Middle East At Point Of No Return As Saudi-Qatar Rift Deepens

Authored by Cyril Widdershoven via Oilprice.com,

Saudi King Salman’s decision to appoint his son Mohammed Bin Salman (MBS) as the new crown prince did not come as a surprise. For months, the power struggle between former crown prince Mohammed Bin Nayef (MBN) and MBS happened in plain sight, and a confrontation was imminent. However, King Salman made his own calculations and decided to remove MBN in favor of MBS, providing a continuation of his own family line in the future. Over the last week, the media has been overwhelmed with assessments of the House of Saud and the role MBS will play or has been playing. The family feuds in the House of Saud are notorious, whenever a king dies an internal power struggle will emerge, regardless of what strategies have been implemented before.

At present, the Young Prince of Riyadh, Mohammed Bin Salman, has been given the key to power. This has happened at a very difficult time for not only the Kingdom, but also for the whole Gulf region and its neighbors. The choice made by King Salman to promote his son is a remarkable one but could, from a Saudi perspective, be the only viable choice. The need for a 180 degree change in the economic and social policy which keeps Saudi Arabia a strategic regional player is essential. Without radical changes, such as those presented in Vision 2030 or the Aramco IPO project, the Kingdom’s future could be bleak, as the era for “Rentier States” is over.

The challenges MBS faces are enormous. Due to lower hydrocarbon revenues, he will need to change an oil-based economy into a more open, liberal and high-tech economy, capable of taking on global competition in these fields. By opening up the Kingdom via Vision 2030 and the expected billions of dollars from IPO revenues, this could become a reality, not a fata morgana.

A successful economic transformation and increased participation of Saudi youth (including women) could stabilize the Kingdom in the future. MBS relies on this economic transformation to silence opposition inside the House of Saud, as other princes are vying for the crown. While the Saudi leading ulema have pledged allegiance to the new crown prince, the reality remains complex.

Even though MBS holds vast powers and influence at present, the situation is far from stable. King Salman’s royal decree to extend the Eid al Fitr holidays by a week or the reinstatement of financial perks for the military and other government officials, should be assessed as a pay-off and cooling-down period to quell possible opposition.

At the same time, the region is at a point of no return if the Syria-Iran and Qatar issues are not solved soon. The Qatar–Saudi confrontation is still heating up, already threatening a regional conflict, with the possibility of bringing in Iran and Turkey at the same time. Mohammed bin Salman has already been able to tackle the Qatari issue inside of the Kingdom, as former crown prince Mohammed Bin Nayef openly criticized the Arab pressure on Qatar.

After the (perceived) removal from power of MBN, the new crown prince will be able to continue with his own regional strategies, which don’t lack some confrontational features as we have seen already. MBS will for sure up the pressure on Iran, not only in the Syrian proxy war but increasingly in Yemen. The intensifying operations by Houthis and others in the Bab Al Mandab, and a growing missile capability onshore, is not taken lightly by the Saudi military command and MBS. Last week’s terrorist act against a Saudi offshore oil field in the Gulf by Iranian (some indicated Qatari) assailants has only put new oil on the fire. Some could argue at present - without the possible mitigating political cloud of MBN - no real soft approach is being discussed in Riyadh.

MBS will pursue a hardline power strategy to block Iran, Syria’s leaders and Shi’a opposition, while trying to force all Sunni Arab states in the region to follow suit. According to Saudi analysts, one of the main reasons for the current Qatari conflict is the rapprochement with Iran and a growing military presence of Turkey on Qatari soil.

At the same time, the rapprochement between Saudi Arabia and Egypt, as shown by the legalization of the two island deal (Sanafir and Tiran), is another major support for the current hardline position against Qatar. It seems that the Egyptian president and the two young wolves, MBS and Mohammed Bin Zayed (Abu Dhabi), are working well together. A new kind of power brokerage has emerged in the region, the period of traditional Arab politics (based on the Shura approach) is over. Arab regional politics in the 21st Century seems to have embedded Sun Tzu and Clausewitz, leaving no room for traditional pow-wows but only a political and economic Blitzkrieg, until now without diplomacy by other means (military).

On a totally different level, beyond his heavy hand in the Vision 2030 strategy and the defense strategy, MBS is also very well inclined and positioned to decide the coming Saudi strategy for OPEC’s production agreements. The blooming friendship between Russia’s Putin and MBS will strengthen in - the short term - the cooperation between OPEC’s leader and non-OPEC member Russia. Both have the same target, a stabilization of the oil and gas markets, not only to support their own economies, but also as a means to reinforce their military capability. Without a coordinated effort, oil and gas prices will be in limbo. MBS’s love for Putin is also based on the possibility of weakening the Moscow-Tehran cooperation, which is seen by Saudi Arabia and its allies as the main cause of instability in the region.

In stark contrast to former Saudi princes and kings, MBS seems to be able to understand the options of playing many cards at the same time. While putting on a charm offensive for U.S. president Trump, which seems to have worked without any flaws, Riyadh’s new crown prince is opening up to Moscow. A multibillion investment spree partly focused on oil and gas followed. Next to this, the Saudi market opened up for Russian companies such as Rosatom. The combined Russian-US technological push will support Saudi Vision 2030 and will also strengthen the Kingdom’s military power in the region. At the same time, Russian oil companies and technology institutes are preparing themselves for a major gold-rush in the Kingdom. Gazprom, Rosneft, Transneft and others are already booking their tickets to Riyadh and Dammam as the gates to oil and gas heaven have cracked open. A stronger Russia-Saudi oil and gas cooperation is in the offing, leaving less room for others to spoil the fun.

How far the current power surge of the new crown prince will be successful is unclear. MBS is a young prince, even for European standards. If he would become king soon, it is possible that instability would hit the streets before too long. However, if he is able to force Qatar to its knees, removing the possible opposition in Doha and anti-Saudi/Egypt groups (Muslim Brotherhood), some room will be available to deal with the other issues. Looking at the signs in Arab media, a peaceful solution is still far from reachable. Arab leaders show an increasing reluctance to become soft with regards to Qatar. A possible unexpected move should be expected if the demands currently on the table are not met. A full military confrontation could ignite the region.

The latter could involve both Iran and, another major Sunni power, Turkey. Ankara’s ongoing support for Qatar’s political standpoints and support of the Muslim Brotherhood, is not taken lightly by MBS, Sisi and Mohammed Bin Zayed. Turkey’s ongoing cooperation with Russia (military) and Iran (economically) could lead to a confrontation with Saudi-UAE and Egypt in due course. The combination MBS and Sisi should not be underestimated, they are smelling blood already. Putin and Trump are currently sidelined by the ambitions of a young Saudi crown prince. Support for his economic dreams could however take some of the sharp (military) edges of his current strategies. All in all, MBS economic and societal changes are worthwhile to pursue.

Hopefully MBS’s ambitions are not standing in the way of progress. Stability is supportive to global oil and gas markets. Cooperation between OPEC and non-OPEC is needed, not only for financial gains but also to support a sustainable supply of oil and gas in the future. Military conflicts in the Gulf region or instability in Saudi Arabia would destroy this for a long time, without any real other solutions or supply options in the short term. A major disturbance of oil and gas (LNG) supplies from the Gulf could stymie global economic growth. The young prince is ambitious, but hopefully his shoulders are strong enough to bear all the global and regional pressure currently put upon him.

Iran Threatens To Destroy Saudi Arabia After Saudi Prince Warns Of "Moving Battle To Iran"

An unexpected war of words erupted between two sworn Middle-Eastern rivals over the weekend, when Saudi Arabia and Iran threatened each other with military action, if not outright destruction.

It started on Tuesday, when in "unusually blunt comments" delivered during a nationally-televised interview Saudi Deputy Crown Prince Mohammed bin Salman - the man who is now effectively in charge of Saudi oil policy - ruled out any dialogue with Iran and pledged to protect his conservative kingdom from what he called "Tehran"s efforts to dominate the Muslim world."

"We know that we are a main goal for the Iranian regime," he said. "We will not wait until the battle comes to Saudi Arabia but we will work to have the battle in Iran rather than in Saudi Arabia."

Iran, never one to leave a lingering belligerent comment by its Saudi nemesis unanswered, responded when its defense minister said on Sunday that Iran would hit back at most of Saudi Arabia with the exception of Islam"s holiest places if the kingdom does anything "ignorant" according to Reuters.

"If the Saudis do anything ignorant, we will leave no area untouched except Mecca and Medina," Defence Minister Hossein Dehghan was quoted by the semi-official Tasnim news agency as saying. Taking a jab at the Saudi war in Yemen, the iranian said that "they think they can do something because they have an air force," referring to Saudi attacks on Iran-aligned Houthi forces in control of the capital Sanaa.

Dehghan, speaking to Arabic-language Al-Manar TV, was commenting on remarks by Saudi Deputy Crown Prince Mohammed bin Salman, who said on Tuesday any contest for influence between the Sunni Muslim kingdom and the revolutionary Shi"ite theocracy ought to take place "inside Iran, not in Saudi Arabia".

Was this just more "run off the mill" jawboning and theatrics, or a prelude to a more serious escalation between the two nations which periodically trade verbal barbs even if neither has been willing to test overt military action against its counerpart? The answer will be revealed in the upcoming OPEC negotiation on production cut extensions, and specifically whether the Saudis will grant Iran - which has been steadily gaining market share at Saudis" expense during 2017 - another waiver from participation in the mandatory output cuts. Because when it comes to Saudi Arabia, while nationalistic verbal pyrotechnics are for popular consumption, when it comes to oil, and associated revenues - especially ahead of the critical Aramco IPO - nothing could be more serious.

A $500 Billion "Hitch" Emerges In The Saudi Aramco IPO

As Saudi Arabia"s deputy crown prince pushes his nation"s Vision 2030 economic overhaul and crows of the $2 trillion Saudi Aramco valuation (ahead of its potential IPO), WSJ reports that officials at the state-owned oil company are using internal value estimates to $1.3 to $1.5 trillion, calling bin Salman"s estimate "unrealistic and mind blowing."

Since deputy crown prince Mohammed bin Salman announced the stock-offering plan and his $2 trillion estimate early last year, insiders and outsiders have questioned how he arrived at that number.

Source

About two dozen employees have been working since last year to try and figure how to take Aramco public, and have been working with Western consultants to explore ways to restructure Aramco to maximize its value, say people familiar with the process. The team has determined several variables - or what some call “levers” - likely to affect the price investors will pay for shares of the world’s largest oil producer, according to internal documents reviewed by The Wall Street Journal and people familiar with the process.

But, as The Wall Street Journal reports, no matter how they pull those levers, which include the price of oil and Saudi tax policy, Aramco’s projected value tops out at about $1.5 trillion, these people say.

One such lever was a major tax reduction (but even then it didn"t add up to bin Salman"s $2 trillion guess...

The Saudi government last month said it is reducing Aramco’s tax rate to 50% from 85%, bringing its tax rate closer to the level of the world’s biggest oil companies such as Exxon Mobil and Royal Dutch Shell.

That move would result in higher dividends for potential shareholders, and it brought Aramco’s internal value estimates to $1.3 trillion to $1.5 trillion from about half a trillion dollars, say people involved in the process.

By selling up to 5% of shares in an initial public offering targeted for next year, the government plans to raise billions of dollars that it can use to invest in other industries as part of a plan to reduce its heavy dependence on oil. The valuation discrepancy raises new challenges for a deal that is already fraught with complexity and facing opposition within the ranks of the kingdom’s government bureaucracy, according to people familiar with the matter.

One Aramco official called the figure “unrealistic and mind blowing.”

Questions about Aramco’s valuation surfaced earlier this year when a report for potential investors prepared by oil-industry consultant Wood Mackenzie Ltd. put Aramco’s value at around $400 billion, according to a client who attended a private Wood Mackenzie briefing. Saudi government officials say Aramco’s high reserves and low costs should make the company attractive to investors.

“Our profitability is higher than others and the interest we have received so far is huge,” said one official who defended the $2 trillion number.

Some officials inside the company and in government have privately suggested reevaluating the listing, say people familiar with the matter, and perhaps reducing its size or delaying it. So far,  Prince Mohammed and his staff seem unlikely to do so, say people familiar with the matter.

“This IPO will happen regardless of the valuation they may receive,” according to the government official who called the $2-trillion-dollar number “mind-blowing.”

Saudi King Arrives In Japan: 10 Aircraft, 500 Limos, 500 Tons Of Luggage, 12,000 Hotel Rooms, 2 Golden Escalators

When Saudi King Salman bin Abdulaziz of Saudi Arabia visited Georgetown in September 2015, the Four Seasons hotel did some serious redecorating.  As we reported at the time, eyewitnesses at the luxury hotel had seen crates of gilded furniture and accessories being wheeled into the posh hotel over the past several days, culminating in a home-away-from-home fit for the billionaire Saudi monarch, who was in Washington then for his first White House meeting with President Barack Obama.

“Everything is gold,” said one Four Seasons regular. “Gold mirrors, gold end tables, gold lamps, even gold hat racks.” Red carpets were been laid down in hallways and even in the lower parking garage, so the king and his family never have to touch asphalt when departing their custom Mercedes caravan

The guests staying at the 222-room hotel for the next couple of days are all part of the 79-year-old king’s entourage of Saudi diplomats, family members and assistants, one source said; a full buyout of the entire property was reserved for the visit. Guests who had booked to stay at the Four Seasons during the royal visit have apparently been moved to other luxury hotels in town. A call to the Four Seasons confirmed the hotel is sold out Thursday, Friday and Saturday nights.

Fast forward to this week, when the same King Salman bin Abdulaziz al-Saud landed in Japan, leading to largely to the same reaction, namely people stunned at the size of his delegation and his 500 tons of luggage. The king made quite an entrance, descending from his plane on one of his two golden escalators. The four-day visit, which began Sunday, is part of the Saudi royal’s month-long Asia trip, as the kingdom looks to diversify its economy from oil dependency. Saudi Arabia is Japan’s largest oil supplier.

The king’s delegation arrived in Japan on 10 aircraft and according to the Japanese press, an entourage so large even Japanese government officials didn’t have an accurate number of how many people to expect. In preparation for the royal visit, 1,200 rooms in Tokyo’s best hotels were booked for the delegation.

King Salman appears to have upped his game since visiting the US and, most recently, Indonesia, where he brought two limousines with him. In Japan, an entire fleet of up to 500 limousines were sourced from around the country according to RT.  "Maintenance costs for luxury models are high and there is little constant demand for such vehicles," a limousine industry insider told Asahi Shimbun. "Because we are unable to secure the needed number only in Tokyo, we are gathering the vehicles from Kanagawa and Saitama prefectures as well as the Tokai region."

While he was in Indonesia, the king also had a special toilet built for him inside a mosque, and another inside the House of Representatives.

On Monday, King Salman met with Japanese Prime Minister Shinzo Abe. King Salman visited the country as a prince in 2014, but this is the first Saudi Arabian king to visit in 46 years. Salman told Abe that the Middle East is facing diplomatic issues involving the Palestinians, Japan Times reported, and cited humanitarian crises in Yemen and Syria. A Saudi-led coalition has been bombing Yemen for almost two years. “Unfortunately, those crises are now giving negative impacts to the region,” the king said.

The Saudi royal’s trip caused many on social media to react in anger, comparing the king’s lavish travel to the situation in war-torn Yemen.

But perhaps the most important part of King Salman"s trip has yet to come: his visit to China. As the SCMP reported in "Why King Salman bin Abdulaziz al Saud upcoming visit to China is important to Beijing ... and a worry for Washington", the trip by King Salman comes amid uncertainty in the kingdom’s ties with Washington, and Beijing’s push to strengthen its presence in the Middle East.

Oil and Beijing’s “One Belt, One Road” trade initiative are expected to head the agenda when the king of Saudi Arabia stops in China as part of his Asian tour.

Dates for the trip have yet to be announced, but diplomatic ­observers said the king’s agenda would probably include oil ­exports to China – the world’s ­second-biggest buyer of the fuel– infrastructure projects for Beijing’s trade initiative linking Asia, Africa and Europe.

The 81-year-old king embarked on his Asia-Pacific trip late last month and is travelling with 25 princes and 10 ministers. After stops in Malaysia and Indonesia, he is taking a break in Bali.

His 1,500-member delegation and 459 tonnes of luggage will go on to Brunei, Japan, China, the Maldives and Jordan.

Saudi Arabia’s alliance with the US has been overshadowed by issues such as the Iran nuclear deal, the war in Syria and Islamic extremism. US President Donald Trump’s policy on the region is also unclear.

China has boosted ties with the kingdom, with President Xi Jinping visiting Riyadh early last year before going to Tehran. Security ties between the two nations have also strengthened, with Saudi Arabia buying Chinese military technology and a Chinese naval fleet visiting the port of ­Jeddah in January.

In other words, if the Saudis want to pivot from the US and toward China, King Salman"s visit to Beijing will be the perfect opportunity.

Or maybe not, because while the king is courting Asian leaders, his son, Deputy Crown Prince, and Defense Minister Mohammed bin Salman are currently in the US meeting with President Trump, and as the WSJ reports, "seeking to reset ties as Trump meets the prince."

Moelis Wins Saudi Aramco Advisory Mandate: World's Biggest IPO

In what will be the biggest victory in the brief history of Ken Moelis" relatively new New York-based independent investment bank, Moelis & Co., moments ago the FT has reported that Moelis has won the advisory mandate for the planned IPO of Saudi Aramco. 

As the FT notes, "winning the hotly contested mandate represents a coup for the boutique investment bank, which was founded by Ken Moelis in the midst of the financial crisis in 2007." As for the potential for advisory fees, they are - in a word - huge: the Saudis hope to turn the state-owned oil group into the world’s biggest, most valuable publicly traded company, with a valuation of about $2tn. As the FT also adds, citing people close to the IPO planning process, the sale of a 5% stake should happen next year, although the number of shares sold could increase, although depending on the price of oil, the timing could slip.

A quick recap on the strategy behind the Saudi plan to take the company public:

Saudi Aramco’s IPO is part of a transformation plan, envisaged by Saudi Arabia’s power broker deputy crown prince, Mohammed bin Salman, which seeks broad-based privatisation to boost employment and diversify the kingdom away from oil. Prince Mohammed believes the privatisation could value Saudi Aramco at $2tn.

A successful flotation aims to use the IPO proceeds for investments in non-oil industries in order to wean the country off its most precious resource.

Banks, advisory firms and consultancies have scrambled to secure work on the IPO since Saudi officials announced their intention a year ago. JPMorgan, which has been Saudi Aramco’s commercial banker for years, and Michael Klein, a former star Citigroup banker, are working with the Saudi authorities on a broad range of matters including the IPO.

It was not immediately clear was the fee structure granted to Moelis will be, but even a sizable haircut on traditional advisory fee assignments will be a huge windfall for the investment bank.