King Salman looking to wow Asian investors in Aramco IPO, maintain market share
The political sands continue to shift in the Middle East as King Salman, Saudi Arabia’s octogenarian monarch, began an epic tour of Asia March 1 looking to shore up political alliances and retain market share for the kingdom’s oil ahead of Saudi Aramco’s public offering.
The trip is both politically shrewd and a sign of weakness for the world’s largest oil producer.
Sauda Arabia kick started the oil price war almost three years ago intending to drive the high-cost American shale producers – US production rose from 5 million b/d in 2005 to 9.5 million b/d in 2015 – out of the market. Instead, the Americans proved far more resilient than expected, dramatically lowering costs and becoming more competitive. With the lifting of the US ban on oil exports, shipments to other countries have grown to 900,000 b/d and may continue to grow, raising concerns in Riyadh that the aggressive Americans will muscle into coveted Asian markets under trade hawk (about exports, at least) President Donald Trump.
Russia and Iran have wasted no time courting Asian governments, growing their marketshare by 81 per cent over the last three years, according to Reuters.
What does King Salman have to offer?
One, capital. The tour has already resulted in a $7 billion pledge to back a new refinery and storage facility in Malaysia, according to Reuters, and agreements to reduce trade barriers between the two countries.
Two, reliability. Other Middle Eastern rivals, including Iran and Iraq, have suffered war and international trade sanctions. Saudi Arabia, by contrast, has been politically stable and a trusted crude oil supplier.
Three, participation in the world’s largest IPO, a five per cent stake in Saudi Aramco, which the kingdom believes is worth $2 trillion.
This is the Saudi version of making friends and allies. Since driving oil prices down by two-thirds didn’t work as planned, King Salman must now resort to diplomacy and strengthening economic alliances.
But there are impediments in the way of closer relationships with Asian countries.
One, religious ultra-conservatism. Saudi Arabia is a commercial and military ally, but that doesn’t mean China isn’t concerned about potential unrest in its small Muslim community caused by the kingdom’s support for Wahhabism, according to James M. Dorsey. Or increasing Saudi religious influence in smaller Asian countries like Malaysia and Indonesia.
Two, China’s deepening ties with Iran. China is trying to navigate between the two Middle Eastern rivals as they struggle for hegemony in the Muslim world. Dorsey argues that Iran has advantages Saudi Arabia doesn’t: “a large population, a huge domestic market, an industrial base, a battle-hardened military, geography, and a deep-seated identity grounded in a history of empire.” Better relations and more trade with China will be high on King Salman’s agenda.
Three, changing American policy. President Barack Obama was criticized both for a business as usual and a softening strategy to the Middle East, one that opened the door to a more aggressive Russia, according to Abdullah Al-Arian, assistant professor of history at Georgetown University, School of Foreign Service in Qatar. What direction will President Trump pursue? On the campaign trail, Trump was harshly critical of the nuclear agreement with Iran. Will he return to a more traditional American policy of favouring the Saudis?
According to Reuters energy columnist John Kemp, Saudi Arabia only reluctantly returned to its role as OPEC swing producer – cutting production to balance supply and demand, thereby raising prices.
One of the ways to minimize loss of market share that comes with being the swing producer is to solidify relationships with customers, especially emerging markets like Asia, which is expected to drive demand growth until 2040, according to the International Energy Agency (which estimates demand will reach 103.5 million barrels per day by 2040 from 92.5 million b/d in 2015).
Market watchers – not to mention rivals Iran and Russia – will be watching closely to see if the excursion by King Salman has n effect.