Saudi Arabia—on with the lid
The kingdom will experience austerity and social reform, and clamp down on corruption and dissent
Crown prince Mohammed bin Salman's ascension to the throne, a possibility in 2018, will be seamless as far as Saudi Arabia's policies go because he's already the person setting all the agendas, including those relating to oil and Opec. But the year will see the future king stamp his personality on the monarchy still further, adopting more the style of an energetic president than a Gulf monarch, stripping away the cumbersome policy-making traditions that made Saudi Arabia a byword for caution and indecision.
Mohammed bin Salman's style makes the Saudi leadership less accountable than in the past—and less predictable. But it gives him the flexibility to adapt to changing circumstances when necessary, as happened when he decided in 2017 to reverse the cuts to civil servants' pay. It also gives him room to take decisions that in the past would have had little chance of receiving consensual support within the ruling family. For example, the decision in September 2017 to allow women to drive was bound to divide Saudi society. But Mohammed bin Salman calculated that it was more important to win over women and young people than bow to the wishes of conservative elements within the religious establishment.
Crown prince Mohammed has promised a social revolution, so further changes are likely in 2018. Public cinemas and other places of entertainment for young people will get the go-ahead. There are sound economic as well as social reasons for this. During a meeting with a foreign dignitary, the crown prince lamented the revenue the kingdom was losing by Saudis being forced to travel to Bahrain or Dubai for leisure breaks. Women's rights will also be expanded during the year, with more workplace opportunities and a relaxing of male guardianship laws. That said, to sink a beer or two, the causeway to Bahrain will still be a much-used route.
The crown prince has also promised an economic revolution, tied up with his Vision 2030 and National Transformation Programme 2020. Before 2017 is up, he'll be asking heads of economic and planning departments why many targets set for 2020 look unlikely to be met. He'll focus on two main areas: housing and jobs. There's a chronic shortage of both. New and more realistic targets will be announced.
He's made hundreds of enemies, but won praise from the younger generation
Revitalising the economy will also be a priority. The IMF reported GDP growth in 2017 of just 0.1%, while the non-oil sector, going forward, is expected to grow by a modest 0.6%. The dividend from reforms is unlikely to be seen much before 2020 and foreign currency reserves will keep shrinking. Austerity, in the form of greater indirect taxation and reduced subsidies, will be unpopular. Explaining the need for belt-tightening will be an important mission for the government in 2018 if protests are to be avoided.
While the key aim of Vision 2030 is to wean Saudi Arabia off oil dependence, the energy sector will continue to dominate the economy in the immediate future. A major step towards moving away from oil will be the planned initial public offering (IPO) of 5% of Saudi Aramco, with the amount raised put into the Public Investment Fund. That's if the IPO goes ahead: 2018 might see, instead, the sale switch from a public share issue to a private sale. Some economists doubt that the valuation of Aramco will match the $2 trillion suggested by prince Mohammed in 2016. They also doubt that preparations for the IPO, including the assessment of Aramco records and choice of locations for the sale, will be completed in 2018. So the best estimate is that if it is to be an IPO, it will go ahead in early 2019—by which time, the Saudi leadership is hoping, global oil prices will be higher, thus boosting Aramco's value. If a private sale is the choice, Aramco won't be short of suitors—Chinese and other—in 2018.
In the wider energy world, Saudi Arabia will continue to work with its Opec and non-Opec partners to maintain production cuts to achieve market balance, possibly beyond 1Q 2018. The kingdom will stick with the current policy, insisting that compliance is the only game in town. But Saudi Arabia is aware of the industry's prevailing view, that oil prices won't move structurally higher (in the absence of geopolitical shocks)—and that this will temper the enthusiasm of reluctant Opec cutters (and Russia) to keep cutting. As certain producers itch to renew output growth, the window of time in which the cuts can be made to work is closing. So the Saudi leadership will be studying output data closely throughout 2018, ready to fully open the taps and go for market share at the first sign that the agreements is coming apart.
Within the kingdom, talk about moving away from oil doesn't imply a cutback in funding for the energy sector. Far from it. Aramco's chief executive Amin Nasser has spoken of the company planning "to invest more than $300bn over the coming decade to reinforce our preeminent position in oil, maintain our spare oil-production capacity, and pursue a large exploration and production programme centring on conventional and unconventional gas resources". The kingdom's aim, he says, is to double natural gas production to 23bn cubic feet a day, "raising the share of gas in the kingdom's utilities to about 70%—the highest of any G20 nation".
A key element in the gas development programme is the expansion of the Hawiyah gas-processing plant's capacity from 2.4bn cf/d to 3.7bn cf/d. During 2018, Aramco will award the engineering contract for the facility, which processes non-associated gas from the giant (5m-barrels-a-day) Ghawar oilfield. In the coming months work will continue on the Fadhil plant, to handle gas from the Khursaniyah field.
Another priority for the new year will be to expand Saudi Arabia's downstream footprint. Its already large commitment in China will be expanded, with or without a Chinese strategic investment in Aramco. The planned Saudi-Chinese $20bn investment fund, agreed in principle in 2017, will be established and some of the many memoranda of understanding covering oil and petrochemicals signed during King Salman's visit to China in 2017 will be converted into full accords. In the coming months, too, Aramco will buy a stake in PetroChina's Anning Refinery in Yunan Province.
Links with Russia, political as well as economic, will also receive a boost in 2018. King Salman's visit to Moscow in October came about after Riyadh signalled that it was cutting off its support to anti-Assad opposition groups in Syria. The new approach to Syria is part of a reassessment of the kingdom's regional policies as a whole. This will result in renewed efforts to secure international mediation to end the costly and reputation-damaging war in Yemen. Before the end of 2018 as well, Saudi Arabia and the UAE, under US and Russian pressure, will accept a compromise formula presented by Kuwait to end the Qatar blockade and associated intra-Gulf crisis.
The biggest question that the Saudi leadership will face in 2018 concerns Iran. At present, crown prince Mohammed isn't averse to the idea of the US and/or Israel taking military action to stop the Iranians developing nuclear weapons. But with persuasion from Russia, China and European states, the kingdom will conclude that a war in the Gulf would be damaging, cutting off its oil exports and revenues. Conversely, the incentive of good relations with Tehran would result in greater Opec cohesion in the collective effort to boost oil prices. This in turn would prepare the ground for a shift in regional policy and the gradual resumption of relations with Iran. In this context, crown prince Mohammed will continue to pursue contacts with the Shia community in Iraq as a way of encouraging a change in public perception of the Shia faith in preparation for an eventual thawing of relations with Tehran.
As for crown prince/King Mohammed himself, the year won't be without difficulties. His dismissal of Prince Mitaeb as head of the National Guard, and arrests of scores of princes and prominent business figures on corruption charges, signal the start of a new and unprecedented era. He's made hundreds of enemies, but won praise from the younger generation for his anti-corruption stance. All Saudis now understand that Mohammed bin Salman favours economic and social reform, not political reform. Dissent—or even the possibility of it—won't be tolerated.
This article is part of Outlook 2018, our annual book looking at energy market trends for the year ahead. To purchase a copy, click here