As US Democrats bandy about a series of wispy trillion-dollar green deals, Saudi Arabia has a green deal of its own-one of monumental proportions. But Vision 2030 is not without its challenges. Can such a comprehensive plan from the world's largest oil exporter really achieve success within the promised time frames?
Kicking That Old Oil Habit
Vision 2030 is the ambitious plan of Saudi Arabia's Crown Prince, Mohammed Bin Salman, ostensibly to modernize Saudi Arabia and diversify its economy away from oil. This is a big ask, considering that oil and gas account for 50% of The Kingdom's GDP, and 70% of its export revenue. It holds 18% of the world's proven petroleum reserves, according to OPEC. It is what we call a single-resource economy, and when oil is trading at $100 per barrel, that's an okay thing to be. But Saudi Arabia has, time and again, used these oil booms to funnel money toward a series of economic development plans designed to kick the oil habit, so to speak. Is this one different?
Vision 1970 All Over Again
Saudi Arabia has had no fewer than nine successive five-year development plans dating back as far as 1970, each one designed to do the same thing: diversify its one-track economy away from oil-and we can see today how that plan turned out.
In addition to kicking the oil habit, most plans called for increases to the role of the private sector and developing human capital. So, the Saudi's are no stranger to grand plans that have moderate success. Â
If successful, the primary goal of MbS' Vision 2030 is to move Saudi Arabia away from being so reliant on its oil industry. But this will have a ripple effect that will go well past Saudi Arabia's oil industry.
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Part of Vision 2030 calls for increases to energy efficiency, with one major energy consumption coming from the building sector. But even as Vision 2030 looks to increase efficiencies surrounding heavy air conditioning use, Saudi Arabia's demand for electricity is expected to double by 2030. This new appetite for electricity will increase the demand for renewable power. As Saudi Arabia's renewable energy needs grow, tech and costs in the renewable sector should improve.
Another aspect of Vision 2030 could see Saudi Arabia's OPEC influence wane as it becomes less of an oil exporter. For OPEC, who has already had to bring in Russia in order to continue to affect the global oil markets, the loss of Saudi Arabia as its largest exporter will further dilute its ability to manipulate prices. And without a powerful oil cartel to do just that, the oil market may be left to ebb and flow more naturally.
The Proof of the Pudding
True success cannot be gauged with mere promises. The evidence suggests several challenges that Saudi Arabia will face on the way to achieving Vision 2030.
Saudi Arabia is still making huge investments in the petroleum sector. In August 2019, Aramco told India it would purchase a 20% stake in India's Reliance Industries' refining and petrochemicals business at an expense to Aramco of roughly $15 billion. It also would have Reliance purchasing 500,000 bpd of Aramco crude oil. Vision 2030 does call out a plan to incorporate India as a strategic partner, but its desire to do this in petrochemicals takes it further away from its goal.
Saudi Arabia has grand plans to fund its Vision 2030 in large part by proceeds from listing 5% of Saudi Aramco. But this plan, which would be the world's largest IPO ever, has seen multiple delays. Roadblocks for the hefty IPO are transparency issues, listing venue challenges, and most critically, the $2 trillion valuation that MbS has been stubbornly sticking to, which most banks have balked at. Lower oil prices and tension with Iran in the Middle East continue to drag down this valuation. The most recent delay was announced this week, with a new deadline of November 7-but this is just the local listing on the Tadawul, which could raise as much as $40 billion, but this is not enough. While the date for listing the IPO on a foreign exchange is still unknown, one this is for certain-without the IPO there will be no Vision 2030. And in a round-and-round-we-go kind of way, hard selling Saudi Arabia citizens to sink money into and tether itself to its biggest oil company really is counterintuitive to moving its society away its oil industry, and leaves fewer dollars that will be invested in Saudi businesses other than oil. So while The Kingdom is saying yes to changes with their lips, their actions are saying no. Related: Protect The Oil: Trump's Top Priority In The Middle East
Human rights issues continue to plague Saudi Arabia, and progress in this area is essential if other industry sectors are to take off and take the place of its oil industry. Tourism-one industry that Saudi Arabia is banking on to help generate revenue from something other than oil-can hardly take off as planned given the current social climate in The Kingdom. For now, Saudi Arabia's plans are to increase tourism from 3% of Saudi Arabia's GDP to 10% by 2030. But Human Rights Watch suggested that in 2018, Saudi Arabia actually "stepped up their arbitrary arrests, trials, and convictions of peaceful dissidents and activists in 2018, including a large-scale coordinated crackdown against the women's rights movement beginning in May." Rights abuses include the death penalty for what HRW considers to be "peaceful activism and dissent." And who could forget the Ritz Carlton incident? Saudi Arabia also enforces Sharia law, which is not inviting for all foreign tourists, and its adamance that it will impose fines for things like public indecency, which includes wearing modest clothing and public displays of affection, shows a glaring disconnect and an unwillingness to do what needs to be done to achieve that 10% goal.
Foreign investors are not looking too favorably on Saudi Arabia. In fact, foreign direct investment in Saudi Arabia last year was a twelfth of what it was just 10 years ago, with big multinationals even delaying planned investments "because of what they see as Saudi Arabia's and MbS' instability.
Vision 2030 is an ambitious plan with an ambitious price tag, and the success of Aramco's IPO plans will determine just how much toward the goals Saudi will achieve by 2030. If it can pull it off, it will likely mean more stability for Saudi Arabia and its citizens, and an energy market that perhaps is not as reactive as it is today on every word out of Saudi Arabia's or OPEC's mouth.
By Julianne Geiger for OilPrice.com
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Comments
This is a huge task considering that the oil revenue accounts for 50% of Saudi Arabia’s GDP, 70% of its export revenue and 85%-90% of budget revenue.
However, the Achilles heel of Vision 2030 is Aramco’s IPO. The IPO was hoped to bring $100 bn based on a Saudi valuation of Aramco at $2 trillion. Would-be-investors have found that the valuation excessive since Saudi Arabia based it on proven oil reserves claimed to be 267 billion barrels (bb). My assessment is that Saudi reserves don’t exceed 55 bb calculated on the basis of oil production since oil was discovered in Saudi Arabia in 1938 (for which we have figures) and an annual depletion rate of 5%-7%.
In my opinion, the IPO will never see the light of day because of two major factors: One is persistent question marks about the actual size of Saudi proven reserves. The second factor is risk of American litigation regarding 9/11. The IPO is dead and buried.
Even a smaller IPO launched in the Saudi stock market (Tadawul) may not fare better because it could overwhelm the local stock market and create a problem of liquidity and possible cases of bankruptcy in the market because of local investors trying to borrow huge amounts of funds to pay for Aramco’s shares. Still it might not get the same amount of funds that the IPO was hoped to get.
Still, Saudi Arabia can go ahead with its diversification even without the IPO. One aspect of diversification is investing in food production projects in the Sudan for instance as part of a Gulf Cooperation Council’s (GCC) collective investment. Investing just 5% of their oil revenues in food production projects each year would enable the GCC countries to create a food revolution for their people.This could save the Saudi economy in due course more than $50 in food imports annually.
Another aspect 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 coast extending from the Arabian Gulf to the Arabian Sea and the Red Sea, not only for drinking but also for irrigation. Moreover solar electricity could in the future be exported to Europe earning a very sizeable income for Saudi Arabia and other Gulf countries.
And yet another aspect of diversification is petrochemicals. Saudi Arabia could add huge value to its energy exports by building the world’s largest petrochemical industry.
Phasing out the financial subsidies for gasoline, diesel, water and electricity could save the country some $100 bn annually and reduce the mindless waste of the country’s resources. The saved money could be used to fund new wealth-creation projects.
Even with the diversification, the Saudi economy along with the other economies in the Arab Gulf will remain oil-based for the foreseeable future because the non-oil sectors will continue to be dependent on the oil revenue for years to come.
Vision 2030 would not succeed without transparency and without giving the Saudi people a direct say in its formulation and implementation. Still it is a step in the right direction.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London