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Research Report

SAUDI ENERGY CHANGES: The End of the Rentier State?

Jean-François Seznec
Copyright Date: Mar. 1, 2016
Published by: Atlantic Council
Pages: 20
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Table of Contents

  1. (pp. 2-5)

    The kingdom’s oil and gas is produced by Saudi Aramco, the national oil company. Saudi Aramco is the successor to Aramco, which was created by five American oil companies to explore, extract, treat, and ship crude oil, mainly that of the Ghawar field. The state nationalized Aramco in the early 1980s. The American companies were compensated for their assets and, unlike in other countries where foreign oil companies were nationalized, the relationship remained excellent.⁴ To this day, ExxonMobil’s largest foreign investment is in Saudi Arabia—its fifty-fifty petrochemical joint venture with SABIC (Kemya Al Jubail Petrochemical Company).

    Saudi Arabia has...

  2. (pp. 5-5)

    Since King Salman bin Abdulaziz took the throne in December 2014, many important changes have been made to the government and economic structure, most notably in the oil sector, including the following.

    The Ministry of Petroleum and Minerals has been “separated” from Saudi Aramco, implying that the Minister of Petroleum, Ali Al Naimi, is no longer Chairman of Saudi Aramco.

    Saudi Aramco is now under the supervision of the Supreme Council of the Saudi Aramco Oil Company (SCSA), chaired by Minister of Defense Prince Mohammed bin Salman.

    The CEO of Saudi Aramco, Khalid Al Falih, was promoted to Minister of...

  3. (pp. 6-7)

    The cleaving of Saudi Aramco away from the direct influence of the Ministry of Petroleum and Minerals (MOPM) is underlined by the fact that the Minister of the MOPM, Ali Al Naimi, is no longer the Chairman of Saudi Aramco. For the past twenty years, Ali Al Naimi has been the main policy guru for oil in the kingdom. He was the Chairman of Saudi Aramco for twelve years, beginning in 1983, and served under two previous Oil Ministers; he has been the Minister of Petroleum and Minerals since 1995. The Ministers of Oil always had Saudi Aramco as their...

  4. (pp. 8-8)

    The new SCSA, headed by Prince Mohammed, replaces the Supreme Petroleum Council (SPC), which used to be chaired by the King; co-chaired by the Crown Prince; and managed day-to-day by Prince Saudi Al Faisal, the Minister of Foreign Affairs. The SPC was supposed to define oil policy for the kingdom and make sure that Saudi Aramco implemented it. In reality, Saudi Al Faisal was busy with other matters and was not as familiar with detailed oil issues as Ali Al Naimi. As a consequence, Al Naimi essentially defined and implemented policy in place of the King. Even prior to the...

  5. (pp. 8-8)

    The new management structure of the crude oil industry may not change the kingdom’s oil policy as the new management recognizes the importance of letting technocrats and engineers manage the country’s oil and natural gas endowment. The main difference between the old and the new structures is that the oil and natural gas industry of Saudi Arabia has been streamlined, with one less layer involved in policy and management.

    Does the new structure mean that Saudi Arabia’s new oil leadership will cut production to maintain prices? Most likely it does not. While the policy of high oil production and low...

  6. (pp. 9-9)

    The reorganization of the Saudi upstream sector has been accompanied by important changes in the downstream side of crude oil and natural gas production.17 In particular, the state has substantially reduced subsidies on gasoline, diesel, propane, and ethane.

    Prior to the changes, however, Saudi Aramco had already implemented major investments in its downstream sector, most notably in the chemical industry and in its domestic and overseas refining capacity. Saudi Aramco controls Petro Rabigh and SADARA, joint ventures with assets of over $30 billion. Saudi Aramco is also investing in the growth of its refining capability. Its capacity is now at...

  7. (pp. 10-12)

    On January 4, 2016, Prince Mohammed bin Salman, in his interview with the Economist, mentioned that he was considering the privatization of Saudi Aramco.19 This move has been mulled over for many years in Saudi Arabia, but has never been implemented. One can only speculate why this privatization has never taken place but it is likely that considerations of transparency have been paramount. Saudi Aramco has always kept most of its financial information very private. On the other hand, it releases much operational information, including on overall production, refinery outputs, shipments, and social responsibility. Hence, it is likely that the...

  8. (pp. 13-13)

    As income from its energy sources declines extensively, the kingdom may want to ration its production somewhat. Of course, Saudi Arabia has the largest conventional oil reserves in the world and is the second- or third-largest producer of crude oil. It is also the eighth-largest producer of natural gas, most of which is associated with oil extraction. However, gas, which is the best fuel for the production of electricity due to its efficiency and energy density, is in short supply. In order to satisfy demand for electricity, which is increasing between 7 percent and 8 percent per year, Saudi Arabia...

  9. (pp. 14-14)

    Observers of Saudi Arabia could view the country’s dramatic decline in oil revenues as either a glass half empty or half full. From the half-empty perspective, one can see that the cash reserves of the country are depleting rapidly. At the going rate of expenditures, and in light of the massive military expenses in Yemen and Syria, cash reserves could be exhausted in five years. As a consequence, the state has to find alternative sources of income, reduce expenses through subsidy cuts and tax increases, and impose curbs on the royal family’s ability to access what should be state funds...