A Saudi Predator?

How market manipulation helped the kingdom become a major investor in western oil companies

By Peter McKenzie-Brown

The last twelve months have been rough for companies invested in Alberta’s oil sands. Things began rough, with Norway’s US$1 trillion sovereign wealth fund, which has its origins in the country’s offshore oilfields, announced that it would unload the US$81 billion it had invested in bitumen companies. The reason? Such an investment was out of alignment with the 2^oC global warming target set by the 2016 Paris Agreement on greenhouse-gas-emissions. “By going…oil sands free,” the Norwegian news release said, “we are sending a strong message on the urgency of shifting from fossil to renewable energy.”

A strong message it may be, but also haughty. There is a direct correlation between a nation’s oil consumption, its GDP and the quality of life its citizens enjoy. By what right could the world’s rich nations – for practical purposes, the 37 members of the Organization for Cooperation and Development, with a population of about 1.3 billion – justify denying affordable energy to other countries in the world? Well, there is the matter of the global warming emergency.  The case for developing alternative energy resources is dire. After all, the population of our planet is rapidly approaching eight billion.

Norway’s wealth fund soon sold its US$81 billion interests in Calgary-based Cenovus Energy Inc., Suncor Energy Inc., Imperial Oil Ltd. and Husky Energy Inc. From that point on, the statement said, the fund would exclude companies involved in the oil sands from consideration as appropriate investments.

The shares in those companies responded immediately by falling. Even though there is widespread concern about global warming in Alberta, many of us with backgrounds in the oil patch felt affronted. “What else could go wrong?” we wondered. We did not know it at the time, of course, but there would soon be the matter of COVID-19.

As the dangers of travel across a pandemic-stricken planet became obvious, governments imposed lockdowns around the world and global oil consumption plummeted. As international travel crumbled, oil prices dropped for an industry which cannot too quickly shut in production. The poster-child for this event came on April 20^th, when the headline price for a barrel of West Texas Intermediate oil fell into negative territory for the first time ever. For the only time in history, sellers had to pay buyers to take their oil. (See chart.)

                Why did it happen? Essentially, because of the way oil markets function in Texas. The Texas Railroad Commission is the steward of the oil-rich state’s natural resources and the environment, and its regulations led to the reality of oil prices crashing from US$18 a barrel to -US$38 in a matter of hours. Rising stockpiles of crude threatened to overwhelm storage facilities and forced producers to pay buyers to take the barrels they could not store. Was this the doing of big oil – such vast publicly-traded oil companies as ExxonMobil, British Petroleum and Royal Dutch Shell, which are so often characterized as villains when pump prices rise at your local gas station.

In fact, the world’s 13 largest energy companies, measured by the reserves they control, are government-owned and operated – by name, Saudi Aramco, Gazprom (Russia), China National Petroleum Corp., National Iranian Oil Co., Petróleos de Venezuela, Petrobras (Brazil) and Petronas (Malaysia). These state-owned companies and their smaller siblings control more than 75 percent of global production. By contrast, the multinationals produce only ten percent.

Markets, manipulated

In early March, OPEC officials presented an ultimatum to Russia to cut production by 1.5 percent of world supply. For her part, the Eurasian giant foresaw continuing cuts in her market share: after all, America’s shale oil production, which uses fairly new technology, was making the country both the world’s largest consumer of oil and the largest producer. Anxious about this concern, Putin’s government rejected the demand – in effect ending a three-year partnership between OPEC and major non-OPEC producers, widely known as the OPEC Plus cartel. Another factor was weakening global demand resulting from the COVID-19 pandemic. This also resulted in OPEC Plus failing to extend the agreement cutting 2.1 million barrels per day that was set to expire at the end of March. Saudi Arabia, which has absorbed a disproportionate amount of the cuts to convince Russia to stay in the agreement, notified its buyers on March 7^th that they would raise output and discount their oil in April. This prompted a Brent crude price crash of more than 30 percent before a slight recovery and widespread turmoil in financial markets.

Perhaps this Saudi-Russian price war was a game of chicken to see who would blink first. But neither of the major players had much reason to blink. In March 2000, the Saudis had US$500 billion in foreign exchange reserves; Russia had US$580 billion. More to the point, the Saudi cost of production, depending on the grade produced, is three dollars per barrel, compared to US$$30 per barrel in Russia.

Thus, the OPEC plus price war was designed to take advantage of a weak global economy, infected by COVID-19. It Saudi Arabia's case, it assaulted the Western petroleum sector – especially America’s. To ward off from the oil exporters price war which can make shale oil production uneconomical, US may protect its crude oil market share by passing the NOPEC bill.

In April 2020, OPEC and a group of other oil producers, including Russia, agreed to extend production cuts until the end of July. The cartel and its allies agreed to cut oil production in May and June by 9.7 million barrels a day, equal to around 10 percent of global output, to prop up prices, which had previously fallen to record lows.

The Russia/Saudi Arabia oil price war, which had begun the previous month, had a huge impact – probably by design – on the ownership of large oil companies in Europe and North America. Saudi Arabia’s sovereign wealth fund saw nothing but opportunity in the global oil price plunge. During the battle, the kingdom scooped up billions of dollars’ worth of shares in downtrodden energy companies, including Canadian firms.

Filings with U.S. Securities and Exchange Commission indicate the kingdom’s Public Investment Fund (PIF), which has an estimated US$320 billion in assets under management, bought stakes worth US$481 million and US$408 million in Suncor and Canadian Natural Resources, respectively, during the first quarter of 2020. That month, the values of the Canadian producers and three other energy stocks PIF bought — Royal Dutch Shell plc, Total SA and BP plc — had all more than halved from their 52-week highs at the time the kingdom made its acquisitions. The illustration shows the prototypical Royal Dutch share price after the crash. It also shows the quick return the kingdom made from the package of acquisition of these five stocks as markets rebounded: more than US$182.6 million since the end of March.