Large-scale renewable energy investments, and new rules specifying how much revenue from Saudi Aramco must be spent on domestic content, are set to drive manufacturing growth. Creating a local supply chain is at the heart of plans to install 3.5 GW of renewable energy capacity by 2020, while the In-Kingdom Total Value Add (IKTVA) programme adopted by Saudi Aramco in 2015 is designed to increase the use of local businesses and workers. “Saudi Aramco’s initiative to promote Saudiisation has shown how serious they are about helping develop the talent of the country by giving companies a financial incentive to meet ratios through the IKTVA programme,” Gasem Al Shaikh, CEO of Petroleum, Chemicals & Mining Company told OBG.
Adding Value
The IKTVA system is a formula to measure how much revenue from Saudi Aramco is spent on local talent and equipment. A percentage value is reached for each supplier by adding up four factors of local investment – expenditure on local goods and services, salaries paid to Saudis, investment in training and development of citizens, and spending on the development of local suppliers – then dividing the total by how much the company receives in revenues from Saudi Aramco and multiplying by 100. According to a 2016 study by management consultancy McKinsey, when the scheme started a score of 30% was regarded as reasonable for most oil field services and equipment (OFSE) companies, but by 2021 Saudi Aramco aims to bring scores up to 70% across the board. The goal is to maximise opportunities for domestic industry presented by the oil giant’s $23bn annual spend on OFSE companies. Reaching the 70% target could provide $16bn to Saudi businesses.
However, the programme is not without its challenges. OFSE companies have four years to recruit and train more local workers, and also review their supply chains to favour Saudi businesses. In addition, international suppliers will have to establish warehousing and manufacturing facilities in the Kingdom.
New Hub
The right support and investment localisation could create a new global OFSE hub to complement those in the North Sea, South-east Asia and the Gulf of Mexico, according to a 2016 McKinsey report. Underscoring the potential for OFSE in the Kingdom is Norway’s decision to focus on localisation in the 1970s, which encouraged the creation of prominent international OFSE companies, such as Aker Solutions and the Odfjell Group.
In order to foster a new talent pool to supply this expansion, adequate vocational training will be required, and in October 2016 the Saudi Arabia Drilling Academy (SADA) was opened in Abqaiq, with 34 local drilling companies coming forward to sponsor students. SADA estimates 30,000 Saudis will be needed for the drilling industry by 2020.
Contracts with the oil giant also help build the skills base. “Saudi Aramco’s involvement in supervising government infrastructure projects has already raised standards for professionalism across the sector, helping Saudi Arabia to catch up to Dubai, for example, where Western business practices are much more universal,”Sherif Megeed, managing director of Jotun Saudia, told OBG.
Deals
One year after the IKTVA programme was introduced, Saudi Aramco said the share of local manufacturing had reached SR10bn ($2.7bn) – an IKTVA ratio of 43% and a 16% increase on 2015 levels. The company also announced the IKTVA programme had been embedded in SR60bn ($16bn) worth of contracts. At the end of 2016 Saudi Aramco signed deals with Jubail Energy Services Company and ArcelorMittal Jubail to supply oil country tubular goods. The IKTVA site lists hundreds of local manufacturers supplying Saudi Aramco with everything from air conditioning systems to valves. Major companies took advantage of US President Donald Trump’s visit to Riyadh in May 2016 to make investments in local energy manufacturing. Announcing $15bn of cross-sector investments in Saudi Arabia, GE, a US conglomerate, signed a memorandum of understanding (MoU) to study “the feasibility of new business development across the energy value chain, including enablers covering upstream, midstream and downstream oil and gas businesses, including development of OFSE manufacturing hubs”. GE plans to use its GE Manufacturing and Technology Centre (GEMTEC) in Dammam as part of its global supply chain.
The joint venture with Dussur – formerly the Saudi Arabian Industrial Investments Company – is GE’s largest heavy-duty turbine repair centre globally, creating 150 jobs directly and drawing on 300 local Saudi suppliers for turbine parts.
In October 2016 a 9000-sq-metre manufacturing facility was opened as part of a second phase of a GEMTEC expansion. That same year GE manufactured its first Saudi-built turbine, which was supplied to the Saudi Electricity Company’s Waad Al Shamal combined-cycle plant. As part of the manufacturing facility, GE is also fostering Saudi industrial research at its “Hot and Harsh” Centre of Excellence to study the effects of high temperatures, dust corrosion and fuel harshness on the reliability of power plants. In addition, GE operates an oil and gas well head manufacturing centre in Dammam.
In addition, Saudi Aramco signed four MoUs with Schlumberger, Halliburton, Weatherford International and Baker Hughes during President Trump’s visit to localise oil field services and provide employment for Saudis. The agreements are set to create 2600 jobs with Schlumberger, 750 with Halliburton, 900 with Weatherford and 600 with Baker Hughes.
Renewable Projects
In the immediate aftermath of the publication of Vision 2030, the Ministry of Energy, Industry and Mineral Resources was created in May 2016 and placed under the stewardship of Khalid Al Falih, chairman and former-CEO at Saudi Aramco. In April 2017 Al Falih announced that 27 companies had been selected as qualified bidders to build and operate a 300-MW solar photovoltaic (PV) power plant in Sakaka in Al Jouf Province, and that 24 bidders had been selected for a 400-MW wind farm in Midyan in Tabuk Province. Both projects are to be backed by 25-year power purchase agreements. While the projects can be privately owned, they must commit to sourcing 30% of their supply chain from the Saudi market; yet, it has not been decided how this stipulation will be enforced.
Building Capacity
The winning bids for round one were expected to be announced in January 2018, with ACWA and a consortium headed by Marubeni Corporation shortlisted for the Sakaka plant. Rounds one and two will provide half of the 3.5 GW of renewable energy capacity planned for development by 2020, in turn stimulating the development of manufacturing capacity in the Kingdom. The government is aiming for 9.5 GW of installed capacity by 2023 and hopes to attract investments of $50bn.
The Renewable Energy Project Development Office is supervising the progress and application of alternative energy, but the independent power producer model means the bidding companies – foreign or local – will have 100% ownership of the operators. In February 2014 the government announced it was embarking on a feasibility study with US renewable energy firm SunEdison to build a $6.4bn solar PV manufacturing facility in the Kingdom. In the end, the facility was not built, but its projected cost indicated the magnitude of capital needed to start new renewables energy production in Saudi Arabia.
Among the partners in the bidding process are some of the world’s biggest manufacturers of wind turbines and solar panels. In the wind segment these include Danish firm Vestas and China’s Xinjiang Gold-wind, which came first and third in terms of turbines installed in 2016, with 8.7 GW and 6.4 GW of global capacity in 2016, respectively, according to Bloomberg New Energy Finance.
Solar companies included as partners in the first-round bidding process include Trina Solar, Canadian Solar and Jinko Solar, which, according to industry media, installed 5.7 GW, 4.7 GW and 4.5 GW of capacity, respectively, in 2016.
Global Reach
The Kingdom’s geographic location will likely make it an attractive base for international manufacturing. At the 2015 UN Sustainable Development Summit, Chinese President Xi Jinping proposed a global energy interconnection (GEI) project, including an ultra-high-voltage direct-current power grid to carry renewable energy between countries. Saudi Arabia could use renewable energy to replace fossil fuels, powering air conditioning in the summer and exporting energy to Europe in the winter, with the GEI grid carrying electricity through Egypt. With energy transport technology innovations, The Kingdom’s climate and position could make it a key domestic and international supplier of renewable energy.
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