (the amount of Russian oil production, reduced according to the OPEC+ deal - TASS) means stability, and strong growth, so I think the [Russian] companies, all of them, are benefiting hugely from the deal but there is obviously internal dynamics, which I will not comment on.

— You also mentioned geopolitical factors, which affect market stability. As we can see these issues are highly influential for the decision-making process in OPEC. Are there any risks to the OPEC Plus agreement? I mean can geopolitics completely destroy the OPEC Plus agreement?

— Well, if you look at the history of oil from a hundred years ago, you will find that geopolitics has always been an issue with oil. There have been wars about oil; there have been embargos; there have been trade dispute; and there have been excessive taxes, and so on. So, let us not contend that this is the first time politics got entangled with oil. It has been a factor both within countries as well as among countries. And I think with the wisdom that we have around the world, we can manage these geopolitical tensions that arise from time to time and resolve them in a peaceful and cordial way to keep this key commodity flowing for the benefit of the global economy, developed countries, developing
countries, and equally important for oil-producing countries. If oil-producing countries are destabilized, it will also impact the stability of the rest of the world. So, I am confident that ultimately wisdom will prevail and we will amicably resolve both our political as well as trade issues.

— A few short questions about your cooperation with Russian companies. The media reported recently that Saudi Aramco had withdrawn from the deal with Novatek on Arctic LNG 2. Is that true?

— No, no, this is not true. Aramco extended the offer and we hope that offer will be accepted by Novatek. Aramco is interested in global LNG but it also has to be commercially attractive, which is why they signed the MoU with the US. They are also willing to sign with Novatek. So, we are hoping that they will agree to Aramco’s offer. It’s a commercial transaction, so it has to be profitable for both companies entering into the agreement. Novatek is a very sure investor and they are looking for the best deal and so is Aramco.

— But there are only 10% remaining in Arctic LNG, not 30%. Is that okay?

— I don’t know. I think we will let Aramco and Novatek negotiate. But I know as the Chairman of Saudi Aramco that they are looking into multiple projects in Russia. Arctic LNG 2 is just one of them, and they are looking at two other projects: some of them with Gazprom, while one of them is with Rosneft. So, we will see. The best project will win and hopefully Aramco will be a part of the upstream landscape as well as the downstream. We are looking at petrochemical projects as well.

— So my next questions are about petrochemicals. I really kept an eye on your Sabic deal. It is a huge one for the market and you were going to look for other assets in this area worldwide. Do you see such projects in Russia? What do you think of Sibur? Do you find it interesting?

— Sibur is a very attractive company, a good operator, and they are efficiently run. I think they have good technologies in some areas like rubbers and elastomers, and they could also benefit from the technologies available to Aramco and Sabic. So, some kind of joint investments, either in projects or even in Sibur’s equity, could be of interest, but the interest has to be from both sides. So we will wait for Sibur and its shareholders to express their interest in future cooperation. 
—  Saudi Aramco is going to increase from 8 to 10 mbd of oil refining by 2026. Are you going to use foreign made crude, in particular Russian? How would this look like?

— I think we would love to use Russian crude. And some of our assets make sense in Asia, in particular. If we invest in Europe, it will make sense for us to use Russian crude. But unless our refinery is in Saudi Arabia, almost none of our refineries will use 100% Saudi crude. It does not make economic sense. It is good to optimise around the best available crude in the market, and Aramco has expressed interest in entering into agreements with companies like Rosneft, Lukoil and Gazprom Neft to have long term agreements with them and use their crude when it becomes attractive in our refining assets around the world. I think this relationship could prove to be a very attractive way forward in trading and crude purchases by the Aramco system.

— So trading has started already?

— I know the agreements have been signed but I am not aware that the trading has started.

— When are you going to wrap up the nuclear plant’s construction tender? Are you considering building more than 2 blocks of the plant in the mid-term due to rising electricity demand?

— At this stage we are only building two. Until we build the two and get some experience, it is unlikely that we will move into the next phase. We are not in a hurry; we have plenty of electricity capacity. You know, we announced a big renewable programme for the Kingdom of Saudi Arabia. We also are also increasing gas in our utilities fuel mix and plan to grow its share to more than 70%. So, we do not need vast generation from nuclear sources. But we will use the first two reactors to get some experience and take it one step at a time, and we hope that Rosatom will continue to be interested and compete for this initial programme. Thank you so much.

 

Interviewed by Julia Khazagaeva at the St. Petersburg International Economic Forum