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Simon Watkins

Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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Saudi Arabia’s Big IMO 2020 Lie

The recent announcement that Saudi Arabia’s Alfanar Group is to set up an office in the U.K. to oversee its multi-billion dollar renewable investments there is interesting not for says but for what it implies and what it implies is extremely misleading, to say the least. The implication is that Saudi Arabia is at the leading edge of the global green energy initiative and the apotheosis of this was the earlier statement from Saudi Arabia that its state oil and gas behemoth, Aramco, plans to eliminate all fuel oil production at its refineries within the next five years.

Although this will not be by 2020 – when the International Maritime Organization’s (IMO) global sulphur cap for marine fuels drops to 0.5% from 3.5% - it was regarded by those unfamiliar with previous Saudi posturing as a positive move, coming as it does from the world’s largest exporter of oil. As seasoned oil market traders and analysts have long known, though, anything Saudi Arabia says should be taken with a huge degree of scepticism.

“There’s a huge gap between Saudi Arabia’s lofty rhetoric and the reality of its [renewable energy] achievements to date,” Richard Mallinson, senior cross-energy analyst for global energy consultancy, Energy Aspects, in London, told OilPrice.com. The truth of the matter is that the real global impact of Saudi halting production of fuel oil will be non-existent as it is in reality set to become an even bigger importer of fuel oil than it already is, making it one of the world’s central hubs for fuel oil and a catalyst for other countries to keep producing the highly polluting fuel oil, if not actually increase their production. Related: Why Saudi Arabia’s Crown Prince Keeps The Aramco IPO Alive

Despite the recent comment from Saudi Aramco’s senior vice president of downstream operations, Abdulazziz al-Judaimi, that the company’s fully-owned refining assets are already 85% IMO-compliant, “Saudi is already one of the very few places in the world that actually imports fuel oil now [the remaining 15% of Aramco’s assets produced around 200,000 barrels per day on average over the course of last year],” said Mallinson. “And, as it reduces its own production of the dirty product, so it will increase its imports of it so, far from this announcement being a product of transition to a more renewable energy idea, it is a product instead of economics,” he added.

The reason for the increasing substitution of imported fuel oil for domestically produced fuel oil is locational, in that currently the vast bulk of Saudi’s home-produced fuel oil is produced in regions that are a long way from the populous areas where it is needed to burn as fuel oil for power generation. “It makes sense for the Saudis to import fuel oil to places where it can be easily used for power generation rather than have to build an expensive logistical network to move it from where it is produced in Saudi to where it is needed,” Mallinson told OilPrice.com. “The Saudis have done this, of course, to move crude oil from East to West, and everywhere else in the country for that matter, but that is because crude oil is important to the Saudis and fuel oil is not,” he underlined.

Economics is also behind the phasing out of its own fuel oil and its substitution with imported fuel oil. “Saudi is actually looking to increase its burn of fuel oil over time to make up for the burning of crude oil in the domestic power generation energy mix, as crude oil is a valuable and flexible energy export and fuel oil is not, especially when the new IMO rules come in next year,” he said. Related: Millions Of ‘Hidden’ Iranian Barrels Set To Hit Oil Markets

A close look at the real figures is instructive in this regard. In 2018, the kingdom exported an average of 340,000 bpd of fuel oil but it also imported just over 300,000 bpd over the same period. The imported fuel oil went to domestic power generation centres and the exported fuel oil went to Saudi’s big markets for the product, mainly India and East Africa. Net/net, then, Saudi’s carbon footprint for fuel oil was around double that of its own production.

Exactly the same pattern has occurred since 2015 which was a peak year for fuel oil production. According to Energy Aspects, from 2015 to 2018, the amount of crude oil that Saudi Arabia used in domestic power generation decreased from 570,000 bpd to 410,000 bpd. However, during the same period, the amount of fuel oil that the Kingdom used in domestic power generation increased from 400,000 bpd to 500,000 bpd. “And this trend is set to continue after the new IMO ruling for 2020,” highlighted Mallinson.

The key point for IMO 2020 compliance, and for all other of Saudi Arabia’s much-vaunted but little realised renewable energy projects for that matter, is that the Saudis have no pressing need to diversify its energy origination from the easiest course – crude oil production, especially with oil prices at a relatively decent level, said Mallinson. This is despite Saudi Arabia having more natural advantages for generating renewable energy than almost any other country in the world. Specifically, it has only 45 cloudy days each year, making it perfect for solar energy projects, and has significant sustained wind patterns in the Red Sea area, making it perfect for wind energy projects as well. “Saudi still has lots of cheap oil [with a lifting cost of around US$2 per barrel, excluding capital expenditure], so there is no push factor compelling it to take action,” he told OilPrice.com.

“The Saudis have barely taken the first step on the renewable energy ladder, which is to switch more to gas, as again this would require a build-out of infrastructure along the lines of that which it has for oil and it has not done it,” he added. “It has only recently begun to even develop its gas fields,” he underlined.

By Simon Watkins for Oilprice.com

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