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Saudi Arabia and the Asian option: Beyond oil?

The growing importance of Asia represents a profound shift in the balance of global oil markets, and may provide Saudi Arabia for decades to come with a stable market for its energy exports.

According to ClipperData, Asia was the destination for 68 percent of Saudi crude exports last year, while North America accounted for some 16.5 percent of volumes. Tellingly, nearly a third of Saudi Arabia’s total oil exports, and more than a quarter of its exports, were shipped to the countries that King Salman will visit in the next few weeks.

Asian countries can play an important role in Saudi efforts to diversify the economy away from oil, going beyond their traditional role of purchasing crude oil and other energy products.

Renewable push

Saudi Arabia seriously considers the introduction of renewable and nuclear energy an option to counter rising oil consumption, and to diversify its energy mix and the industrial structure for the Kingdom’s future development.

Under the ambitious National Renewable Energy Program (NREP), the Kingdom will develop a total of 9.5 gigawatts (GW) of renewable energy by 2023, which will increase the share of renewables in the power mix from 0 to 4 percent. Energy Minister Khalid Al-Falih says the program will require investment of $30-$50 billion in the next 6 years.

From the Saudi perspective, Asian countries would be very attractive partners to build a clean energy industry. They will also be useful to address a broad range of things the Kingdom needs, such as technologies, training of human resources, investments, high standards of safety and security, research and development and so on.

Solar-powered water desalination will be an integral part of the Kingdom’s long-term energy strategy. The Kingdom is also starting its nuclear program and has made progress with the design for two reactors with a combined capacity of 2.8GW. However, BMI research noted that reforming the fuel-subsidy systems is needed if renewables are to become more cost-competitive with fossil fuels in power generation.

Stable supplies

Despite the efforts of economic diversification, Saudi Arabia will remain dependent on oil exports for a long time. HSBC predicts that the oil sector will remain dominant, but its contribution to the rise in exports will ease from 87 percent in 2016-20 to 78 percent in 2021-30. In this context, Saudi Arabia is participating in oil processing and storage projects in Asia.

These actions are to improve access to markets, protect the Kingdom’s future oil shares in the region, and offer a stable source of supply. Saudi Aramco has stakes in Asian refineries via joint ventures in Japan (Showa Shell), South Korea (S. Oil) and China (FREP). The company also plans to invest in new refineries to cement its position in countries including China, India, Indonesia, Malaysia and Vietnam.

There is a growing push in the Kingdom to develop and apply clean energy technologies and reduce dependence on oil consumption. A successful model to follow may be Japan.

Naser Al-Tamimi

Malaysia’s Prime Minister Najib Razak on Monday said Saudi Aramco will invest $7 billion into a 300,000-barrel-per-day Refinery and Petrochemical Integrated Development (RAPID) project in the southern state of Johor, which is valued at $27 billion. According to Reuters, Aramco will also supply at least 50 percent of the crude that will be processed at RAPID, with an option to increase supply.

Saudi officials are in talks with the Indonesian government about constructing an oil refinery in Cilacap, Central Java, as the result of cooperation between Saudi Aramco and Pertamina, with an investment of $6 billion. Aramco is also in advanced negotiations with the China National Petroleum Corp. (CNPC) to build the Yunnan refinery in southwestern China.

Energy efficiency

Saudi Arabia has identified energy efficiency as a key national priority and sees renewable energy sources as supplementing existing sources. There is a growing push in the Kingdom to develop and apply clean energy technologies and reduce dependence on oil consumption. A successful model to follow may be Japan, which has one of the most energy-efficient economies in the world.

One of the most ambitious targets for the Saudi government within Vision 2030 is to boost the ratio of non-oil exports as a percentage of non-oil gross domestic product (GDP) from the current 16 percent to 50 percent by 2030.

The Asian countries King Salman will visit may provide a very useful experience of how to support small and medium enterprises (SMEs), which are the backbone of growth of the non-oil sectors, and which the Kingdom desperately needs to increase employment and productivity.

Finally, Saudi officials are keen to court Asian investors for the sale of a 5 percent stake in Aramco next year, which is expected to be the biggest public offering in history. This is part of a broader privatization program of state-owned companies and increasing the role and effectiveness of the private sector in the Kingdom.

• Dr. Naser Al-Tamimi is a UK-based Middle East researcher, political analyst and commentator with interests in energy politics and Gulf-Asia relations. Al-Tamimi is author of the book “China-Saudi Arabia Relations, 1990-2012: Marriage of Convenience or Strategic Alliance?” He can be reached on Twitter @nasertamimi and e-mail: [email protected]