BIG READ: The Saudi prince of oil vows to drill out the last molecule

The Boeing 767 banked over the Red Sea, turning east into Saudi Arabia. A commercial version of the plane can carry about 260 passengers. Inside this one, Saudi energy minister Prince Abdulaziz bin Salman and a dozen or so aides were heading home from a tumultuous meeting at headquarters of oil nations Opec in Vienna the day before.

For most of the journey the jetliner had followed its expected route over Eastern Europe, the Mediterranean and Egypt. It was a path that Abdulaziz had flown scores of times. As oil minister since 2019 and a royal understudy before that, he had attended almost every Opec meeting over the past 35 years.

But this flight, on March 7 2020, was not typical. What occurred afterward was not either.

The decisions Abdulaziz took over the next 24 hours exposed a new Saudi oil policy — bolder, less constrained by Washington, defiant of a growing global consensus on climate change and more centrally controlled by the royal family, including one of his half-brothers, Crown Prince Mohammed bin Salman.

They also reflected what Abdulaziz sees as his destiny: to ensure that the last barrel of oil on the face of Earth comes from a Saudi well. As he said in June during a private event organised by Bank of America, according to a person familiar with the meeting: “We are still going to be the last man standing, and every molecule of hydrocarbon will come out.”

All of this has huge implications for the world’s energy markets at a time when, in erecting a fortress to safeguard oil, Abdulaziz and Saudi Arabia seem to be on the wrong side of history. The first member of the royal family to be the kingdom’s energy minister, Abdulaziz is the most important single person in the oil market today. As influential in global economic terms as some central bankers, he has repeatedly taken bold, successful steps to control the markets, manage the flow of oil supplies and shore up prices.

But a rancorous Opec+ (including 10 non-Opec members such as Russia and Kazakhstan) meeting in July showed just how difficult it is going to be for Abdulaziz to consistently get his way in an era when oil-producing nations — their self-­interests often in conflict — are contemplating a future of declining oil consumption. By the time Opec+ ministers convened over videoconference, resurgent demand had pushed crude prices up 50% in 2021. When the talks collapsed, oil prices jumped to the highest level in more than six years.

It took Abdulaziz two weeks of behind-the-scenes diplomacy to resolve the impasse, ultimately clinching a deal that followed a classic blueprint of his: everyone involved saved face, even if some of the targets for future production stretched credulity. “Consensus-building is an art,” he told reporters after the meeting, coyly declining to elaborate. “Why should I divulge it? This is an art, and we keep it between ourselves. We call it a state secret.”

Abdulaziz’s time as energy minister since his appointment in September 2019 has been perhaps the most convulsive and consequential period in the history of the Saudi oil industry, overshadowed only by the first and second oil crises in the 1970s.

After the Opec+ meeting in Vienna in March 2020, Abdulaziz and his retinue boarded their waiting jet — ­registration number N767A emblazoned on its tail — and took off. An oil world geek monitoring the plane’s radar signature on a real-time aircraft tracking website would have known something was amiss. The plane did not land at Riyadh, the capital, where the energy ministry and Abdulaziz’s residence are located. It continued flying over the Saudi desert, the bleakness occasionally broken by gas flares down on the oilfields, and then on towards the Persian Gulf coastline.

At 3.35pm that Saturday, the jet landed at King Abdulaziz Air Base, a military complex near Dhahran in the heart of the kingdom’s petroleum industry. Abdulaziz headed straight to the headquarters of Saudi Aramco, the national oil company.

The surprise detour to Dhahran was prompted by what had happened the day before in Vienna. At a special Opec+ meeting, Saudi Arabia and Russia clashed over how to respond to the coronavirus pandemic that was beginning to spread across the globe.

Moscow, anxious to avoid reducing output, preferred a wait-and-see approach. Riyadh wanted to slash ­production — immediately. Through their association with refineries around the world, the Saudis had recognised early on that the ­Covid-19 outbreak was going to cause economic havoc, and they wanted to prevent a crash in oil prices.

The meeting ended without agreement. Ominously, Alexander Novak, then the Russian oil minister, said to reporters afterward, “Given today’s decision, all Opec+ countries from April 1 have no obligations to cut output.” Now all eyes were on Abdulaziz. Asked if Saudi Arabia would follow Russia’s lead, he told reporters: “I’ll keep you wondering.”

Not for long. The drive from the airfield to the Aramco campus takes about 15 minutes. Abdulaziz’s entourage would have gone past Dammam No 7, known as the “Prosperity Well” because the day it struck oil in March 1938 marked the commercial discovery of petroleum in Saudi Arabia.

Over the years, the Saudis had come to believe they must always act in concert with other oil producers and not unilaterally. Now Abdulaziz had decided to suspend that rule, if only for a short time, to make a point — we’re in charge of managing the oil market — and to teach a lesson to Russia and its president, Vladimir Putin, whose power depends in part on his country’s oil revenue.

Once inside Aramco’s main administration building, Abdulaziz did something shocking and counterintuitive for someone who had indicated in Vienna that he favoured production curbs: He ordered the world’s biggest energy company to ramp up production to maximum levels. The next day, with the oil market closed for the weekend, Saudi Arabia launched an all-out price war. It announced it would begin pumping 12-million barrels a day, an increase of more than 20% from the month before.

For the energy markets, this was the equivalent of a nuclear first strike. To push such huge volumes onto the market, Aramco slashed the price of its oil, offering refiners the largest discounts ever. The price cuts were particularly big for European oil refineries, hitting Russia’s traditional market the hardest.

When the oil market reopened on Sunday evening, Brent crude, the global benchmark, plunged almost 25% within seconds — the biggest one-day fall since January 1991, during the Persian Gulf War. The carnage extended beyond the oil market. The MSCI World Energy Sector index — a basket of leading petroleum companies, including ExxonMobil, Chevron, Royal Dutch Shell, Total and BP —plummeted almost 19%, its ­biggest ever one-day drop, erasing $330bn in share value. Over the next week the index lost $400bn more. 

Panic gripped the White House. Breaking with decades of close co-operation, Saudi Arabia had not informed Washington of its production bombshell, which caught the Central Intelligence Agency (CIA) and US diplomats in Riyadh by surprise, according to Victoria Coates, a White House deputy national security adviser at the time. The administration of President Donald Trump, which saw the US oil industry as a strategic and political asset, was in shock. “It was uncharted territory,” says Coates.

The oil industry and the countries that depended on it were staring into an abyss of collapsing prices. That, of course, included the Saudis, who had just shown they were ready to shoot themselves in the foot to get production and prices back to what they deemed sustainable levels. The scenario, as risky and cynical as it was, was unfolding just as Abdulaziz intended: create enough pain to get everyone around the negotiating table — quickly.

On April 12, after 36 days of hostilities, Riyadh and Moscow agreed to the deepest oil production cuts in history, calming the markets and torpedoing Russia’s refusal to curb output a month earlier.

At July’s Opec+ meeting, Abdulaziz found Saudi dominance under attack again. This time the obstreperous member was Saudi Arabia’s neighbour, the United Arab Emirates (UAE).

Backed by most Opec+ members, including Russia, Abdulaziz wanted the group to agree to graduated production increases not only over the next few months but also, for the sake of stability, until the end of 2022. “The extension puts lots of people in their comfort zone,” Abdulaziz told Bloomberg TV on July 4. But UAE energy minister Suhail Al Mazrouei opposed the longer extension as “unnecessary to take now”.

Resurgent demand had already pushed up crude prices in 2021 by the time Opec+ convened. When the talks collapsed, blocking a supply increase, the standoff threatened to turn into a conflict as damaging as last year’s price war. West Texas Intermediate crude reached $76.98 a barrel, the highest price since November 2014. With his diplomatic manoeuvring, Abdulaziz managed to avert a worsening spiral — for the time being.

In his Bloomberg TV interview, Abdulaziz had said: “If I’m going to be called something, I would like to be ‘volatility buster.’ ” And yet once again, representing Opec+’s largest producer, here he was, fighting to retain Saudi control of the market and preserve the “volatility buster” reputation he had tried to craft for himself.

Given the veil of secrecy that keeps prying eyes away from the House of Saud, it is difficult for an outsider to know if Abdulaziz hatched the price war idea himself in 2020. Recent history suggests little happens in Saudi Arabia without the direction or input of Crown Prince Mohammed. Whatever the truth, Abdulaziz embraced the tactic as his own.

“He’s the ultimate inside man,” says Helima Croft, global head of commodity strategy at RBC Capital Markets. Croft, a former CIA analyst, has known Abdulaziz for many years. “He understands power better than anyone else,” she says. “And oil is about power.”

But Saudi Arabia’s power — and therefore Abdulaziz’s — are under threat as the world seeks to move away from oil and other fossil fuels. Beneath the kingdom’s desert there are about 265-billion barrels of oil, worth almost $20-trillion at this summer’s prices. It’s an enormous prize, but one that may be worthless someday if the global economy figures out how to keep churning without oil.

“Saudi Arabia is not in a comfortable position,” says Karen Young, a senior fellow at the Washington-based Middle East Institute and director of its Programme on Economics and Energy. “There will be customers for oil in 10 and 20 years from now. But [every oil producer] is going to be competing for a smaller and smaller number of buyers.”

It was a tense gathering. In September 2020, Abdulaziz was chairing the energy ministers’ meeting of the Group of 20 (G20). Environmentalist groups have long accused Saudi Arabia of obstructing global efforts to reduce carbon emissions. Over the past couple of decades, the Saudis have moved from climate change denial to supporting the historic 2016 Paris ­Agreement — but never forfeiting the protection of their valuable resource. The G20 forum was a chance for Riyadh to get a grip on the diplomatic manoeuvring ahead of this year’s most important climate change conference, the COP26 gathering in Glasgow, Scotland, in November 2021.

Hours of talks over video link went by, but the ministers were unable to come to an agreement on what their communiqué would say. European ministers wanted a greener statement; Saudi Arabia did not. Finally, Abdulaziz got his way, arguing in effect that if they ended the meeting with no statement at all, they would all look bad.

The communiqué that emerged endorsed several of Saudi Arabia’s pet fixes to the climate crisis. One is to employ carbon sequestration, even though the technology has not proved commercially viable. Another, with no targets or timelines attached to it, is what the Saudis call “the circular carbon economy”, built around “the four Rs” — the reduction, reuse, removal, and recycling of carbon to cut emissions.

What these measures have in common is that they make sure oil will live to die another day. “We are sitting on a huge amount of hydrocarbon resources,” Abdulaziz said at the meeting, “and we want to bring it to better use.”

A few years ago, the International Energy Agency (IEA) came out with one of its regular bulletins about how the growth in oil demand is slowing. “If I had to be concerned with IEA projections,” Abdulaziz said in Abu Dhabi during a public forum at the 24th World Energy Congress in September 2019, “I probably [would] be [on] Prozac all the time.”

More recently, the IEA released a report calling for the cessation of all new investment in fossil fuels as a means of avoiding global warming. Speaking to journalists at an Opec+ news conference in June, Abdulaziz described the document as “a sequel of the La La Land movie.”

Where Abdulaziz saw fantasy, the climate activist Greta Thunberg saw the Saudis in retreat. “Wow,” she said on Twitter on June 1. “We’re clearly witnessing the beginning of the end of the fossil fuel era. They’re starting to panic. Let’s speed up the process.”

At some point, the demand for petroleum will reach a tipping point. The signs are everywhere, from the explosion of renewables and the increased adoption of electric vehicles to the readmittance of the US to the Paris Agreement under President Joe Biden and the growing number of fossil fuel-shy investors staying away from oil companies. That’s one school of thought.

The Saudis are convinced that peak demand is further out than green campaigners, a growing number of governments, and even some oil majors forecast. The Saudi view got a boost over the past year and a half. After energy demand plunged in 2020 during the pandemic, some forecasters thought oil consumption was fading fast. Yet the opposite appears to be true: demand is rising fast, and the IEA says it will reach an all-time high by late 2022.

Even so, Abdulaziz knows from personal experience that some things are out of his control. Less than a week after he became oil minister, a drone attack on the oil processing centre at Abqaiq in eastern Saudi Arabia shut down half of the country’s crude supplies for a few days. (The Saudi and US governments blamed the attack on Iran, the kingdom’s great regional rival. Tehran denied any involvement.) Then, within months, came the price war with Russia and, this year, the collapse in Opec+ talks.

Under pressure from shareholders to comply with climate change targets, international oil companies such as ExxonMobil and Royal Dutch Shell are being forced to cut spending on new exploration projects. The Saudis, who are able to benefit from some of the lowest production costs in the industry, believe there is an opening for them: invest now, when everyone else isn’t, and capture market share.

And Saudi Arabia’s future as an oil superpower is all about control. What Abdulaziz did to Russia in the 2020 price war was a demonstration of that. It worked, if only temporarily: the Russians came relatively tamely back to the Opec+ table even though the terms — on production, on price — were not what they wanted. But Abdulaziz’s 2020 power play did little to prevent the producer dispute in July.

One of Abdulaziz’s strategies to cement Saudi control, as he has expressed it in private meetings with analysts and investors, is to mould Opec into a kind of central bank, regulating the oil supply in much the same way the US Federal Reserve regulates the US money supply. Of his thinking, he told the JPMorgan clients: “I have copied and pasted what central bankers have done.”

In this scenario, Abdulaziz is not just a regulator of one commodity’s supply; he is an oil industry sheriff slapping down speculators messing with his territory. “I want the guys in the trading floors to be as jumpy as possible,” he said at an Opec+ news conference in September 2020. “I’m going to make sure whoever gambles on this market will be touching like hell.”

Over the past year Abdulaziz has had considerable success in his role. The price of US oil has risen above $75 a barrel for the first time in more than six years, and Opec+ has been able to boost production. Oil-consuming nations are once again begging the cartel to open the taps.

And yet Abdulaziz’s complacent claims of dominance may come back to haunt him. His turbulent two years as energy minister — from the drone attack on Abqaiq through the 2020 price war to the devastating Opec+ breakdown in July — demonstrate that, for all the oil it is sitting on, Saudi Arabia cannot always count on the commodity it most strives for: total control.

• Javier Blas covers energy for Bloomberg News in London.

Bloomberg Markets. More stories like this are available on bloomberg.com.