Dealing with the Saudi energy conundrum

Saudi Arabia already consumes over a quarter of its oil production domestically, as well as all of its gas production
By Ed Attwood
Sun 09 Sep 2012 01:12 PM

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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