For Houston, stakes high in Saudi turmoil
Crown prince’s purge could mean boom or bust for energy sector
Saudi Arabia is undergoing revolutionary change with the sudden arrests of the princes and top ministers, triggering uncertainty in the Middle East, global oil markets and here in Houston, where the energy industry’s ties to the kingdom are deep and long, stretching back for decades.
Whether the purge by 32-yearold Crown Prince Mohammed bin Salman sparks a civil war, ignites an armed conflict with Iran or peacefully drags the conservative Islamic regime into the modern world could have huge implications for Houston and its economy, beyond its impact on oil prices. Saudi Arabia is not only a major market for some of the region’s biggest employers, including energy services companies Schlumberger, Halliburton and Baker Hughes, but also a large and growing investor in the Texas Gulf Coast as it seeks to diversify
the Saudi economy and holdings.
Just this year, the Saudis’ U.S. refining arm, Houston-based Motiva Enterprises, bought out Royal Dutch Shell’s stake for $2.2 billion for sole ownership of North America’s largest oil refinery in Port Arthur. The country’s government-owned industrial company known as Sabic is investing billions more as part of a partnership with Exxon Mobil to develop a $10 billion petrochemical plant near Corpus Christi.
Sabic’s CEO, Yousef Al-Benyan, calls Houston its hub for global growth after moving its Americas headquarters to Houston last year. Saudi Aramco, the state-owned oil company, has maintained its America’s headquarters in Houston for 40 years. The Saudi companies employ well more than 1,000 people in Houston offices.
“I think (Salman) has hitched his wagon to the U.S.,” said Chris Ross, a University of Houston finance professor focused on international oil.
Salman, known by his initials MBS, last weekend ordered the arrest of 11 princes of Saudi Arabia’s sprawling royal family, as well as various ministers and other prominent officials in what was portrayed as a crackdown on corruption. Salman, who leapfrogged uncles and older brothers to become heir to the throne, is considered a modernizer looking to develop industries and investments beyond oil, and soften the harsh brand of Islam practiced in the country, including allowing women to drive.
His move to consolidate power less than six months after he was named crown prince by his father, King Salman bin AbdulAziz Al Saud Salman, coincides with his “Vision 2030” modernization plans to open Saudi’s oil sector to foreign investors, while diversifying globally, especially along the Texas Gulf Coast. The crown prince also plans to take Saudi Aramco, valued at some $2 trillion, public as soon as next year, possibly on the New York Stock Exchange.
If the younger Salman succeeds in opening the Saudi economy and society, it likely will mean more opportunities for U.S. and Houston energy companies,
But, said Bruce Everett, an adjunct associate professor of international business at Tufts University, “if he can’t pull this off, and there’s a civil war within the House of Saud, all bets are off. Who knows what can happen.” Good news for Texas, for now
The modernization efforts already are helping smaller Houston energy firms, such as McDermott International and Rowan Cos., which have landed deals in Saudi Arabia. Rowan, for example, recently launched an offshore drilling joint venture with Aramco, called ARO drilling. “While there have been a number of changes in the country and it is certainly a very dynamic atmosphere,” said Rowan Chief Executive Tom Burke, “we believe the future is bright for Saudi Arabia.”
Texas oil and gas companies also are getting a lift at home from the Middle East developments. Rising global demand, slowing production and declining petroleum stockpiles already were boosting U.S. crude prices, which climbed to $55 a barrel last weekend — before the arrests.
The Saudi shake-up added almost $2 more per barrel.
“If I’m a Permian producer, I’m feeling better than I was a year ago,” said Dave Pursell, a managing director and research manager at Houston energy investment bank Tudor, Pickering, Holt & Co.
While drillers in the Permian and other Texas shale plays need higher prices, so do the Saudis to ensure the Aramco initial public offering is a success, Pursell said. Some members of the Saudi royal family have opposed the IPO and the scrutiny it would bring, but the arrests last weekend mean that the IPO is moving forward, Pursell said.
That, in turn, maintains incentives for Saudi Arabia, which controls about 10 percent of global production, to support higher prices. “It says economic reforms are happening and, if you don’t like it, here’s this ankle bracelet,” Pursell said.
The Saudis played a key role in the 2014 oil bust when they led the decision of the Organization of the Petroleum Exporting Countries to reject oil production cuts late that year. But, the subsequent collapse in oil prices triggered a shift, with the Saudis dragging OPEC into cutbacks in 2016. The reductions are expected to be extended beyond March at OPEC’s upcoming Nov. 30 meeting, especially with the support of the crown prince.
That’s creating more certainty and stability for American energy companies, said Jim Krane, a fellow for energy studies at Rice University.
“OPEC has basically been giving a police escort to shale producers,” Krane said. “If you’re in the oil business in the U.S., it’s more good news.” Not so fast
Salman has branded himself a modernizer, but he’s also proving hawkish and calculating, consolidating power behind the scenes even before he was named the successor to the crown in June. He already had taken charge of the kingdom’s economy and defense, and begun to lay the groundwork — rhetorically — for the anti-corruption crackdown for more than a year, stoking populist support with young working-class Saudis, many unemployed.
“He has to be taken at his word now,” said Matt Reed, vice president of Foreign Reports, a Washington, D.C.-based consulting firm focused on Mideast oil politics. “Systemic corruption is poison for privatization.”
A one-off, shock-and-awe move against potential rivals is OK as long as it doesn’t indicate a bigger pattern of instability within the top levels of Saudi government, Reed said. Foreign investors need predictability, and ongoing chaos could scare them away.
But the changes also represent dramatic shifts from how Saudi Arabia has functioned since its founding in 1932 by the crown prince’s grandfather, Abdul-Aziz Al Saud. A country traditionally ruled by the consensus of tribal leaders under a king is moving toward a more authoritarian monarchy, in which the ruler makes unilateral, sweeping decisions, analysts said.
Greater dangers are lurking, too. If the rifts in the massive royal family destabilize the political system, leading to territorial grabs by certain factions and civil war, it would jeopardize the flow of oil and disrupt both global markets and Saudi investment in the Texas Gulf Coast, analysts said. Careful what you wish for
At the same time, the crown prince’s hawkish approach to regional rivals, particularly Iran, raises the specter of a broader regional conflict that could send oil prices soaring to $100 a barrel and higher. The crown prince has signaled he wants Saudi Arabia to play a larger role in Middle East geopolitics, particularly as a counterweight to an aggressive Iran.
The two countries have engaged in ongoing proxy wars in Syria and Yemen, each offering support to opposing sides. Last week, when Saudi Arabia shot down a missile fired at the kingdom’s capital of Riyadh by the Iranian-backed Houthi rebels in Yemen, officials blamed Iran, and Salman called it an “act of war” by the Islamic Republic. The U.S. Air Force on Friday said the missile had Iranian markings.
At first glance, a surge in oil prices that would likely follow Middle East conflict would seem a windfall for the Houston energy industry. But it’s also a case of being careful what you wish for, said Ross, the University of Houston professor. If prices rise too high, too fast, it could hasten the end of the world’s reliance on oil.
“If we get $4 gasoline,” Ross said, “then it makes the Chevy Volt much more attractive.”