Riyadh flags plan to enrich uranium - Saudi reforms start to yield results: IMF

ABU DHABI: Saudi Arabia’s new energy minister, Prince Abdulaziz bin Salman, said yesterday that oil production cuts would benefit all exporting nations, in an indication he will support further reductions to address an oversupplied market and sagging prices. In his first comments since being appointed by his father King Salman on Sunday, the minister signaled no major change in approach in Saudi Arabia, the de facto OPEC leader which pumps about a third of the cartel’s oil. “The pillars of our oil policy are pre-determined and will not change,” he told Saudi broadcaster Al-Arabiya.

The prince was in Abu Dhabi to attend the World Energy Congress, followed by a meeting on Thursday of the Joint Ministerial Monitoring Committee (JMMC) of the OPEC+ alliance for a supply cut deal reached last year. The ministers will consider fresh reductions, even though analysts are doubtful such a move would succeed in bolstering crude prices which have been badly dented by the US-China trade war.
Crude prices are moving around levels of $60 a barrel, in contrast with more than $75 a year ago, but were given a boost Monday by the Saudi official’s comments, with West Texas Intermediate oil for October delivery advancing 53 cents to $57.05 a barrel. Prince Abdulaziz said that the trade war, which has triggered fears of a global recession, has cast a “fog” over the oil market. However, he appeared to swing his support behind further curbs to rebalance the crude market. “Cutting output will benefit all members of OPEC,” he told Al-Arabiya on the sidelines of the conference, but added to reporters later that “it would be wrong” for him to pre-empt the decision of the alliance.

The International Energy Agency (IEA) last week lowered its growth forecast for oil demand for 2019 and 2020, blaming the ugly US-China trade dispute which has triggered fears of a global recession. “If I (am) to be concerned with IEA projections, I’ll probably be on Prozac all the time,” Prince Abdulaziz said with a laugh, referring to the well-known antidepressant.

The prince also made light of gloomy depictions of the global outlook. “Do we have a recession today? No. They’re projecting a recession subject to a possible trade war. Where is it?” he told reporters on the sidelines of the conference. “Do you really believe that the US and China and those other countries involved in this issue would not have the wisdom and sensibility to try and overcome these issues?”

The appointment of Prince Abdulaziz, half-brother to Crown Prince Mohammed bin Salman, marks the first time a royal family member has been put in charge of the all-important energy ministry. He replaces veteran official Khalid Al-Falih as the world’s top crude exporter accelerates preparations for a much-anticipated stock listing of state-owned oil giant Aramco, expected to be the world’s biggest.

The OPEC petroleum exporters’ cartel and key independent producers want to halt a slide in prices that has persisted despite previous output cuts and US sanctions that have squeezed supply from Iran and Venezuela. Analysts say the JMMC monitoring body has limited options when it meets in Abu Dhabi to formulate recommendations ahead of an OPEC+ ministerial meeting in Vienna in December.
UAE Energy Minister Suheil Al-Mazrouei said Sunday the group would do “whatever necessary” to rebalance the crude market, but admitted the issue was not entirely in the hands of the world’s top producers. The market is no longer governed by supply and demand but is being influenced more by US-China trade tensions and geopolitical factors, he said. 

Analysts say that while cuts could help prices, they could also mean producers lose further market share. Prince Abdulaziz also alluded to the sense that Saudi Arabia is shouldering the burden of production cuts, while other nations - notably Nigeria and Iraq - are flouting the limitations. Speaking to reporters in Abu Dhabi, he said that one or two countries “need to be more committed” in order to bring benefits to the entire industry.

The 25-nation OPEC+ group, dominated by the cartel’s kingpin Saudi Arabia and non-OPEC production giant Russia, agreed to reduce output in Dec 2018. That came as a faltering global economy and a boom in US shale oil threatened to create a global glut in supply. Previous supply cuts have mostly succeeded in bolstering prices. But this time, the market has continued to slide - even after OPEC+ agreed in June to extend by nine months an earlier deal slashing output by 1.2 million barrels per day (bpd). The new factor is the trade dispute between the US and China, whose tit-for-tat tariffs have created fears of a global recession that will undermine demand for oil. 

Meanwhile, Saudi Arabia wants to enrich uranium for its nuclear power program, Prince Abdulaziz said yesterday, potentially complicating talks with Washington on an atomic pact and the role of US companies. Uranium enrichment has been a sticking point with the United States, especially after Crown Prince Mohammed bin Salman said in 2018 that the kingdom would develop nuclear arms if regional rival Iran did.
The world’s top oil exporter says it wants to use nuclear power to diversify its energy mix, but enrichment also opens up the possibility of military uses of uranium. “We are proceeding with it cautiously … we are experimenting with two nuclear reactors,” Prince Abdulaziz said, referring to a plan to issue a tender for the Gulf Arab state’s first two nuclear power reactors.

Ultimately the kingdom wanted to go ahead with the full cycle of the nuclear program, including the production and enrichment of uranium for atomic fuel, he told the energy conference in Abu Dhabi. The tender is expected in 2020, with US, Russian, South Korean, Chinese and French firms involved in preliminary talks about the multi-billion-dollar project.
Although atomic reactors need uranium enriched to around 5 percent purity, the same technology can also be used to enrich the heavy metal to higher, weapons-grade levels. Saudi Arabia has backed President Donald Trump’s “maximum pressure” campaign against Iran after he withdrew the United States from a 2015 nuclear pact that curbed Iran’s disputed nuclear program in exchange for sanctions relief.

In order for US companies to compete for Saudi Arabia’s project, Riyadh would normally need to sign an accord on the peaceful use of nuclear technology with Washington. The United States would like to sign this pact, known as a 123 agreement, a senior US official said at the conference. “It’s important for us, with regards to US technology, we’re going to pursue a 123 agreement,” Dan Brouillette, Deputy Secretary of the US Department of Energy, said. “We would like to see a 123 agreement accompany any agreement to transfer US technology or use US technology in Saudi or any other place,” he added.

In a related development, Saudi Arabia’s economic reforms, including VAT and higher energy prices, have started to yield results, but more needs to be done to plug a chronic budget deficit, the IMF said yesterday. After a crash in oil prices that shrank Saudi Arabia’s revenues and led to budget shortfalls for five years in a row, the world’s largest crude exporter imposed a raft of measures to diversify its economy.
“Reforms have started to yield results and… the outlook for the economy is positive,” the International Monetary Fund said in a regular report. But it said the kingdom, where oil income still accounts for 70 percent of public revenues, must extend adjustments in the price of utilities and fees levied on expatriates. It also called on Saudi authorities to consider doubling value added tax (VAT) from five percent to 10 percent.

Saudi Arabia introduced the tax in 2018, a year in which its returns amounted to $12.5 billion or 1.6 percent of gross domestic product. Commitment to the reform program will be key to success in “promoting non-oil growth, creating jobs for nationals, and achieving the objectives of the authorities’ Vision 2030 agenda”, the IMF said. “Vision 2030”, the brainchild of influential Crown Prince Mohammed bin Salman, is aimed at weaning the Saudi economy off its reliance on oil.

Saudi GDP grew by 2.4 percent last year but the IMF said growth would fall to 1.9 percent in 2019 due to substantial OPEC oil output cuts aimed at addressing oversupplies and underpinning sagging prices. The fiscal deficit is forecast to widen to 6.5 percent of GDP this year, from 5.9 percent in 2018, it said. The global lender also called for greater diversification to create jobs for Saudis whose unemployment rate stands at 12.5 percent. One million new jobs are needed for citizens over the next five years, it said.

Oil directly accounts for more than 40 percent of Saudi Arabia’s GDP, nearly 70 percent of fiscal revenues and almost 80 percent of exports, the IMF said. Saudi Arabia has posted a budget deficit since 2014 and the total shortfalls until last year amounted to over $320 billion. The kingdom is projecting another deficit this year. The IMF said in the report that Saudi authorities have reiterated their commitment to balancing the budget in 2023. – Agencies