Divisions among Libya’s political, security, and financial institutions remain a key obstacle to the political transition process, and foreign powers still stoke many of these divisions for their own strategic interests.
This post is part of an AGSIW series on Saudi Vision 2030, a sweeping set of programs and reforms adopted by the Saudi government to be implemented by 2030.
Saudi Arabia is powering ahead with ambitious plans to reorganize its massive energy sector. The restructuring is part of its strategic plan to reduce domestic oil dependence and adopt a more commercial approach to its business operations at state oil company Aramco as part of Vision 2030 and ahead of the historic initial public offering set for 2018.
Saudi Arabia’s Minister of Energy, Industry, and Mineral Resources Khalid al-Falih is overseeing a fundamental shift in the country’s energy strategy and Aramco’s business models, including a more proactive approach to maximizing profits. Falih’s most urgent task when he assumed his post less than a year ago, however, was reversing the catastrophic two-year plunge in oil prices. His pragmatic, diplomatic approach with fellow OPEC ministers was largely responsible for a bold and unexpected shift in policy, which led to an agreement on new production quotas with key non-OPEC producers that went into force on January 1. To date, the new accord has delivered a revenue dividend in the form of a 20 percent increase in oil prices, which has more than offset the lower output levels.
Falih, who has worked hand-in-glove with Deputy Crown Prince Mohammed bin Salman on Vision 2030, has a much broader economic remit than previous ministers given the energy sector is a central pillar of Saudi Arabia’s transformation. Aramco is “fully engaged as a champion of transformation,” according to Falih. New business strategies at Aramco now place an even greater emphasis on building a knowledge-based, technology-driven company. By adopting more advanced technologies, for example, the company plans to increase recovery rates in its oil fields to 70 percent compared with the current 40 percent, which would enhance substantially the value of the company.
Taming Surging Oil Demand
As part of the restructuring, Aramco plans to double natural gas production over the next decade, invest as much as $50 billion in renewable energy projects, and launch the country’s first nuclear power plants, all aimed at meeting surging power demand in line with an expanding population and rapid industrial growth. The strategy also envisions a stronger downstream business with plans to double refining capacity and expand the petrochemical sector.
Taming the country’s runaway oil consumption is a critical issue ahead of the Aramco IPO given its enormous drain on oil exports and revenue. Increased use of renewables, natural gas, and nuclear energy, combined with greater efficiency and conservation measures, holds the potential to significantly reduce the burning of oil for electricity generation and in desalination plants by an estimated 300,000-400,000 barrels per day (kb/d) over the next decade. The country’s oil demand has surged by 150 percent over the past 10 years, to 3.2 million barrels per day (mb/d) in 2016. That represents more than 30 percent of the country’s total oil production. At the same time, crude burned at power and desalination plants has jumped by 270 percent, to an average 510 kb/d in 2016, with levels reaching as much as 900 kb/d during the peak summer cooling season.
The country is also embracing new energy efficiency and conservation policies. “An annual increase of 4 percent in future energy efficiency would result by 2030 in 1 mb/d of avoided domestic energy consumption and thus enable additional oil exports,” according to a recent report by the King Abdullah Petroleum Studies and Research Center.
Mohammed bin Salman, who brought the energy sector under his wing as head of the Council for Economic and Development Affairs and the Saudi Aramco Supreme Council, set relatively modest targets for renewable energy use despite framing Vision 2030 around a goal of reducing the country’s oil dependence. That said, plans set a target of 9.5 gigawatts (GW) of renewable energy by 2023, 17 years earlier than originally planned.
In the past month, the ministry has set up the Renewable Energy Project Development Office (REPDO), tasked with overseeing the National Renewable Energy Program set out in the National Transformation Program in June 2016. After years of working at cross purposes, the new organization will be led by a committee of leaders of the various institutions involved in renewable development such as the King Abdullah City for Atomic and Renewable Energy, Electricity and Cogeneration Regulatory Authority, Saudi Electricity Company, and Saudi Aramco.
Renewable Projects Break New Ground
The renewable energy projects represent the new model of private investment set out in the National Transformation Program and Vision 2030 and are another step in the country’s shift to an independent power producer system. Current plans involve a two-tier development schedule, with 3.45 GW by 2020 and a further 6.05 GW by 2023. In line with its new mandate to expand opportunities for private sector companies, Saudi Arabia is offering full ownership of the first tranche of renewable energy projects under 25-year agreements. This is the first Saudi project that will be tendered through public private partnership, Falih said.
The first round of the program was launched on February 20 with REPDO issuing a request for qualifications for 700 megawatts of solar and wind energy projects. Bids for the projects will be due on April 20 and contracts awarded on October 20. Given the size of the projects, international financial institutions are expected to participate and the qualifying criteria suggest companies will need to join forces when bidding for the projects. “It is our goal to make the National Renewable Energy Program among the most attractive, competitive and well executed … in the world, and we have all the necessary infrastructure in place to ensure that is the case,” Falih said. The next two rounds will target 1.02 GW and 1.73 GW, respectively.
Saudi Arabia is also advancing plans to build its first nuclear reactors as part of its revamped energy strategy. The ministry is in the early stages of planning for two nuclear reactors with a combined generating capacity of 2.8 GW but have not yet set a timeline. “We are in the feed phase, the early feasibility and design phase for our first two nuclear reactors,” Falih said. He added “We are doing site selection. We are doing technology development. So, Saudi Arabia is also serious about nuclear and you will see significant investment in nuclear for civilian purposes.”
Natural Gas Production Set to Double
Saudi Arabia is on track to generate 70 percent of its electricity from natural gas by 2020 and new initiatives to expand existing capacity appear to be emerging. Plans are to double domestic gas production to 23 billion cubic feet per day (bcf/d). The higher production is earmarked for use in power generation and at desalination plants, reinjection into oil fields to boost production rates, and to meet rising industrial demand.
The massive Wasit gas plant was brought online in March 2016 and has already led to a significant substitution of natural gas for oil burning in power plants. Crude oil use at plants fell by 25 percent on average in the second half of the year from 2015 levels. Saudi Aramco will next bring online the smaller Midyan gas processing plant, which is in the final stages of completion. Midyan is the kingdom’s first turnkey project with a Saudi contractor. The $13.3 billion mega Fadhili gas facility located in the Eastern Province is slated to begin operations by the end of 2019. The three projects combined will add 5 bcf/d to gas production, for a total 17.8 bcf/d by 2020.
A further 4 bcf/d is expected to come from new nonconventional shale gas projects, according to Saudi Aramco CEO Amin Nasser. Production of shale gas in the northern region of the country is scheduled to start by the end of 2017. Saudi Arabia embarked on its unconventional shale gas initiative five years ago, in part for use in power generation but also because it needs the gas to produce more value-added specialty petrochemicals rather than lower value oil-based products. The company has been actively expanding its technology capabilities, including opening a new research center in 2014 in Houston, Texas to focus on developing unconventional oil and gas.
Saudi Aramco is also reportedly looking to raise existing gas processing capacity at its Hawiyah and Haradh plants, which are part of Ghawar, the world’s largest onshore oil field. Plans call for increasing processing capacity at Hawiyah by 1.3 bcf/d from its current 2.5 bcf/d.
Aramco Arm Twisting
At the end of 2016, Aramco also stepped up pressure for more local investment under its In-Kingdom Total Value Add program. Launched at the end of 2015, IKTVA was designed to benefit local content providers and stipulates that all suppliers must spend a proportion of their earnings from Aramco in the country. The program aims to produce long-term tangible benefits such as “quality jobs for a growing Saudi population, innovation and diversification of industry, and increased global competitiveness,” according to IKTVA.
The proportion of each supplier’s earnings from Saudi Aramco that go back into the Saudi economy is measured by a score, with a target of 70 percent by 2021 compared with 35 percent in 2015. Another goal of IKTVA is to export 30 percent of energy goods over the same time frame. The initiative hopes to create 500,000 jobs for Saudi citizens. IKTVA has been embedded in over $15.6 billion worth of contracts since its launch. In 2016, Aramco’s use of local manufacturing reached $2.6 billion, or 43 percent, which is an increase of 16 percent over 2015 levels and the highest level of local content in the company’s history, according to Nasser.
As part of the IKTVA program, in December 2016 Aramco signed joint venture contracts with oil services firms Nabors Industries and Rowan Companies to own, manage, and operate drilling rigs in the kingdom. The new ventures will invest $6-7 billion and create 5,000 new jobs in Saudi Arabia. Other significant contributors to IKTVA include Schlumberger, General Electric Oil & Gas, and Halliburton.
Aramco’s Asia Pivot
Saudi Arabia set in motion a pivot to Asia years ago given the region’s growing importance in international oil markets and in line with its central strategy of investing in refining capacity to secure markets for its crude oil production. Asia imported roughly 70 percent of Saudi Arabia’s 10 mb/d crude production in 2016. Aramco plans to nearly double its refining capacity by 2025 to 10 mb/d, both at home and with joint ventures in Asia, which would make it the largest refiner in the world, ahead of current leader Exxon. Refining joint ventures provide a guaranteed market for Saudi crude since the arrangements largely stipulate that Aramco will supply the crude to be processed at the plants.
After locking in markets with refining joint ventures in Japan and South Korea, Saudi Aramco inked joint venture agreements in February for refineries and petrochemical plants in Indonesia and Malaysia worth approximately $13 billion. Saudi Arabia said on February 27 that it will invest $6 billion in refining projects in Indonesia and a day later announced it will invest $7 billion in Malaysia’s massive Refinery and Petrochemicals Integrated Development project. The announcements coincide with a monthlong trip to Asia by King Salman bin Abdulaziz aimed at strengthening political and economic relations, especially in the energy sector.
The expansion of the country’s refining and petrochemical industries is central to plans to restructure Saudi Aramco from primarily an oil and gas producer to a global industrial company. At the launch of Vision 2030 in April 2016, Mohammed bin Salman announced the plan to “transform Aramco from an oil producing company into a global industrial conglomerate” and latest developments over the past six month indicate progress is well underway.
Muqtada al-Sadr’s announcement that he will boycott upcoming parliamentary elections has thrown the electoral process into disarray at a time when the future stability of Iraq depends on legitimate and transparent elections.
Through its careful examination of the forces shaping the evolution of Gulf societies and the new generation of emerging leaders, AGSIW facilitates a richer understanding of the role the countries in this key geostrategic region can be expected to play in the 21st century.Learn More