For Hous­ton, stakes high in Saudi tur­moil

Crown prince’s purge could mean boom or bust for en­ergy sec­tor

Houston Chronicle Sunday - - FRONT PAGE - By Jor­dan Blum and Collin Ea­ton

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.”

Fayez Nurel­dine / AFP/Getty Im­ages file

Saudi Crown Prince Mo­hammed bin Sal­man, 32, has branded him­self a mod­ern­izer, but he’s also prov­ing hawk­ish and cal­cu­lat­ing as he con­sol­i­dates power.

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