Driving commercial and political engagement between Asia, the Middle East and Europe
Driving commercial and political engagement between Asia, the Middle East and Europe
Driving commercial and political engagement between Asia, the Middle East and Europe
By Daniel Worrall, Senior Advisor, with contributions from Freddie Neve, Senior Middle East Associate.
Key Takeaways
1) Maximising national value from traditional energy systems while minimising production emissions and diversifying further down the hydrocarbon value chain into natural gas, LNG, petrochemicals, and technologies that could further reduce emissions.
2) Building capability across the new energy value chain, including minerals extraction (domestic and international), in-country minerals processing and establishing the Kingdom as a clean tech, green steel, and electric vehicles (EVs) manufacturing hub. This has extensive policy support and is being fuelled by investment in local and low-cost renewable power generation alongside strategic partnerships with international businesses and institutions for project delivery and building capacity within major domestic companies.
3) Forging bilateral government agreements on new energy and minerals to maintain and further build international influence and position Saudi Arabia as an emerging new energy and minerals hub.
Aramco is building resilience by investing in downstream capabilities
Saudi Arabia, principally via Aramco’s activities, is well placed to retain a major role in global hydrocarbon energy markets while building a key position in new energy supply chains.
Through majority-owned oil giant Aramco, the Kingdom has achieved the world’s lowest average oil production costs per barrel (approximately US$3-US$5 per barrel[1]) and is reducing the carbon emissions produced per barrel to meet Aramco’s 2050 net zero (Scope 1 & 2) target. Despite the recent cancellation of production capacity expansion projects[2], Aramco retains significant spare capacity that can be ramped up at comparatively short notice. The use of this excess production capacity combined with Aramco’s low production costs could therefore be used to pressurise higher-cost producer countries and increase crude revenues to Aramco and, ultimately, the state.
Although variable depending on oil and gas pricing and production rates, Aramco revenue accounts for around 40 to 50 per cent of Saudi GDP[3],[4]. Value is primarily transferred from Aramco to state coffers via a dividend, but when multiplier effects are incorporated (including the low-cost provision of electricity and feedstock to manufacturing sites) the economic impact is significantly higher, with national revenue lately enhanced via recent Aramco share sales. This revenue has funded Saudi Arabia’s sovereign wealth fund – the Public Investment Fund (PIF) – and enabled it to strategically invest in overseas assets and domestic economic diversification.
Aramco is also actively supporting Saudi’s Vision 2030 objectives by moving down the hydrocarbon value chain into LNG and petrochemicals via acquisitions (MidOcean Energy and SABIC, respectively), forming new international partnerships (Sadara with Dow, the Amiral complex with TotalEnergies, and the Panjin petrochemical plant with Norinco Group and Panjin Xincheng Industrial Group) and the establishment of an internal new energies and capital division focused on investing in clean energy and supporting further internal emissions reduction projects.
Mining, minerals and the battery value-chain
In response to projections for increased domestic and global demand for critical minerals and metals[5], Saudi Arabia has embarked on several strategic in-country and international projects and partnerships to develop mineral resources.
Domestically, the government – with the Ministry of Industry and Mineral Resources as the industry sponsor – is encouraging resource exploration and evaluation to fully understand the extent and quality of the domestic resource base, particularly in critical minerals and rare earths. To this end, the state has passed a new mining law seeking to facilitate investor access to financing and support exploration and geological survey activity. Industry and Mineral Resources Minister Bandar Alkhorayef revealed the Ministry’s updated assessment of the Kingdom’s untapped mineral potential in January 2024, stating that the total value of Saudi mineral reserves, including copper, nickel, phosphates, and iron ore, had increased from US$1.3 trillion to US$2.5 trillion. The government has also announced US$180 million of additional support for national exploration programmes and promised additional minerals licensing rounds in 2024. While the Kingdom has developed a domestic mining champion in Ma’aden, it has also recognised that it is relatively new to minerals extraction and processing and has therefore sought partnerships with more experienced international operators to explore and develop domestic resources at multiple points along the minerals value chain[6]. This has expedited activity, bridged sector specific talent shortages and provided Saudi Arabia’s mining operations with international best practices and cutting-edge technology.
This partnership approach has also been seen internationally, and has also leveraged national political support, with a focus on Africa, Central Asia, and Asia. Ma’aden and PIF, primarily through the Manara Minerals Investment Company (Manara)[7] joint venture, are targeting minority stakes in international mining companies and international projects with a stated focus on copper, lithium, nickel and iron ore: all of which are important to the energy transition. A good example of this internationalisation is the acquisition by Manara of a 10 per cent stake in Vale Base Metals for US$2.5 billion in a deal that closed in 2024.
In terms of developing its supply chains for critical minerals and metals, Saudi Arabia is adopting a similar approach to China by seeking to have key minerals offtakes processed and high-graded within the Kingdom, thereby boosting domestic GDP, fostering adjacent industries and strengthening the Kingdom’s position in international trade. In addition to minerals extraction and processing, the Kingdom has ambitious plans to move further down the subsequent electrification (battery and mobility) value chain by building an investment and development ecosystem within its borders. Partnership is again the preferred approach here, with examples including PIF’s majority investment in Saudi-headquartered Ceer and US-headquartered Lucid, both of which are manufacturing EVs and components in King Abdullah Economic City.
Regional and international engagement
Saudi Arabia has conducted a concerted regional and international engagement programme to support its bid to become a key global critical minerals hub.
The Kingdom’s convening of the third, and greatly enhanced, annual Future Minerals Forum in January 2024 marked a step change in international engagement in the minerals space. Entitled “Resilient and Responsible Mineral Value Chains in Africa, Western and Central Asia”, the forum was attended by industry, investors and representatives from more than 80 countries. The event also featured discussions about how to increase domestic mining in the country’s western provinces, along with an exploration of how mining is becoming a third economic pillar of Saudi Arabia’s economy, after oil and petrochemicals. The event also saw the Kingdom publicly sign international mining agreements with Egypt, Russia, Morocco and the Democratic Republic of Congo (DRC). The Kingdom’s growing engagement with Africa has been of particular interest, where it plans to deploy approximately US$40 billion[8] in investment between 2023 and 2030. As outlined at the 2023 Saudi–Africa Summit, the Kingdom is seeking to enhance business, social and governmental ties with the continent.
Similar to APEC and ASEAN, the Gulf Cooperation Council (GCC) provides minerals coordination among its members via the GCC Mineral Resources Committee. The committee has focused on enhancing the coordination of in-region value-chains, sharing approaches to ESG, and building a common understanding of GCC minerals development strategies. Through its bilateral relations the Kingdom has recently partnered with China to help better understand its indigenous resource base via the Saudi Geological Survey[9]. However, there is the potential for competing interests with China as Saudi Arabia seeks to challenge its dominant position in mineral processing and battery sales to the Middle East region, along with its growing influence in minerals extraction in Africa and Central Asia.
The US has been supportive of Saudi expansion into critical minerals extraction and processing, regarding this as a way to dilute China’s – and to a lesser extent Indonesia’s – market dominance while still generally increasing global supply. While Saudi Arabia has not formally joined the US-led 2022 Minerals Security Partnership, it has recently signed critical minerals and energy transition financial agreements with US Exim[10], and agreements with other partnership members such as the UK[11]. Likewise, while there is currently no US–Saudi Free Trade Agreement, the strong and multifaceted relationship between the two countries could see the emerging Saudi hub as an ideal location for organisations seeking to “friendshore” supply chains.
Advantages and challenges
Saudi Arabia has many advantages in its drive to maximise national benefit from both hydrocarbons and new energy value chains.
Low-cost oil production, in conjunction with increasing gas/LNG exposure and a move down the hydrocarbon value chain into chemicals and plastics – while also reducing Scope 1 and 2 emissions and investing in lower carbon technologies – underpins Aramco’s ability to provide value to the Kingdom for decades to come.
In new energy value chains, strong and geopolitically balanced international relationships, combined with significant amounts of capital, a willingness to take a long-term view on investment and an effective partnership strategy put the Kingdom in a strong position to both meet domestic demand and to evolve into a minerals and a clean tech/mobility hub.
There are challenges. The Kingdom’s domestic minerals reserves are yet to be fully mapped and internationally sourced flows need to be further developed. Furthermore, much of the current and targeted domestic manufacturing base relies on access to state-subsidised electricity. There also remains a significant minerals value chain talent deficit, despite the introduction of new university and vocational training courses. There has been some outside criticism of the environmental and social practices employed by mines that the Kingdom will need to factor into its plans to become a processing hub.
Recommendations for businesses:
[1] Source: https://www.economist.com/business/2024/06/02/how-saudi-aramco-plans-to-win-the-oil-endgame
[2] Source: https://www.aramco.com/en/news-media/news/2024/aramco-receives-directive-to-maintain-msc
[3] Source: https://www.elibrary.imf.org/view/journals/002/2022/275/article-A001-en.xml
[4] For more information see: https://oilprice.com/Energy/Energy-General/Saudi-Arabias-Non-Oil-Revenue-Hits-50-Of-GDP.html
[5] For more information see: https://asiahouse.org/research_posts/critical-minerals-in-global-trade/
[6] For more on Ma’aden domestic partnerships see: https://www.maaden.com.sa/en/about/saf
[7] Ma’aden hold 51 per cent of Manara and PIF hold the remaining 49 per cent. However, PIF also has a direct 67 per cent holding in Ma’aden.
[8] US$25 billion direct investment, US$10 billion from exports, development finance of more than US$5 billion.
[9] Source: https://www.seetao.com/details/199396.html
[10] Source: https://www.exim.gov/news/export-import-bank-signs-memorandum-understanding-saudi-exim
[11] Source: https://www.gov.uk/government/news/uk-and-saudi-arabia-pledge-to-deliver-closer-co-operation-on-critical-minerals
Asia House is working with governments across Asia, the Middle East and the West, as well as multilateral organisations and the private sector, to drive commercial and political engagement around key issues in global trade. For more information on our research and programmes, please contact Katie Reid, Stakeholder Engagement Associate via katie.reid@asiahouse.co.uk.
