Sunny Arabia is Going Solar

There is a famous quote by Former Saudi Oil Minister from 1962–86 Sheik Zaik Yamani that people in (renewable) energy never tire of throwing out there,

“The Stone Age did not end for lack of stone, and the Oil Age will end long before the world runs out of oil” — Sheik Zaik Yamani

Sheik Yamani was no wishful thinker.

Energy shifts happen, in part because of poles pulling in different directions, not necessarily because of a lack of supply. There is plenty of oil in the ground and it is being extracted more cheaply and efficiently than ever before, yet the current environment is propelling Saudi Arabia (&Co) into the opposite direction of going solar.

Today, when someone mentions Saudi Arabia’s energy mix, what usually comes to mind is crude, crude and more crude, but come a few years this will change radically. With the nosedive that the oil price took in the last few years, Saudi Arabia is launching a massive renewable energy plan to try to replace some, if not all, of their energy needs.

The Plan

Newly appointed energy Minister Khalid al-Falih, a graduate of Texas A&M University and Chairman of Aramco, intends to launch an ambitious renewable energy program and is currently soliciting tendering bids. The program, which is to be officially launched “very soon” is expected to involve an investment of between $30 billion and $50 billion by 2023, he said at a press conference in Dubai.

The plan involves the development of almost 10 gigawatts of renewable energy by 2023, starting with wind and solar plants across the sun-soaked northwestern desert. The effort has the potential to replace the equivalent of 80k barrels of oil a day now burned for electricity generation.

According to Bloomberg, bidders seeking to qualify to build 700 megawatts of wind and solar power plants should submit documents by March 20, and those selected will be announced by April 10, Saudi Arabia’s energy ministry said Monday in an e-mailed statement. Qualified bidders will be able to present their offers for the projects starting on April 17 through July.

The Kingdom intends to require all investors to invest in the local supply chain of goods and services, so as to render themselves more competitive.

The Kingdom’s Electricity Needs

Relying heavily on hydrocarbons as feedstock for the electricity sector, Saudi Arabia is by far the largest user of crude oil for power generation in the world. Oil accounts for two-thirds of the input into electricity generation, with natural gas providing most of the remaining portion, according to the Joint Organizations Data Initiative (JODI). During the prohibitively hot summer months, consumption of electricity increases as domestic demand for air conditioning rises. The Kingdom has recognized that this is both highly inefficient, expensive and unsustainable.

Saudi Arabia used an average of 0.7 million bbl/d of crude oil for power generation during the summers from 2009 to 2013, which is massive. To put this into perspective, that same period, Iraq and Kuwait, the next two largest users of crude oil for power generation in the Middle East, each averaged roughly 0.08 million bbl/d of crude burn. At the same time, net electricity consumption in Saudi Arabia has more than doubled since 2000.

Shifting the energy mix towards renewable energy would bring about several key advantages:

  1. Local Emissions Reductions: more on that later;
  2. Economics: The Kingdom has seen two years of budget deficit, and is looking at a $53b deficit moving into 2017. Stubbornly low oil prices have forced austerity measures on a country that is not associated with belt- tightening measures. In the context of the 2018 Aramco IPO prospected to raise $100b, it is clear that the economic tide is shifting. With the Kingdom’s main sources of income: oil exports, decreasing due to a number of economic factors, this leaves less for exporting and therefore less revenue. By shifting to renewables, they aim to free the crude currently being consumed domestically so they can export it, thus generating more revenue;
  3. Diversification: diversifying their investment portfolio away from oil is recognition that an economy based on the export of crude is, as demonstrated, highly vulnerable to prices drops and other external shocks.

Saudi Arabia has boosted output for years to sustain export income while also satisfying domestic demand. Demand for refined fuels such as gasoline has doubled since 2003, according to JODI. Moreover, Saudi Arabia, the UAE, Qatar, Oman, and Bahrain have significantly reduced or eliminated fuel subsidies over the past year to limit government spending because of low oil prices. Brent crude is trading at $55 a barrel today compared to $112 per barrel between 2011 and 2014.

Domestic demand for oil increased by about 24,000 barrels a day in the first five months of 2016, the slowest growth rate for that period since at least 2010, the first year according to JODI.

Mario Maratheftis, chief economist at Standard Chartered Plc. said, according to Bloomberg, “Renewable energy is not a luxury anymore — If domestic use continues like this, eventually the Saudis won’t have spare oil to export.’’

Without alternative power sources, including gas and renewables, the kingdom would be forced to increase the amount of crude it burns, diverting it from exports. That can reach as high as 900,000 barrels a day during the kingdom’s summer months, according to data from the JODI.

Saudi Arabia has already taken steps to substitute natural gas for oil in power plants, a change that’s had “immense” impact on the crude burn, OPEC said in its Monthly Oil Market Report released in January. The use of crude for domestic power has fallen by nearly 1/3rd since the Wasit gas plant began operations in March 2016, according to the OPEC report.

300,000 Barrels

Saudi Aramco will bring online the similar-sized Fadhili gas project in the country’s east by the end of the decade. That gas project along with the renewable projects, planned for completion by 2023 could save about 300k barrels of oil from being burnt for power, according to estimates based on IEA and OPEC data.

According to Fabio Scacciavillani, chief economist at the Oman Investment Fund, “Alternative energies are a key factor in the economic transformation, this region has a great competitive advantage in low-cost energy production and that will continue with renewables. That will create a big advantage particularly in energy-intensive industries.’’

On top of that, the Saudis want to build nuclear reactors, a less ambitious program that would see 2.8 GW of new electric capacity.

The end goal is to generate 30% of the Kingdom’s electricity from renewable sources by 2030, with the remainder to come from natural gas and a small portion from nuclear.

Deputy Crown Prince Mohammed, at the forefront of promoting reforms and development in his country, said, “I think by 2020, if oil stops, we can survive…We need it, we need it, but I think in 2020 we can live without oil.”

The Tide is Turning to an Energy Transition

It goes without saying that the primary reason the Saudis are shifting to renewables (solar) is economics rather than emissions, yet we can still predict some emission reductions.

It is clear that the Kingdom does not expect oil prices to increase above $100 like it was a few years ago. They know that the days when they would squeeze massive economic rent out of oil have passed. Their long-term objective is to ensure the future competitiveness of their oil in a global environment where paradoxically, fossil fuels are abundant and renewable energy has a higher penetration, while still decarbonizing their energy sector.

This takes me back to Sheik Yamani’s prediction. It is not so much that the Kingdom is physically running out of oil to sell as much as the energy environment is changing. The supply is outpacing demand and oil is just not as profitable as it was. The hammer blows of energy efficiency, renewable energy (solar), and global economic trends are forcing a transition to better options.

Sheik Yamani’s prediction is coming to life.