Country report: Saudi Arabia

Materials World magazine
,
1 Jul 2016

As part of our ongoing series, Rhiannon Garth Jones considers how and why Saudi Arabia is changing its energy policy, and what the impact might be.

Saudi Arabia has the second largest proven oil reserves in the world, estimated to be 268 billion barrels. Even a minute shift in its energy policy can significantly affect global oil prices, and its response to any global change in energy policies is always one of the most heavily scrutinised.  

In May, its long-serving Minister of Petroleum and Natural Resources, Ali al-Naimi, was dismissed and replaced by Khalid al-Falih, the former CEO of Saudi Aramco, the state oil company, known for his much more bullish position on production. The position was also renamed the Minister for Energy, Industry and Mineral Resources, to reflect the rapidly diversifying portfolio.

In addition, the country announced that not only would it maintain its current level of oil production – 10.2 million barrels per day – but increase it. The current CEO of Aramco, Amin Nasser, also said that the theoretical ceiling on Saudi oil production capacity – 12.5 million barrels per day – could be expanded in the future. 

On its own, this shift in policy would be important, but there have also been other important shifts in the country’s energy and natural resources policy recently. Plans to sell up to 5% of Aramco by 2018, which would be the world’s largest ever IPO, were announced in April. Aramco controls around 10 times the oil reserves held by Exxon Mobil Corp and pumps more than 10 million barrels a day of crude, exceeding the domestic output of all American oil companies combined. 

Elsewhere, the country has invested significantly in solar and nuclear power, and looked to diversify its mineral resources portfolio. Saudi Arabia has large deposits of gold, bauxite, silver, copper, iron, tin, zinc and lead, as well as non-metallic minerals such as phosphate and tantalum. Although there has been plenty of exploration and some public–private partnerships have arisen over the years, there was little in the way of extraction and processing until the introduction by the Government of state mining company, Ma’aden. Since its creation in 1997, Ma’aden has been crucial in exploiting previous exploration and discovery work (Materials World, Jan 2014, page 34).

The country also plans to construct 16 nuclear power reactors over the next 20 years at a cost of more than US$80 billion, with the first reactor on line in 2022. It hopes to have 17GWe of nuclear capacity by 2040 to provide 15% of the country’s projected energy needs. 

The motivation

The fluctuating price of oil is one clear reason for the kingdom’s move to diversify its resources, particularly since its budget relies so heavily on oil sales – Saudi Arabia’s fiscal breakeven, the oil price at which its budget would be balanced, has been reduced from US$100.40 in January 2015 to US$77.60 in 2016, according to DeutscheBank, which is still significantly higher than the current price of Brent crude (US$50.30 at the time of press). 

But another big factor is how reliant the country is on oil for electricity. Saudi Arabia is the 40th most populous country in the world, but is sixth in domestic oil consumption. The climate of the country explains much of this energy usage – 70% of its electricity use in 2013 went on air conditioning, and the energy-intensive desalination process. Abdul Rahman al-Ibrahim, Governor of the Saline Water Conversion Corporation, revealed in May 2014 that his company consumes the equivalent of 80 million barrels of oil a year. 

In January, the Saudi Government raised prices on natural gas, water, electricity and diesel fuel, which seems set to reduce demand while raising around US$7 billion. That revenue, and the diversification of its energy and mining portfolio means the budget should be less affected by changing oil prices, and also means its citizens can continue to use disproportionately large amounts of electricity without cutting significantly into the increased stocks of oil for sale.

The impact

As one of the biggest oil producers in the world, Saudi Arabia’s decision to increase oil production will almost certainly have a significant impact on prices and usage. Increased stocks would likely keep prices at their current rates or lower.

Jim Krane, Wallace S Wilson Fellow for Energy Studies at Rice University’s Baker Institute for Public Policy, USA, believes that, if the price of oil stays relatively low, emerging economies will be more inclined ‘to increase their dependence on oil by making investments that lock in higher levels of long-term demand. That’s because cheap oil also encourages urban sprawl. When cities become less dense, they require more energy – commutes lengthen, homes are more spacious and private car ownership grows.’

Long-term increased oil usage in emerging economies would clearly impact global efforts to reduce carbon emissions, most recently agreed at the UN Climate Change Conference (COP21) in December 2015. It could also prevent, at some point in the future, other countries maximising their own oil reserves. An article titled The geographical distribution of fossil fuels unused when limiting global warming to 2°C in January 2015’s issue of Nature sought to quantify the amount of burnable fossil fuels as a portion of global reserves, within the parameters that would eventually be agreed at COP21. It calculated that the Middle East will see 38% of its reserves left underground – higher than the global average of 33%. This is because of the large size of those resources relative to production. In contrast, the United States could find itself with only 6% of stranded reserves, because of the relatively small amount of remaining oil and comparatively high rates of production.  

Low oil prices across the world could mean countries with higher production costs would lose market share, allowing Saudi Arabia to increase its own. Conversely, it could inspire a further advance in extraction technologies, such as that which has allowed American shale producers to carry on extracting at cost-efficient rates, despite lower-than-expected prices. Either way, it is likely that the country’s current strategy would increase its geopolitical significance, a possibility that has surely been factored into calculations, given the current emergence of Iran, its long-term rival, from economic isolation. 

Hedging its bets

Saudi Arabia’s new focus on its mineral resources portfolio should help to cushion the financial blow if its oil strategy doesn’t work out as expected – Krane points out that a rise in Saudi output could trigger a period of global oversupply that could play out in several ways. 

In the long term, Krane says, ‘the oil business is entering an age of increasing risk, since progress on climate change endangers the dominance of fossil fuels in the global energy market. Although no one has yet devised a viable replacement for oil-fueled transportation, governments are increasingly seeking alternate fuels and technologies, regardless of oil prices. This understanding will most likely prompt at least some holders of large reserves, like Saudi Arabia, to move their crude to market before the world moves on.’

By focusing on solar and nuclear energy alongside its new oil strategy, Saudi Arabia appears to be giving itself the best chance to deal with an uncertain future energy market, and its behaviour will almost certainly affect that future market and the actions of other governments and major companies.