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Sun 9 Sep 2012 01:12 PM

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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

Dealing with the Saudi energy conundrum
Dealing with the Saudi energy conundrum

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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jim 8 years ago

Solar panels don't last forever and I doubt KSA will manufacture them anyway. The panels will be purchased from overseas manufactureres like China. It takes vehicles to drive around and maintain your panels, blow the dust of them, that sort of thing. I belive that last year 93% of KSA budget was derived from oil exports. They will be broke long before they stop exporting. I doubt they will ever be an importer of oil as they will have no money to buy it. Saying that they will cease to export by 2030 is one thing, saying they will import is rather another. They have nothing other than oil that anybody wants. KSA will return to what it was before oil once they run outof oil. Unless the price of sand goes through the roof and global demand for it is created they have nothing anybody wants to buy from them. What's now happening may be refered to as 'the balkanization of the worlds oil patch'. Wait for it.

SAM 8 years ago

Boo hoo, poor jim from Canada wants an emotional response from Arabs; poor jim from Canada does not like Saudis; poor jim from Canada must have been stung and hurting; poor jim from Canada must have mistaken AB with FOX. Your post is pedestrian at best and your insight is dime a dozen.

nirsly 8 years ago

@ 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.

marty 8 years ago

@ 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!
:)

WHJ 8 years ago

@ 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.

Nirsly 8 years ago

@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.

steve 8 years ago

I saw a wiki leaks memo from saudi to USA stating they incorrectly estimated the reserves by 40%. Tar sands might be better than you think.

Ahmad 8 years ago

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.

bob 8 years ago

they let your post on. Its called freedom of speech.

WHJ 8 years ago

@Telcoguy. Let's see if we can put things in persepective for you. A country does not have to be big in size or in population to own significant assets in the West. Qatar is a case in point.
Your objectivity leaves much to be desired. The way you try to make sense out of Jim's comments is ludicrous at best. To say "they have nothing anybody wants to buy from them" is a statement that reflects little knowledge, and yet you defend it. I suggest you read Ahmad's post above and maybe, just maybe, you'll learn something about Saudi's economy. You need to start looking beyond what you just want to believe. You will be surprised how much knowledge you lack.