DW: Saudi’s policy discord at full volume

The following is Douglas-Westwood’s May 9, 2016 DW Monday report.

(Shutterstock/rickyd/Kingdom Tower Riyadh)

The end of March saw a resolution reached between Kuwait and Saudi Arabia for the resumption of production from the Khafji field – located in the Arabian Gulf. The project was shut-in by the Saudis in October 2014 due to environmental regulation breaches, March’s initial agreement was backed by senior Riyadh officials. However, Deputy Crown Prince Mohammed bin Salman recently brought an abrupt halt to proceedings, moving to block the addition of oil from Khafji to global markets – highlighting potential discordance in Saudi Arabia’s oil policy.

Salman’s opposition to Khafji is arguably in direct conflict with the country’s expansion at Khurais and Safaniya and the establishment of the Public Investment Fund (PIF). Saudi Aramco plans to complete a 200 kbbl/d expansion of the onshore Khurais oilfield by 2018 after initially delaying project commissioning until 2019 due to spending cuts. Similarly, a tender is also being offered for new facilities on Safaniya – one of the world’s largest offshore oilfields with a current production capacity of 1.2 MMbbl/d. These expansions are likely to add significant volumes to Saudi Arabia’s production capacity, a tactic that may spook traders and suppress prices – contradicting any notion of halting Khafji in order to support the oil price.

January’s surprise announcement of the floating of Saudi Aramco initially appeared to be a short-term means of funding a fiscal deficit. However, recent developments suggest the idea has shifted to weaning Saudi Arabia off its reliance on crude oil export revenues. This is to be accomplished through shifting cash raised from the Aramco offering to the PIF – a multi-sector, $2 trillion fund channeled into a range of industries. The ultimate aim is to safeguard Saudi Arabia from future oil market downturns. However, the expansion of the two aforementioned oilfields will likely compromise this initiative if oil prices are driven down by trader sentiment – reducing the ultimate value of Saudi Aramco’s public offering.

Without an alignment of Saudi’s oil policies, the effectiveness of the country’s output strategy, the Aramco offering and the PIF is likely be severely eroded. Though the PIF is designed to help the Kingdom diversify its governmental revenues, its success hinges on healthy crude oil export revenues – something that is simply not possible in a world of low oil prices.

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