The Arabian Peninsula has, for most of its existence, not been of significant strategic value. The region is mostly dry and, until recently, didn’t produce much the world needed. Saudi Arabia, however, has become a regional power centre due to custodianship of Islam’s two holiest sites and due to its pivotal role in the global oil market. Now, Riyadh is also planning to become a renewable energy powerhouse.
The oil kingdom has an incredibly high number of sunny days, with only 45 cloudy days each year. It also has significant potential for wind energy, particularly in the Red Sea area. Furthermore, Riyadh has embarked upon a path to become a nuclear energy powerhouse with the instalment of approximately 19 reactors. It is only relatively recently that the Saudi government has made clear its intentions to expand its renewable footprint.
Saudi's plans: realistic vs overblown
Until recently, Saudi Arabia was a country controlled by old men, all brothers from the same father and founder of the Kingdom. King Salman, however, has fostered his son, Mohammed bin Salman (MBS), to become the heir-apparent and the de-facto leader of the country. The crown prince’s instalment was greeted with much excitement due to his intention to wane Saudi Arabia of its oil addiction and diversify the economy. The Vision 2030 program outlines the Kingdom's objectives in the diversification of the country's sources of development and growth. The creation of a renewables sector is an essential part of the program.
Besides diversification, ulterior motives drive the push for clean energy production. Saudi Arabia produces on average 10 million barrels of oil per day of which the majority is exported. A significant portion, approximately one million barrels, is burnt for electricity production. Therefore, Riyadh’s plans to diversify its energy sector are also aimed at increasing its export capacity and thus its revenue stream. Related: A Big Week For Oil Bulls
Saudi Arabia’s primary focus is solar energy, with the country having announced several projects already. It aims to invest $50 billion on expanding PV installations and plans to install 41 gigawatts of solar energy by 2032. As well as solar, several companies have signed contracts worth $500 million to build the first Saudi wind energy farms.
Economic and political factors have pushed the country to build a critical domestic nuclear energy industry from scratch, an industry which should provide 15 percent of its energy by 2032. Saudi Arabia’s archenemy, Iran, already has several active atomic reactors which have been built with Russian assistance. A nuclear energy industry serves two purposes: having the capacity to produce ‘the bomb' if an arms race occurs and decreasing dependency on the oil industry.
Although the Saudi Energy Research Centre acknowledges that hydrocarbons will remain a significant part of its energy mix until 2032 (60 GW), there will also be 41 GW of solar energy, 17.6 GW of nuclear energy, 9 GW of wind power, 3 GW of waste to heat, and 1 GW of geothermal energy.
Impeding factors
Despite the abundant media attention for Riyadh’s planned reforms and investment in alternative energy sources, not much has materialized in recent years. The unrealistic nature of some projects together with lousy communication with the relevant authorities have led to disappointing results. The planned investment of $200 billion in a 200 GW solar energy facility together with Japanese Softbank is an example of a project which has failed to deliver due to bad planning and unrealistic volumes.
Also, MBS’ streak of political blunders has decreased investor confidence. The crown prince is blamed for the disastrous war in Yemen which has led to the biggest humanitarian crisis on the planet, the blockade of Qatar which has driven the country into the hands of Iran, and the murder of Washington Post journalist Jamal Khashoggi. The murder of Khashoggi has probably proven to me the most damaging of all of these factors. This has also made the U.S. Congress wary of any deal to provide American nuclear technology for energy production that could also be used to produce a nuclear weapon. Related: Goldman: ‘Shock And Awe’ OPEC Cuts To Send Oil Higher Soon
Thirdly, an essential factor influencing Riyadh’s commitment to reaching its renewable energy targets is the price of oil. Being the largest exporter of oil in the world has the advantage of providing ‘easy money’ for the state coffers. When prices collapsed in 2014, the urgency was high for the Kingdom to decrease its dependency on both oil revenues and the oil industry as a form of employment. However, the improved position of oil exporters in recent years has reduced the pressure on the Saudi leadership to push through painful reforms.
What are the odds
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The energy transition has proven to be a difficult and complex task. Riyadh has set the bar high for creating a significant renewable energy market from scratch within a couple of years. The combination of continued low energy prices, political instability due to MBS' reforms, and the reluctance of international investors to provide funds threaten to derail Saudi plans for the instalment of renewables. Nevertheless, the favourable geographic characteristics of the Arab country and falling costs of PVs and wind turbines warrant a future for clean energy in one of the world’s biggest oil centres.
By Vanand Meliksetian for Oilprice.com
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Saudi Arabia’s demand for its own oil has been growing at annualized rate of 7% for the last ten years. At this rate of growth, domestic consumption will have doubled in a decade. This would jeopardize the country’s ability to export oil to global markets.
In 2018, Saudi Arabia consumed an estimated 4 million barrels a day (mbd) or 40% of its oil production and this is projected to reach some 8.2 mbd by 2030 according to Saudi Aramco’s own estimates. This means that the Kingdom will have to cut its domestic oil consumption drastically or replace oil by nuclear power and solar energy in electricity generation and water desalination. Failing to do either would result in its relegation to a minor crude oil exporter by 2025 or ceasing to remain an oil exporter altogether by 2030. By embarking on diversification, Saudi Arabia could enhance its oil exporting capacity and thus its revenue stream.
It is estimated that Saudi Arabia currently uses up to 16% of its daily oil production (1.6 mbd in 2016) to power its 27 desalination plants and this is projected to rise to an estimated 40% by 2025 if no alternative energy sources are found. It also uses some 1.2 mbd for electricity generation and some 1.2 mbd for transport. There are two explanations for this growing thirst for oil: Fast-growing population and subsidies.
Before December 2015 Saudi Arabia was spending $100 bn a year or 13% of its GDP on subsidizing water, gasoline, diesel, electricity and food. As a result, the price of electricity was 3 US cents per kWh whilst Gasoline sold at 12 US cents per litre.
However, in one of the biggest economic reforms, the Saudi government decided to raise prices of fuels, water and electricity by 60% in its 2016 budget and the budgets that followed in order to reduce subsidies and therefore reduce the huge budget deficit.
An integral part of diversification is intensive investment in renewable energy, particularly solar power and nuclear energy. Solar power along with nuclear energy could provide all the electricity needs of Saudi Arabia. Solar energy could also power an extensive network of water desalination plants along the Saudi coastline extending from the Arabian Gulf to the Arabian Sea and the Red Sea, not only for drinking but also for irrigation.
As part of its energy diversification, Saudi Arabia plans to install 41 gigawatts of solar energy by 2032. As well as solar, several companies have signed contracts worth $500 million to build the first Saudi wind energy farms. It is also planning to install 19 nuclear reactors to provide 15% of its electricity needs by 2032.
However, Saudi Arabia has been very slow in starting the diversification of its economy. It has always had huge ambitions but has not been diligent enough to pursue them. Still, vision 2030 is a step in the right direction. The Saudis should set themselves achievable targets within a a time frame and also within their financial resources and pursue them with diligence and speed otherwise they may wake up in 2025 to the fact that their oil exports could hardly support the needs of their budget.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London