Dealing with the Saudi energy conundrum


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Another month, another report that claims Saudi Arabia’s economy is hurtling towards the edge of a cliff. The latest research, from Citigroup, has warned that the kingdom risks becoming a net oil importer by 2030. This worrying prediction is based on the fact that Saudi Arabia already consumes over a quarter of its oil production domestically, as well as all of its gas production. Peak electricity demand is soaring at around eight percent per annum, with oil and its derivatives providing almost half of electricity in the country. Citigroup believes that the loss to the Saudi economy due to using its oil instead of exporting it amounted over $80bn in 2011 alone. To make matters worse, Saudi Arabia is selling off its energy supplies at highly subsidised rates; local power providers pay between $5 and $15 per barrel of oil (compared to Brent prices of $115 at the moment) while petrochemicals firms benefit from cheap gas feedstocks to outperform their international peers.

Saudi Arabia’s alleged fiscal meltdown has been brought up before, of course. In a report issued in July last year, Jadwa Investment warned that the oil ‘breakeven price’ — or the price at which the country can sell a barrel of oil in order to balance its budget — was projected to top $320 a barrel by 2030. The firm also projected that the kingdom could be running budget deficits from 2014, and that Saudi Arabia’s bulging foreign assets could be replaced by debt in under 20 years time.

Will such gloomy projections actually occur, though? I doubt it. As the CEO of one of the kingdom’s biggest banks told me earlier this year, in reference to the Jadwa report: “I suspect that the country is aware of that issue and is taking steps to both curtail the use of domestic energy consumption, by making it more efficient, and indeed find new sources of energy. For every challenge that comes along, there is an opportunity.”

It is hard to escape the notion that Saudi Arabia has lagged behind its GCC peers when it comes to diversification, given that roughly 85 percent of the country’s GDP is based on the energy sector. But the country does have a trick up its sleeve.

By its own admission, the Citigroup projections do not take into account the kingdom’s plans for sustainable energy. The bank argues that adding solar capacity would be the easiest option, “given the successful execution of projects globally”. According to the King Abdullah City for Atomic and Renewable Energy (KA-Care), concentrated solar power and solar photovoltaics will make up 23 percent of Saudi Arabia’s energy mix by 2030 and 39 percent by 2050. In addition, KA-Care says that nuclear power will provide 18 percent of the energy mix by 2030 and 36 percent by 2050.

To say that such plans are ambitious is a massive understatement. But this is where Saudi Arabia’s near-$600bn worth of foreign assets can come into play. The kingdom has a real opportunity to become a world leader in the provision of solar energy, but that would require immense investment.

In the same vein, the country’s nuclear plans will not come cheap. A total of 16 reactors are planned — at a total cost of well over $100bn — and the first two of these are scheduled to come online in less than a decade. Is it affordable? Certainly, given that the amount is far less than the $130bn social spending packages that King Abdullah announced last year.

Given that, in the UAE’s case, it will take roughly eight years for the country’s first reactors to be built (from deal signing to full operations), then it seems likely that the Saudi nuclear deal — likely to be the biggest power contract in history — is a matter of weeks or months, not years, away. My bet lies with the GE/Hitachi joint venture, given the US firm’s decades of experience in Saudi Arabia.

The warning signs are there for all to see. But Saudi Arabia has the tools to make the change happen.

Ed Attwood is the Editor of Arabian Business.

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Please post responsibly. Commenter Rules

Posted by: Ahmad

It's a fair characterization to say that Oil and Petrochemical derivatives make up a large percentage of Saudi exports. It's not accurate however to say that there is nothing else that Saudi Arabia exports or the world wants as Jim put it.

The manufacturing industry is alive and well in Saudi. Aluminum smelters that are being built, the multiple steel mills operating, cement, conversion manufacturing inclusive of detergents and other FMCG products, and as well as thriving dairy and poultry sectors.

Not to forget that Saudi Arabia will always have religious tourism.

Yes there are challenges. Yes they are being addressed, how quickly and effectively remains a point of discussion. And Saudi Arabia has much more than oil to export to the world.

Posted by: Hassan

Ahmad,

While your point is factually correct; there is a growing industrial and aggro-business sector in KSA, there is one important factor I feel you might have overlooked.

Industry such as smelting and cement requires vast quantities of thermal and electrical energy, energy which ultimately (currently) is being provided for by highly subsidized carbon fuels. ( industry that may be uncompetetive w/out subs)

Agriculture and industrial process also come with a heavy water burden, and with a lack of sustainable water resources desalination is used to make up for the region's lack of resource. Yet again desalting sea water is a hugely energy intensive, yet again this is energy that is untimely fossil fuel derived.

Add the factor of rapidly increasing domestic demand in turn leading to heavy opportunity costs, and it is not unfathomable that the kingdom might be facing an economic tipping point.

What will make the difference is what actions are taken now to secure future prosperity

Posted by: WHJ

@ Ahmad. To add to your point, there's also the vast untapped mineral resources of Saudi Arabia. In fact, the General Investment Authority hopes that the Kingdom's mining sector will be the economy's third pillar after oil and petrochemicals. The Kingdom has thousands of square kilometers containing minerals that include gold, silver, lead, zinc, uranium, copper, bauxite....etc. In fact, Saudi has some of the largest phosphate reserves in the world.

Posted by: Nirsly

@Arabian Business

Why do you allow racists and bigots to post such comments as "goat herders" and then stop all attempts for defense against that?
The first commenter broke your own guidelines and you still allowed him. Stop supporting these racists.

Posted by: SAM

Freedom of speech is oral; when written, it is called freedom of expression, which is exactly what Nirsly and all other contributors are doing.

Posted by: nirsly

@bob

No bob, they didn't let my post on, they changed the words.

Look at their rules, clearly no one would accept the first post as it was written.

However when I replied, they changed my words and this is the first time, where's the freedom of speech.

@Arabian Business

Stop changing my words.

Posted by: WHJ

@ Nirsly. Very well said. Telcoguy, as usual, uses statistics to distort facts. Facts such as:
Saudi Arabia is expected to record a budget surplus of USD 3.2 billion this year. While the UK, for example, recorded a budget deficit of USD 23 billion in June of this year.
Saudi Arabia's debt to GDP is 7.5% while the UK's is 86%
Saudi Arabia's current account surplus was USD 47.6 billion in Q1, while the UK's current account deficit was GBP 11.2 billion in Q1.
These are the figures that matter, not the population. I guess the wait will not be long after all.

Posted by: marty

@ jim

well said..for someone whose country is about to be split into 2!!! (ie quebec!)...Jim, you have evidently not read anything about economics or history..stick to shovelling tar sands my friend!
:)

Posted by: marty

@ steve- well done on being able to use the internet and supply us with information which is over 5 years old. ps 60% still is a LOT of oil for one country to use, let alone its export markets..if even true..and i suppose you dont know how energy efficient tar sands really are...ie you expend $2 energy in getting $1.5 of oil...did you study economics from an online university or what?

@ telcoguy- i think i just did but you seem to, as always, lose the plot...


Posted by: nirsly

@ Jim

Could you please be more bigoted and racist in the future, we wren't very clear this time.

With bankruptcy and high unemployment, The West is more likely to be herding cattle sooner.

Anyway by that time, The West will be owned by Saudi.

Wait for it.

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