Saudi Arabia’s energy strategy revolves around extracting maximum economic benefit from its remaining hydrocarbons reserves while expanding renewable power capacity at home by investing in research, development and innovation activities to develop clean energy solutions, as well as to reduce the environmental impact of fossil fuels.
The Kingdom’s strategy is guided by forecasts of an eventual decline in hydrocarbons demand as global efforts ramp up to address the threats of climate change. Indeed, the International Energy Agency (IEA) announced in June 2023 that peak oil demand may occur before the end of the decade. The IEA cited the transition to greener fuels and slowing global growth as the reasons for its forecast. However, it estimated that global oil consumption in 2023 would increase by 2.4m barrels per day (bpd) to a record 102.3m.
The Kingdom’s leaders have had peak oil demand in mind for some time and are pursuing a National Renewable Energy Programme (NREP) as part of Vision 2030, the strategy designed to reduce longterm reliance on hydrocarbons and transition to a more diverse and sustainable economy. Under the NREP, which was launched in 2017, the Kingdom intends to generate 50% of its domestic power requirements from green sources by 2030, with the remainder coming from natural gas.
Structure & Oversight
The Ministry of Energy oversees all aspects of the Kingdom’s energy ecosystem, including domestic energy demand, energy exports, renewables and digitalisation. Prince Abdulaziz bin Salman Al Saud, the first royal to serve as energy minister, has been in the post since September 2019. Within the ministry, the Renewable Energy Project Development Office (REPDO) drives NREP implementation, with updates and tender announcements posted to the Power Saudi Arabia e-portal. Saudi Arabia is one of the five founding members of the Organisation of the Petroleum Exporting Countries (OPEC) and plays a leading role in the organisation shaping international oil policy.
Players
Aramco, Saudi Arabia’s national oil company and the world’s largest integrated oil and gas group, located in Dhahran in the east of the country, is responsible for all upstream and downstream oil and gas operations within the Kingdom. It is also the principal supplier of feedstock for power generation.
Aramco went public with an initial public offering (IPO) in December 2019, listing around 1.5% of its shares on Saudi Arabia’s stock exchange, known as the Tadawul. In 2022 Aramco’s net income increased by 46.5% to a record $161.1bn, reflecting higher crude oil prices, higher volumes sold and improved margins for refined products.
Another important player in the energy and utilities sector is ACWA Power. With the Public Investment Fund (PIF) sovereign wealth entity as its largest shareholder, ACWA Power plays a significant role in energy diversification and water security by developing, investing in and operating power generation and desalinated water plants. The company conducts operations in 12 countries, often acting in public-private partnerships with national governments. It made its debut on the Tadawul in 2021 in a $1.2bn IPO, attracting massive investor interest due to its central role in Saudi Arabia’s transition to renewable energy.
In the natural gas power market, the government oversees joint venture agreements that unite major energy sector players with the international expertise required to operate major projects. For example, Jazan Integrated Gasification and Power Company (JIGPC) was created in 2020 as a joint venture between Aramco, US company Air Products, Air Products Qudra and ACWA Power.
Aramco’s 400,000-bpd Jazan refinery, located in the south-western region of the country, provides feedstock to JIGPC, which in turn provides power (3.8 GW gross), hydrogen (184,000 normal cu metres per hour) and steam (580 tonnes per hour) back to Aramco. Saudi Electricity Company (SEC) – the Kingdom’s main generation, transmission and distribution company, which is indirectly government-owned through majority shareholders PIF and Aramco – sells any excess power generated by the project.
The Saudi Nuclear Energy Holding Company was established in March 2022 to spur development of nuclear power, under the auspices of the King Abdullah City for Atomic and Renewable Energy. The Kingdom has sufficient uranium reserves to allow domestic development of nuclear fuel, at 1.4-5% of the global total, and has held discussions with China about partnering on nuclear technology.
In the utilities segment, the Ministry of Environment, Water and Agriculture (MEWA) oversees matters related to potable water, wastewater and sewage, and has been led by minister Abdulrahman bin Abdulmohsen Al Fadhli since 2015. The Water and Electric Regulatory Authority (WERA) is the regulatory body for the electricity and desalination industry, including power from renewables, under the Electricity Law. As of 2021 the National Water Efficiency and Conservation Centre has guided water conservation efforts, while Water and Electricity Holding, known as Badeel and wholly owned by the PIF, acts as an investment vehicle for utilities projects.
In August 2022 the government completed the nationalisation of Saudi Power Procurement Company (SPPC), a former subsidiary of SEC. Despite long-held intentions to create a competitive electricity sector, SEC holds a monopoly on the generation, transmission and distribution of electric power through 45 power generation plants.
Government-owned Saline Water Conversion Corporation operates both desalination projects and power plants. SPPC, meanwhile, conducts electric power purchase and wholesale agreements, and develops energy trading markets with an eye to increasing localised investment and reducing the proportion of liquid fuels.
The National Water Company (NWC), a joint stock company established in 2008 that is wholly owned by the PIF, provides water and wastewater services throughout the Kingdom. Saudi Water Partnership Company is the principal off-taker for water and wastewater projects in Saudi Arabia, and intends to develop more than 24 projects in partnership with the private sector. These projects span independent water plants, water transmission, reservoirs, sewage treatment plants and effluent networks, as well as some power plant projects.
As part of Vision 2030 the NWC has earmarked $80bn for a National Water Strategy, which aims to achieve universal and equitable access to safe and affordable drinking water for all residents while preserving resources and protecting the environment. By 2030 its sanitation is to be made available to more than 95% of the population and 70% of the water used in Saudi Arabia’s major industrial complexes should be sourced from treated industrial wastewater.
Regulation & Legislation
Several new laws and regulatory frameworks were designed to assist Saudi Arabia in its implementation of Vision 2030 and attainment of energy objectives. In December 2022 the Council of Ministers approved an Energy Supplies Law, which created a committee aiming to put forward frameworks that will enable the privatisation of the energy sector and promote circular economy principles and local content. The law covers segments as broad as oil refining and petrochemicals to agriculture and construction.
Elsewhere, in November 2022 the Ministry of Energy signed off on a framework allowing consumers to install renewable energy systems of up to 2 MW for their own use, including solar panels. WERA followed up in May 2023 by approving more than 106 contractors to build solar photovoltaic (PV) systems for households and small businesses.
Action is also being taken to raise awareness of the importance of energy efficiency among young people under the National Campaign to Rationalise Energy Consumption, an initiative of the Saudi Energy Efficiency Centre. The campaign will use mobile games and other interactive and entertaining means to educate the next generation about the impact of energy consumption and conservation.
Performance
Saudi Arabia is home to an estimated 15% of the world’s proven oil reserves, including those sourced from the Neutral Zone that is shared with Kuwait. The Kingdom is the world’s largest exporter of crude oil, as well as the largest crude oil producer in OPEC and the second-largest petroleum liquids producer in the world after the US. Global oil production increased by 3.8m bpd in 2022, with OPEC+ accounting for more than 60% of the increase. Saudi Arabia (1.18m bpd) and the US (1.09m bpd) recorded the largest increases. Saudi energy consumption rose 6.9% to 11.5 exajoules (EJ) in 2022, with oil accounting for 7.15 EJ, natural gas 4.33 EJ and renewables still a fraction of the energy consumed at 0.01 EJ, according to BP’s “Statistical Review of World Energy 2023” report.
At the same time, Saudi Arabia’s carbon emissions increased by 7.1% in 2022 to 612.5m tonnes, accounting for 1.8% of the global total, while China generated the largest proportion of global CO₂ emissions (30.7%), followed by the US (14%).
Production Boost
In 2022 the Kingdom’s oil production rose 10.8% and increased to 12.14m bpd, while refinery throughput climbed by 6.3% to 2.94m bpd. Refining capacity reached a record of 3.31m bpd. Crude oil exports grew by 14.1% to 8.87m bpd, accounting for 12.9% of the global total. Natural gas production also achieved a new high of 120.4bn cu metres, up 5.2%, all of which was consumed domestically. Saudi Arabia produced 0.8 TWh of solar energy, or 0.1% of the global total. Electricity generation surpassed output from previous years at 401.6 TWh, up 2.2% with natural gas the source of 234.2 TWh and oil contributing 157.9 TWh.
Looking ahead, Aramco is planning to boost its maximum crude oil production capacity to more than 13m bpd by 2027, up from 12m bpd as of August 2022. The expansion plan was announced in March 2020 and is expected to be delivered in phases. Capacity is expected to reach 12.3m bpd in 2025. There are also plans to expand petrochemicals production at the Kingdom’s primary refining facility in Jubail, which is a joint venture between Aramco and France-based TotalEnergies. Contracts worth $2bn were awarded to Italian engineering group Maire Tecnimont in June 2023 for two polyethylene units using Advanced Dual Loop technology, with a nameplate capacity of 500,000 tonnes per annum each.
Saudi Arabia’s dry natural gas production exceeded 4trn cu feet for the first time in 2020. Aramco commissioned the Fadhili natural gas processing plant in 2019 and began processing natural gas from non-associated fields in the Eastern region, scaling up gasbased infrastructure in the country.
Aramco also targets 12 GW of solar and wind capacity by 2035 and 11m tonnes per year of blue ammonia by 2030 as part of its drive towards net zero by 2050. By 2035 Aramco aims to reduce its upstream carbon intensity by 15% to 8.7kg of carbon dioxide equivalent per barrel of oil equivalent against a 2018 baseline of 10.2kg.
Generation Capacity & Energy Mix
Saudi Arabia’s cumulative installed power capacity was about 97.7 GW in 2022 and is expected to achieve a compound annual growth rate (CAGR) of more than 3% between 2021 and 2035, according to UK-based analytics firm GlobalData.
In terms of the energy mix, 42% of Saudi Arabia’s 110-GW daily power requirement comes from burning petroleum. According to the most recent Energy Institute Statistical Review of World Energy, oil was the source of 62.2% of the Kingdom’s overall primary energy consumption in 2022. Natural gas contributed 37.7%, and coal, solar and wind together accounted for the remaining 0.1% of the total.
Saudi Arabia is an outlier in the G20 in not publishing up-to-date figures for its electricity generation mix, making it difficult to track the progress it is making on its net-zero commitments. It is worth noting, though, that in May 2023 ACWA Power indicated its capacity portfolio stood at 23.4 GW, including projects only recently slated for development. Elsewhere, the government has said that 13 new renewable energy projects with a total capacity of 11.4 GW, worth $9bn, are in the works.
At the recent rate of progress – equivalent to adding 0.1 GW a year between 2010 and 2021 – the government’s stated 2023 target of installing 27.3 GW will be missed by about 20 GW. As suggested by GlobalData, the chief obstacle is stasis in the bureaucracy governing the energy and electricity market. Low energy efficiency, a legacy of decades of dependence on abundant oil as a power source, and a high dependence on desalination, are further challenges in achieving this goal.
Green Initiatives
Although much progress is required to meet renewable energy targets, this also creates a high ceiling for growth. Indeed, government outlay on renewable power projects is forecast to reach $293bn by 2030, with $38bn earmarked for power distribution improvements – primarily upgrading to a smart grid. Put another way, Saudi Arabia is seeking to almost double its power generation capacity from 82 GW in 2018 to 160 GW by 2040, investing on average approximately $5bn in generation and $4bn in distribution and transmission each year.
The NREP specifies renewable power capacity should rise to 58.7 GW by 2030. Saudi Arabia has significant wind and solar potential, estimated at almost 1000 TWh (nearly 17 times larger than that of Germany) and 145 TWh, respectively.
Between 2023 and 2030, 30 solar and wind projects are slated to come on-line, at an estimated cost of $50bn. The projects are set to comprise 40 GW of PV solar, 16 GW of wind and 2.7 GW of concentrated solar capacity, a technology that uses mirrors to directly heat fluids to high temperatures to generate power. These projects will proceed in phases, with SPPC in September 2022 launching a tender for 1.5 GW of solar across two projects and 1.8 GW of wind across three facilities. A list of the companies qualified to bid for both wind and solar projects was released in November 2022.
Badeel and ACWA Power in May 2023 invested SR12.2bn ($3.3bn) in three new solar projects, in keeping with the PIF’s mandate to develop 70% of the aforementioned new renewable capacity. The projects, the largest single transaction for a solar project in ACWA’s history, intend to produce a combined capacity of 4.55 GW of renewable energy, enough to power approximately 750,000 households.
The deal serves as an example of how the government envisages government-owned entities and the private sector collaborating to realise the NREP, with the SPPC signing off on the power purchase agreements. PIF so far has five renewable projects in the pipeline: Sudair (1500 MW); Shuaibah 2 (2060 MW), to be the Middle East’s largest solar plant once finished in 2025; Ar Rass 2 (700 MW); Al Kahfah (1425 MW); and Saad 2 (1125 MW). Together, they have a total capacity of 8 GW, and entail $6bn of investment from the PIF and its partners.
Hydrogen
Saudi Arabia’s renewables push has a vital corollary – a national hydrogen strategy that aims to produce 4m tonnes of blue hydrogen ( produced from natural gas with emissions caught via carbon capture, utilisation, and storage technology) and green hydrogen (produced via renewables) annually by 2030, while becoming the top supplier of hydrogen to global markets.
The strategy hopes to attract $36bn of investment by 2030, starting with five priority areas; government to government engagement on hydrogen mobility; exploring hydrogen export infrastructure; introducing a regulatory framework; establishing standards; and expediting investments.
Capturing a share of a global hydrogen market forecast to be worth $700bn annually by 2050 is critical to Saudi Arabia achieving several Vision 2030 goals, including diversifying exports, leveraging existing sectors’ supply chains to increase local content, and developing new industrial sectors.
Estimates suggest that Saudi Arabia’s vast renewables resources could allow it to produce green hydrogen via electrolysis at a cost of $1.50 per kg by 2030 – the lowest in the world – compared with market rates of about $5 per kg for so-called grey hydrogen, produced using fossil fuels without carbon capture.
These assessments centre on the potential of Helios, a $8.4bn project to produce green fuels for export at the futuristic NEOM mega-city in the northwest, near the coasts of the Gulf of Aqaba and Red Sea. The 4-GW plant is to be powered entirely by wind and solar, with all the zero-carbon fuel it produces to be shipped to international buyers in the form of ammonia. Helios should be fully operational by 2026 and produce up to 600 tonnes of hydrogen a day through electrolysis – enough for conversion to 1.2m tonnes per year of green ammonia – using Haldor Topsoe carbon emissions-reduction technology.
NEOM Green Hydrogen Company (NGHC), an equal joint venture between ACWA Power, US-based Air Products and Chemicals, and NEOM, is the vehicle charged with bringing these plans to fruition. Germany-based Thyssenkrupp is to supply 120 electrolysers.
In February 2023 the Ministry of Industry and Mineral Resources granted NGHC an operating licence for Helios. The Saudi Industrial Development Fund and the National Infrastructure Fund are also participating in the funding, and the company has also inked facility agreements with 23 local, regional and international banks. Meanwhile, UK-based bank Standard Chartered has provided the first-ever green guarantee for India-based Larsen and Toubro (L&T)’s work to develop the project’s wind and solar farms in a contract worth $2.8bn. Construction is underway, and L&T has also been contracted to work with Air Products to create the grid infrastructure for renewable energy sources.
Large-scale projects such as NEOM or the luxury tourism Red Sea Project require a high level of digitalisation, which provides business opportunities for other international and local electrical equipment companies. For example, digital transformation through the use of new technologies such as the internet of things has the potential to not only transform lives, but also improve energy efficiency.
Saudi Arabia is not alone in advancing hydrogen capacity in the GCC. The UAE and Oman are notable competitors, as they are both undertaking national strategies to bring their liquefied natural gas (LNG) to global markets. The EU has committed $550bn to scale up hydrogen production infrastructure, while China is also pursuing a long-term hydrogen development plan, which will at the very least take care of domestic demand. How the supply and demand dynamics play out as advanced economies compete to develop hydrogen-production technologies and take market share promises to provide a fascinating next phase of the global energy story.
Circular Economy
Saudi Arabia’s hydrogen push should be understood in a wider context of efforts to create a carbon circular economy (CCE), in which carbon emissions are either reduced, reused, recycled or removed (captured). In November 2022 the Kingdom launched a CCE knowledge centre to facilitate regional collaboration in CCE technologies and best practices. A carbon credit trading exchange is also slated to launch in the first half of 2024. In March 2023 the PIF announced that five leading Saudi businesses signed memoranda of understanding to become its first potential partners of the Middle East and North Africa regional Voluntary Carbon Market. While these measures are to be commended, academics have cautioned that meaningful operation of a CCE requires a strong carbon-accounting framework, aligned with international measurement, reporting and verification standards.
Notwithstanding aspirations to export hydrogen, a complementary effort to drive domestic demand for the fuel is under way, focusing on the creation of an electric vehicle (EV) manufacturing centre. Before 2030 Saudi Arabia hopes to produce 500,000 EVs a year, with US-based company Lucid Motors leading the charge by establishing an initial EV factory in the region with an annual capacity of 150,000 zero-emission units in King Abdullah Economic City.
In June 2023 Lucid Group announced plans to raise $3bn via a stock offering, with the PIF buying almost two-thirds of the new shares. The move is indicative of intense price competition in the global EV market, which has yet to see the expected overseas expansion of Chinese brands. Riyadh’s backing of Lucid may yet require more financing to sustain success.
The future of the EV industry in Saudi Arabia looks promising. In order to ensure supply of lithium and other minerals needed to construct EV batteries, the PIF has established a company to invest in mining across the globe. Australian battery producer EV Metals plans to build a lithium hydroxide plant in the Kingdom. A framework to control the EV charging industry has also already received approval from the authorities, which should allow the deployment of the required infrastructure.
Another aspect of the CCE is the Saudi Green Initiative (SGI), a whole of society approach to reducing the Kingdom’s carbon footprint. Major projects include efforts to plant 10bn trees and rehabilitate 40m ha of land, and to protect 30% of the terrestrial and marine environment by 2030. A pilot to restore 100 ha of land in the Shaaran Nature Reserve is another example of Saudi Arabia’s ecological rehabilitation efforts.
Energy Efficiency
The Saudi Energy Efficiency Programme, meanwhile, revolves around the implementation of new energy efficiency standards across power generation, water desalination, and electricity transmission and distribution. There is growing awareness of the need to adopt sustainable inputs and more efficient manufacturing processes in the industrial sector, which accounts for almost half of Saudi Arabia’s total emissions. Power generation accounts for 28% and transport for 19%. A March 2023 report published by US-based consultancy Arthur D Little presented recommendations to help the sector balance its economic growth with sustainability measures as it advances towards a goal of reducing industrial emissions by 65% by 2050.
The PIF-owned Saudi Investment Recycling is tasked with removing 94% of municipal solid waste from landfills by 2035, while National Energy Services, known as Tarshid, is responsible for replacing over 2.7m higher-energy sodium vapour light bulbs that illuminate the Kingdom’s roads with efficient LED units. It also rewired 8000 government buildings, reportedly saving some 4.2 TWh each year – reportedly comparable to saving 6.6m barrels of oil.
Projects
Aside from renewables, Saudi Arabia’s other major area of energy sector expansion is natural gas. The Kingdom aims to increase natural gas production by more than 50% by 2030, helping to free up oil for export, meet growing domestic energy demand for power generation and industry, and support economic diversification.
More gas will enable the Kingdom to expand its petrochemicals industry and support the development of blue hydrogen production. In the long term, Saudi Arabia aims to become a gas exporter with an integrated global gas portfolio.
Central to these plans is Aramco’s development of its $24bn Jafurah onshore gas field, which is forecast to produce up to 3.1bn cu feet per day of natural gas liquids and condensates by 2030, with construction of two phases estimated to be completed by 2027. Aramco is currently in a so-called listening phase regarding proposals from China’s Sinopec and TotalEnergies to develop the downstream aspects of the shale field, which is the largest outside the US with reserves of 200trn cu feet of raw gas. Whether Saudi Arabia directs the gas to replace oil in domestic power generation, or exports it directly using existing gas pipelines, remains an open question.
Either way, the Kingdom is promoting carbon capture, utilisation and storage (CCUS) as a vital means of allowing the government to continue to exploit fossil fuels like natural gas while meeting its emissionsreduction targets. The Kingdom aims to capture 44m tonnes of carbon per year by 2035. This will centre on a new CCUS centre in Jubail, which will have a storage capacity of 9m tonnes by 2027.
Engineering, procurement and construction tenders for the Jubail project, which would be the largest anywhere in the world, are worth up to $1bn, and involve international players such as Ireland-based Linde and UK-based WesternGeco.
While Saudi Arabia is not alone in pushing CCUS – Abu Dhabi-based oil company ADNOC has committed to a $15bn investment by 2030, for example – the technology remains unproven at scale, and critics argue that such plans enable fossil fuel polluters to delay switching to renewable energy.
Meanwhile, the $1.8bn Egypt-Saudi Arabia electrical interconnection project, the first large-scale high-voltage direct current (HVDC) interconnection in the MENA region, is set to enter trials in the second half of 2023. While the project’s primary purpose is to allow Egypt to trade its large surplus of electricity, the project serves as an example of the network infrastructure that will be required for Saudi Arabia to do the same in future, and could handle as much as 3 GW of exchanged capacity at peak times. Links with Turkey, Yemen and the entire Arab region have also been tabled. Meanwhile, the government is investing billions of dollars to install smart-meter technology and hopes to have 12m devices in situ by 2025, having completed 10m over less than 14 months as of April 2021. Notably, discussions have been held with Iraq encompassing electrical-grid and smart-meter technology exchanges.
In 2022 the NWC announced plans to tender 1429 projects worth $28.7bn, aiming to expand the coverage of water and wastewater networks, and increasing sewage plant capacity. Industrial wastewater treatment capital expenditure alone is forecast by India-based Ken Research to grow at a CAGR of 12.9% between 2021 and 2026 to reach $1.6bn, as the government demands that small and medium-sized enterprises install packaged water treatment systems and zero-liquid discharge water treatment technology, which removes all liquid from a system to reduce wastewater loss. News of major water infrastructure project contract awards is breaking on a regular basis. This is illustrated by the NWC’s announcement in May 2023, selecting Austria’s ILF Consulting Engineers to oversee an urban water supply programme in the Eastern region. The initiative aims to tackle elevated levels of salinity in the drinking water.
Outlook
The repercussions of Russia’s invasion of Ukraine on global energy markets continue to be felt, and support for the idea that natural gas is a necessary bridge to a more sustainable energy future now appears locked in. Saudi Arabia will therefore likely continue to earn large profits from its vast hydrocarbons reserves, with the intention of investing the windfall in long-term projects for clean and renewable energy and CCUS.
Elsewhere, the digitalisation of the Kingdom’s energy complex is an area of huge opportunity for companies specialising in digital transformation and the greater efficiencies this entails. The annual UN Conference on Climate Change, taking place in neighbouring UAE in November 2023, should provide further insight into how OPEC members intend to steer the conversation around the energy transition.
