Saudi Arabia’s Economic and Geopolitical Moves

Saudi Arabia is one of the most relevant States regarding oil, both for its production and its global reserves, no wonder about this. Nevertheless, it is hard to realize and fully understand what this actually means, so numbers can provide some help. The great importance of Saudi Arabia in this field is due to the fact that it is the biggest oil exporter country and by possessing crude reserves of about 266.5 billion barrels, accounting for 18 per cent of global proven oil reserves, it has the world’s second largest crude reserves after Venezuela[1]. These numbers also mean that the nation’s wealth is based mainly on oil, with crude sales accounting for 75 percent of total export earnings; the gas sector too has a key role, as the two combined account for about 50 per cent of gross domestic product, and about 85 per cent of export earnings[2].

Saudi Vision 2030.

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Having these numbers well in mind, Saudi Arabia is planning to introduce a huge change in its economy and business strategy. Mohammad Bin Salman Bin Abdulaziz Al-Saud, deputy crown prince and Chairman of the Council of Economic and Development Affairs, on April 25, 2016 has talked about Saudi Vision 2030. This plan contains a great aim according to which in 14 years time the country should work towards economic diversification so as to reduce its dependence on oil revenues to the lowest level possible[3]. Saudi Vision 2030 constitutes the post-oil era plan of the Kingdom, stressing the importance on structural reforms, privatizations and the development of small and medium enterprises, with the final goal to increase the non-oil export products and create more job opportunities for the Kingdom’s citizens[4].

Regarding this plan, Prince Mohammad said that it is “an ambitious yet achievable blueprint, which expresses our long-term goals and expectations and reflects our country’s strengths and capabilities”. Talking about economy, he said: “We are determined to reinforce and diversify the capabilities of our economy, turning our key strengths into enabling tools for a fully diversified future. As such, we will transform Aramco from an oil producing company into a global industrial conglomerate. We will transform the Public Investment Fund into the world’s largest sovereign wealth fund. We will encourage our major corporations to expand across borders and take their rightful place in global markets. As we continue to give our army the best possible machinery and equipment, we plan to manufacture half of our military needs within the Kingdom to create more job opportunities for citizens and keep more resources in our country[5].

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Khalid Al-Falih, Minister of Energy, Industry and Mineral Resources of Saudi Arabia said that the aim contained in the Saudi Vision 2030is huge, audacious, ambitious, and the word ‘transform’ does not do it justice”. Anyhow, he notes that the Kingdom has a solid base to build on, with the largest economy in the Middle East, a stable currency, strong fiscal position, robust consumption and world-class infrastructure. Saudi Arabia’s reform plans to transform the country’s economy and society and move away from its oil dependency[6] are not going to be easy to achieve, as Riyadh’s intention is to increase non-oil government revenue from Saudi Riyal (SAR) 163 billion to SAR 1 Trillion in 2030[7].

In the Saudi Vision 2030 Prince Mohammad stresses an important point[8]: “Diversifying our economy is vital for its sustainability. Although oil and gas are essential pillars of our economy, we have begun expanding our investments into additional sectors, we understand that there are complicated challenges ahead but we have long-term plans to overcome themOur Vision is to maximize our investment capabilities by participating in large international companies and emerging technologies from around the world. This will ensure that we become market makers in selected sectors, as well as a leader in competitively managing assets, funding and investment”. According to Prince Mohammad, the Kingdom’s national oil company Saudi Aramco will play a very important role in in this plan, as it will be transformed “from an oil producing company into a global industrial conglomerate” because “Saudi Aramco has the ability to lead the world in other sectors besides oil, and it has worked on a sweeping transformative program that will position it as a leader in more than one sector[9]. Not a simple task for the country’s biggest oil company, holding about 261 billion barrels of total Saudi reserves[10], which sum up to about 266.5 billion barrels.

Speaking on January 17th at the World Future Energy Summit 2017 (WFES)[11], which was part of the Abu Dhabi’s Sustainability Week (ADSW) event, Khalid Al-Falih announced that in this new grand energy plan for the country, solar and wind power will be the preferred technologies in the auctions, but geothermal and waste projects will also be considered, just with a smaller role to play. Regarding solar and wind, the goal is the production of 9.5 gigawatts by 2023, but this is just the starting point, as by 2030, the country will generate 70 percent of its electricity from natural gas and 30 percent from renewables and other sources not linked to fossil fuels. “Other resources” include nuclear power plants, of which plans for two nuclear reactors totaling 2.8 GW are currently in the early stages of consideration and planning. These are just the first steps of the post-oil economy, as it is described in the Saudi Vision 2030.

Aramco and the domestic electric production: from crude to renewable.

Saudi Arabia is facing a growing energy demand and for this reason, it is seeking a $30 billion to $50 billion worth plan of investment in renewables. “This marks the starting point of a long and sustained program of renewable energy deployment in Saudi Arabia that will not only diversify our power mix but also catalyze economic development,” energy minister Khalid Al-Falih said[12]. The effort goes hand-in-hand with a drive by the royal family to broaden the economy following two years of budget deficits tied to low oil prices. More industry, though, means more energy. The 9.5 GW of energy that are going to be produced by wind and solar plans could replace the equivalent of 80,000 barrels of oil a day now burned for power[13]. Saudi Arabia burns more oil than any other country to generate electricity, and according to the most recent International Energy Agency figures, the kingdom consumes at least 900,000 barrels a day at peak periods during the summer months, which is an amount worth more than $16 billion a year based on current oil spot prices. Integrating more solar power on to the Saudi grid could free up more crude for export[14]. As the country’s biggest oil company, Aramco is greatly involved in this project and it is driving Saudi Arabia’s first steps toward a renewable energy industry, as it is already running the country’s biggest solar plant, a 10-megawatt facility mounted on a parking lot roof[15].

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These challenges are part of a long-term plan, and privatization will be central among reforms. Saudi Vision 2030 aims and explains how to boost the role of the private sector to make the kingdom a competitive hub for manufacturing and services. The need for change has been highlighted by the pain inflicted on the Saudi economy by the drop in oil prices in recent years, but an important role is played also by the war in Yemen and the costs that must be supported in order to preserve the leadership in the Middle East, now that sanctions from Iran have been removed[16]. Saudi Arabia’s government cabinet has approved the introduction of a value added tax, signalling an end to tax-free living in the Gulf state. According to Agence France-Presse, a 5 per cent levy will apply to certain goods following an agreement that the country struck with the six-member Gulf Cooperation Council in June last year. Saudis and those living in the country have for years been exempt from paying taxes, but now the government is looking for other ways to generate revenue[17]. Talking about the Saudi Vision 2030 Thamer Al-Sharhan, managing director of ACWA, the country’s leading renewable energy developer, told the WFES that he has heard a number of promising plans over the last six years that didn’t materialize, but this time he has genuine optimism[18].

Regarding the role of the private sector, in the Saudi Vision 2030 it is possible to read that[19]: “The ongoing privatization of state-owned assets, including leading companies, property and other assets, will bring in new and more diverse revenues for the Saudi government. This will further enhance our financial resources and economic stability, which will be reinvested for long-term impact. We will develop further the sophistication of our investment vehicles, particularly after transferring the ownership of Aramco to the Public Investment Fund, which will become the largest sovereign wealth fund in the world. We will increase the efficiency of the fund’s management and improve its return on investment, with the aim of diversifying our government resources and our economy. The Public Investment Fund will not compete with the private sector, but instead help unlock strategic sectors requiring intensive capital inputs. This will contribute towards developing entirely new economic sectors and establishing durable national corporations“.

King Salman’s Asian tour is much more than just business: it’s a geopolitical move that cannot go unnoticed.

In the final days of February, Saudi Arabia’s King Salman bin Abdulaziz Al Saud, along a 600-strong delegation, embarked on a month-long tour of the Asia-Pacific, where he has visited Malaysia, Indonesia, Brunei, Japan, China and the Maldives[20]. The tour has seen the agreement of investment and security ties with countries that are some of the biggest customers for the kingdom’s oil, as Riyadh is looking for new investment opportunities outside the turmoil in the Arab world[21].

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The big focus for major oil producers is on markets where demand is growing: right now, that means Asia. According to Ben Simpfendorfer, CEO of Silk Road Associates, “as Saudi looks to the future, Asia of course is front and center. It is two thirds of the world’s population, half of its economy, and those shares will only grow”. The continent represents about one third of daily global oil demand, with over 31 million barrels a day. This year demand is expected to grow by 1.4 million barrels a day according to FACTS Global Energy and one million of that is expected to come from Asia, as Japan and China are the most important markets for crude: the former has overtaken the latter as Saudi Arabia’s largest oil consumer. Moreover, Aramco has its Asian headquarters in Beijing[22]. The visit has come as the oil company has been preparing for world’s biggest initial public offering (IPO), which could value it as much as US$2 trillion. This might make the Kingdom’s Public Investment Fund one of the largest -if not the largest- sovereign wealth fund in world[23]. Saudi state media and the royal court have portrayed the trip as primarily concerned with energy and investment matters, but the broader geopolitical context motivating this rare month-long regional tour by the king merits a closer look.

The king’s trip can be bifurcated into two tranches: China and Japan have fulfilled one set of priorities while the trips to Malaysia, Indonesia, and Maldives have satisfied another[24]. Regarding the latter, the King’s tour has an important geopolitical meaning, as Malaysia, Indonesia, Brunei, and Maldives all have a Sunni Muslim majority, as well as being members of the Organisation of Islamic Cooperation[25]. For this reason, Ahmed bin Misfir Al-Ghamdi, deputy president of Saudi Telecom Company (STC), said the king’s visit to Asia reflects the Kingdom’s leading role in serving Islam and all people. It also underlines its endeavors to cement Islamic solidarity and encourage the ranks of united Muslims to allow them to enjoy their true position among the world countries thanks to their enormous potentials and resources, he said[26]. Considering the other two actors, Japan[27] and China, the Middle Kingdom surely plays a very important role, as on March 15th it has signed with Saudi Arabia a US$65 billion worth of deals involving investment, energy, space and other areas during King Salman’s visit to Beijing. The issue is so relevant because China is expanding its influence in the Middle East and seeking Riyadh’s support for its “One Belt, One Road” trade scheme, and president Xi Jinping welcomes Saudi Arabia as a “global partner” in its initiative, which aims to boost trade and connectivity among nations from Asia to Africa[28].

Regarding this point, “when you have to start thinking of your non-oil future… then all of a sudden geography matters”, Simpfendorfer said. The “One Belt, One Road” initiative is aimed at connecting China with over 60 countries, from Asia to the Middle East and Europe, through the rebuilding of roads, railways and ports to speed up trade. “You have somebody in China who has technology, money, people and the market, and somebody in Saudi Arabia who wants to look at future options,” Fereidun Fesharaki, chairman of FACTS Global Energy said. “The Chinese provide the options[29]. Those options, strategists say, take on added importance as the king’s tour is also seen as possibly cementing and building on new international alliances: according to analysts, Riyadh is “looking east” in its diplomacy as policies of the Donald Trump administration towards the complex and volatile Middle East remain unclear[30]. Li Guofu, a Middle East specialist with the China Institute of International Studies said Saudi Arabia would still rely on the US for security, but that Riyadh had realized that it could no longer “put all of its eggs in one basket[31]. In recent years, Saudi Arabia has boosted military and security cooperation with countries in Southeast Asia. Saudi Special Forces have also trained in China. In Malaysia, King Salman signed an agreement for advanced military cooperation with Kuala Lumpur, and announced the creation of the King Salman Center for Global Peace in the country. When addressing the Indonesian parliament, Salman called for a united front against global terrorism and signed a security pact with Indonesia[32].

It’s worth remembering that Riyadh’s look eastward is not sudden, but borne of a strategic plan incorporating the priorities of the National Transformation Program (2020) and Saudi Arabia’s broader global agenda. The kingdom, like so many states in the region, is betting on the center of gravity in global affairs shifting away from the West and towards the East in the coming years[33].

 

Notes:

[1] Anthony Dipaola, Saudi Arabia Sees Its Oil Reserves Lasting Another 70 Years, October 11, 2016: https://www.bloomberg.com/news/articles/2016-10-11/saudi-arabia-sees-its-oil-reserves-lasting-another-70-years.

[2] http://www.opec.org/opec_web/en/about_us/169.htm.

[3] Arabia Saudita: presentato Vision 2030, il piano per l’indipendenza dal petrolio, 26 aprile 2016: http://it.ibtimes.com/arabia-saudita-presentato-vision-2030-il-piano-lindipendenza-dal-petrolio-1448671.

[4] Reale Ambasciata dell’Arabia Saudita a Roma, Vision 2030 e la Trasformazione Nazionale: http://www.arabia-saudita.it/page.php?id=227.

[5] Saudi Vision 2030, pp. 6 and 7.

[6] Carolyn Canham, Saudi Arabia Vision 2030, January 20, 2017: https://www.weforum.org/agenda/2017/01/saudi-arabia-vision-2030/.

[7] Saudi Vision 2030, Op. Cit., pag. 67.

[8] Ivi, pp. 42 and 43.

[9] Ivi, pag. 82.

[10] Anthony Dipaola, Saudi Arabia Sees Its Oil Reserves Lasting Another 70 Years, Op. Cit.

[11] http://www.eventsitadubai.com/wfes-world-future-energy-summit-2017/. World Future Energy Summit (WFES) is the world’s leading global exhibition dedicated to advancing future energy, energy efficiency and clean technology. The summit has been held in Dubai form January 16th to 19th.

[12] Anthony Dipaola, Saudis Kick Off $50 Billion Renewable Energy Plan to Cut Oil Use, February 20, 2017: https://www.bloomberg.com/news/articles/2017-02-20/saudis-kick-off-50-billion-renewable-energy-plan-to-cut-oil-use. The two projects are a 300-megawatt solar facility at Sakaka in the country’s northern Al Jouf province and a 400-megawatt wind plant at Midyan in northwestern Tabuk province, according to the statement.

[13] Anthony Dipaola, OPEC’s Top Producer Is Turning to Wind and Solar Power, February 14, 2017: https://www.bloomberg.com/news/articles/2017-02-14/saudis-warm-to-solar-as-opec-s-top-producer-aims-to-help-exports.

[14] Anna Hirtenstein, Saudi Arabia begins shift from oil to solar power to fuel electricity generation, December 21, 2016: http://www.independent.co.uk/news/business/news/saudi-arabia-oil-revenue-production-solar-power-shift-electricity-energy-opec-a7488626.html?cmpid=facebook-post.

[15] Anthony Dipaola, OPEC’s Top Producer Is Turning to Wind and Solar Power, Op. Cit. In January, Aramco started the Kingdom’s first commercial wind turbine to power a facility in the northwest. The solar panels atop the parking facility cut the need for the equivalent of about 30,000 barrels of oil and the wind turbines will eliminate demand for about 19,000 barrels.

[16] John Defterios, Oil looms large over Saudi king’s Asia tour, March 13, 2017: http://money.cnn.com/2017/03/12/news/economy/saudi-arabia-king-salman-china-asia-oil/. Cfr. Patrizia Licata, Ecco i nuovi piani energetici dell’Arabia Saudita,6 gennaio 2017: http://formiche.net/2017/01/06/ecco-come-larabia-saudita-vuole-esportare-piu-greggio-puntando-sulle-rinnovabili/.

[17] Josie Cox, Saudi Arabia calls to an end to free tax living as oil slump continues to bite, January 30, 2017: http://www.independent.co.uk/news/business/news/saudi-arabia-calls-an-end-to-tax-free-living-as-oil-slump-continues-to-bite-a7554481.html?cmpid=facebook-post. Last year, the country recorded a budget deficit of $97 billion according to Agence France-Presse. In December, Saudi Arabia projected a deficit of about $53 billion for 2017.

[18] Ilias Tsagas, Saudi Arabia to focus on solar, wind in $US50bn clean energy plan, January 18, 2017: http://reneweconomy.com.au/saudi-arabia-to-focus-on-solar-wind-in-us50bn-clean-energy-plan-35690/.

[19] Saudi Vision 2030, Op. Cit., pag. 42.

[20] Ankit Panda, What King Salman seeks in Asia, March 1, 2017: http://www.aljazeera.com/indepth/opinion/2017/02/saudi-king-salman-seeks-asia-170228095334605.html.

[21] Sami Moubayed, Saudi King starts Japan leg of Asia tour, March 11, 2017: http://www.atimes.com/article/saudi-king-set-japan-leg-asia-tour-investment-alliances/.

[22] John Defterios, Oil looms large over Saudi king’s Asia tour, Op. Cit.

[23] Sami Moubayed, Saudi King starts Japan leg of Asia tour, Op. Cit.

[24] Ankit Panda, What King Salman seeks in Asia, Op. Cit.

[25] Ibidem.

[26] King’s visit to China reflects Saudi Arabia’s position globally, experts say, March 19, 2017: http://www.arabnews.com/node/1070531/saudi-arabia.

[27] Sami Moubayed, Saudi King starts Japan leg of Asia tour, Op. Cit. The visit is the first by a Saudi king in 46 years, though Salman visited more recently as crown prince. Japan’s thirst for oil and gas made Tokyo almost fully dependent on the Gulf for more than 80% of its oil supply, with 41% being met by Saudi Arabia, which is one of Japan’s biggest suppliers of crude oil. Trade between the countries fell overall last year as oil prices dropped. Japan’s $18.6 billion in imports from Saudi Arabia in 2016, mostly oil and gas, dwarfed its exports of $4.8 billion.

[28] Catherine Wong, China, Saudi Arabia sign US$65 billion in deals as King Salman starts Beijing visit, March 16, 2017: http://www.scmp.com/news/china/policies-politics/article/2079528/china-saudi-arabia-sign-us65-billion-deals-king-salman.

[29] John Defterios, Oil looms large over Saudi king’s Asia tour, Op. Cit.

[30] Sami Moubayed, Saudi King starts Japan leg of Asia tour, Op. Cit.

[31] Catherine Wong, China, Saudi Arabia sign US$65 billion in deals as King Salman starts Beijing visit, Op. Cit.

[32] Sami Moubayed, Saudi King starts Japan leg of Asia tour, Op. Cit.

[33] Ankit Panda, What King Salman seeks in Asia, Op. Cit.

 

References:

 

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