Extracted crude oil pours from a pipe (Photographer: Dimas Ardian/Bloomberg)

Saudi Arabia’s Oil Chief Faces Toughest OPEC Test

(Bloomberg) -- Since he became Saudi Arabian energy minister two years ago, Khalid Al-Falih has had a good run: he persuaded a fractious OPEC to cut oil production, convinced Russia to join the cartel in curbing output, and then saw Brent crude rise nearly 75 percent to $80 a barrel.

But his toughest test comes this week when the Organization of Petroleum Exporting Countries holds what’s likely to be its most difficult meeting in years. As economic growth, renewed sanctions on Iran and the collapse of Venezuela’s petroleum industry stretch the global oil market, he needs to ensure a smooth exit strategy from the cuts without causing a crash in prices.

To make things more complicated for the mechanical engineer turned oil diplomat, OPEC is being buffeted by competing geopolitical agendas. While Riyadh and Moscow have agreed to open the taps,  Caracas and Tehran want higher prices to compensate for the impact of U.S. sanctions. On Sunday, Iran threatened to veto any Saudi proposal to increase output.

"The consensus is imploding," said Roger Diwan, a veteran OPEC watcher at consultant IHS Markit Ltd. "I don’t see how you can reconcile the positions of Russia, Saudi Arabia, Venezuela and Iran. The contradictions are too many."

Saudi Arabia’s Oil Chief Faces Toughest OPEC Test

And behind the scenes, a Trump administration worried about the impact of rising gas prices on mid-term voters is lobbying hard for a surge in production.

"This is the most political OPEC meeting in a long time," said Amrita Sen, chief oil analyst at consultant Energy Aspects Ltd.

When Al-Falih was appointed energy minister in May 2016, replacing the veteran Ali Al-Naimi after almost 25 years in the job, Saudi Arabia had little grip on the market: U.S. shale production had stolen market share and OPEC’s policy response was essentially every man for himself. With prices barely above $45 a barrel, Saudi Arabia was bleeding foreign reserves at the rate of $10 billion a month.

Al-Falih, a methodical technocrat who rarely sleeps more than four hours each night, rolled up his sleeves. First, he made clear Riyadh was prepared to reverse the pump-at-will policy Naimi had forced on the rest of OPEC in 2014. Then, with the help of his boss, Prince Mohammed bin Salman, he reached out to Russia, convincing Moscow to join OPEC production curbs for the first time in more than a decade.

He built an a close working relationship with his Russian counterpart Alexander Novak, cementing the alliance between the world’s two largest exporters. They talk regularly, both by phone and in person, and like to put forward a united front in joint media appearances. Last Thursday, they were at Moscow’s Luzhniki stadium to watch Russia beat Saudi Arabia in the opening match of the World Cup together. Two days later, Novak visited Saudi Arabia for a working meeting with Al-Falih.

Saudi Arabia’s Oil Chief Faces Toughest OPEC Test

Mohammed al-Shatti, the national representative at OPEC from Kuwait, said that Al-Falih delivered two new things to the cartel.

"The first is his good cooperation with non-OPEC and that’s one of the reasons behind the success of the current production cut agreement," he said. "The second feature is his ability to think outside of the box and look for new ideas all the time."

Even then, the initial results were paltry, in part because Saudi Arabia decided to compensate for lower production by drawing down its own inventories rather than limiting exports. In mid-2017, Al-Falih changed course after meeting in secret with oil traders and hedge funds in London. The kingdom slashed exports to the U.S. to a 30-year low.

Then, everything started to come right.

After years of lackluster growth, the global economy boomed, propelling oil demand beyond its usual trend; the once-mighty Venezuelan petroleum industry collapsed; and, this year, the Iranian oil sector came under renewed U.S. sanctions.

Saudi Arabia’s Oil Chief Faces Toughest OPEC Test

It was a mixture of hard work and luck, but the results were impressive. With Brent back to just below $80 a barrel, the kingdom is breaking even. In March, Saudi Arabia added $13 billion in hard currency, the biggest inflow of petrodollars since late 2013.

Inside OPEC, few would besmirch Al-Falih’s achievements, but privately officials and delegates sometimes complain about his methods. To some, the Saudi minister is overly direct, occasionally bordering on undiplomatic. For others, he’s a micro-manager. It’s certain Al-Falih has brought a business-like approach to OPEC -- creating dashboards to check whether countries deliver on their promises, for example. That’s angered old-timers who prefer the cartel’s Byzantine traditions.

Al-Falih, who likes to start the day at around 5 a.m. after exercising on a treadmill, is an oil man by birth, education and work.

He was born in 1960 in Dammam, the petroleum capital of Saudi Arabia, where his father, Abdulaziz al-Falih, was a senior executive at Aramco, the country’s giant energy company. Al-Falih followed in his father’s footsteps, and after joining Aramco in 1979 the company sponsored him to study mechanical engineering at Texas A&M University in College Station, a campus town half-way between Houston and Dallas.

Progressed Quickly

On his return to Saudi Arabia in 1982, Al-Falih progressed quickly, from project engineer to running the big Ras Tanura refinery then negotiating big deals with international oil companies. During this time, he also pursued studies for an MBA at King Fahd University of Petroleum and Minerals, receiving his degree in 1991.

"Ever since his earliest years as a professional in Saudi Aramco, engineer Khalid al Falih caught the eye of his superiors as a high potential employee who would rise to leadership positions," said Sadad al-Husseini, a Dhahran-based consultant and former head of exploration at Aramco.

Al-Falih became chief executive of Aramco in 2009, replacing Abdallah Jum’ah. For the next six years, he expanded the company’s production capacity, bringing on stream giant oil fields and adding several new refineries. Not everything was a success, however. The deals that Al-Falih negotiated with foreign companies to search for natural gas in the so-called Empty Quarter desert in the south of the country failed to find any significant reserves.

Al-Falih was seen as the country’s top technocrat -- a jack-of-all-trades fixer for any assignment. He was appointed health minister in 2015 as Saudi Arabia struggled to eradicate outbreaks of the so-called Middle East Respiratory Syndrome, a virus from the same family as the Severe Acute Respiratory Syndrome that killed dozens in China.

The minister switched jobs again in 2016, leaving health to take the energy portfolio. There he faced a twin challenge, repairing the oil market and preparing Aramco for a IPO, potentially the largest ever. Two years later, despite Al-Falih’s success with oil prices the IPO has been postponed from 2018 to 2019 at the earliest.

For now, the oil market is the priority. After his visit to Moscow, he’ll be Vienna next week, dashboards in hand, trying to hold the OPEC alliance together and keep his good run going.

©2018 Bloomberg L.P.