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
As part of the Asia House COP26 series, Freddie Neve, Asia House Middle East Associate, examines Saudi Arabia’s environmental sustainability strategy.
Key takeaways
– Saudi Arabia has started to diversify its economy away from oil and engage in economic transformation, raising prospects for sustainable growth.
– Since Vision 2030’s launch five years ago, Saudi Arabia has invested money and government resources into developing its renewable energy sector.
– Saudi Arabia has some way to go before meeting its renewable energy production targets but developments this year show signs of progress.
– Crucially, Saudi Arabia’s promotion and development of carbon capture and storage technologies aim to demonstrate that oil can remain in the global energy mix without causing environmental degradation.
Saudi Arabia, the world’s largest exporter of oil, has traditionally not been associated with green policies. Its oil exports have fuelled global economic growth for decades. In 2019, it accounted for 13.3 per cent of the world’s total oil exports, but this has also meant it has contributed heavily to global warming. Saudi Arabia’s high domestic oil consumption also means it is one of the world’s worst CO2 emitters on a per capita basis.
Saudi Arabia’s oil exports have provided the country with great wealth, allowing it to provide its citizens with generous benefits including public sector jobs with inflated salaries, free healthcare, and free tuition, and until recently without the expectation on Saudis to pay taxes.
But this situation is now under threat as global governments become increasingly focused on decarbonising their economies. With the 26th UN Climate Change Conference of Parties (COP26) taking place in Glasgow this November, pressure will only increase on governments to increase their focus on meeting or extending their commitments under the Paris Agreement. Saudi Arabia’s own Nationally Determined Contribution (NDC) under the Paris Agreement to prevent 130 million tonnes of CO2 emissions has been labelled by Climate Action Tracker as critically insufficient to address global climate change.
Saudi Arabia’s overreliance on oil for revenue, at a time when governments are looking to reduce fossil fuel consumption and carbon emissions, has prompted the Saudi government to pay greater attention to environmental sustainability as a means of diversifying its economy.
Following the launch of its national transformation programme, ‘Vision 2030’, five years ago, Saudi Arabia has increased investment and government resources into putting the country on a more environmentally sustainable footing.
It has done so by investing in renewables and in particular solar power, undertaking initiatives to reduce domestic consumption of energy and oil, and promoting carbon/capture storage technologies to allow the world to continue using oil in the future without causing environmental degradation.
The key drivers behind Saudi Arabia’s moves towards greater environmental sustainability are:
1. Global oil demand will eventually decrease
Estimates for when the world will reach peak oil demand vary, but a recent McKinsey report argues that the demand shock caused by COVID-19 could bring forward peak oil demand to 2029. Technological advances in electric vehicles and battery storage, and declining renewable energy costs, could put further downward pressure on oil demand.
The Saudi government recognises the necessity of diversifying the Saudi economy away from oil. Saudi Arabia’s fiscal breakeven oil price is the third-highest among GCC economies at around US$77.90 per barrel in 2020. Brent Crude was priced on average at US$41.69 per barrel in 2020, though this was largely due to the demand shock caused by the COVID-19 pandemic. Oil prices have since recovered to around US$70 per barrel. To hedge against a future of low oil demand and low prices, Saudi Arabia needs alternative revenue sources. Developing its renewable energy sector offers one opportunity to achieve this.
2. Investment in renewables can help monetise oil resources for longer
Saudi Arabia has the second-largest proven oil reserves in the world and wants to maximise the revenue from its natural resources. Although global oil demand will eventually decrease, it remains a key input for producing petrochemicals and jet fuels, and alternative hydrogen-based fuels such as “blue” ammonia.
Saudi Arabia produces oil more cost-effectively than any other country at around US$2.80 per barrel. As global demand for oil declines and prices fall, Saudi Arabia could gain greater market share as oil production becomes less profitable for its competitors.
But Saudi Arabia also consumes a quarter of the oil it produces, much of it to create electricity. Investing in renewables and reducing domestic electricity consumption will leave more oil reserves in the future to monetise.
3. Saudi Arabia is vulnerable to climate change
Saudi Arabia is already threatened by desertification, low rainfall, and debilitating dust storms. 70-90 per cent of land in the Arabian Peninsula is under threat from desertification. These problems will be compounded by rising temperatures, hampering foreign investment and impeding growth in sectors that are crucial to Saudi Arabia’s economic diversification efforts, such as tourism and sport. Temperatures in Saudi Arabia are expected to rise faster than global averages and the Intergovernmental Panel on Climate Change (IPPC) has modelled that rising sea levels could lead to the loss of over 4,000 hectares of sandy beaches by 2100.
Moving Saudi Arabia towards a more environmentally sustainable footing has been a focus of the Saudi government since the launch of ‘Vision 2030’. Four recent steps by Saudi Arabia to achieve this are:
Saudi Arabia aims to have renewables make up 50 per cent of its energy production by 2030. This ambitious target was reaffirmed in March 2021 when Crown Prince Mohammed bin Salman launched the Saudi Green Initiative.
Saudi Arabia’s location, climate, and large swathes of unpopulated land, make it a promising site for solar energy generation. In 2018, Saudi Arabia increased its Vision 2030 target for renewable energy production from 9.5GW to 57.8GW by 2030. Efforts to meet this target have so far been slow, but are beginning to show signs of progress through the following projects and initiatives:
– Saudi Arabia’s first utility-scale solar power project, the 300MW Sakaka plant, became operational in April 2021.
– Saudi Arabia’s first utility-scale wind farm, the 400MW Dumat Al Jandal wind farm, is reportedly half-way near completion.
Additionally, seven further solar projects were announced in April 2021, with a combined capacity of 3.6GW. ACWA Power, which is half-owned by Saudi Arabia’s Public Investment Fund (PIF), is a major vehicle behind Saudi Arabia’s renewable projects. It recently agreed to sell electricity produced by the 600MW Shuaibah project at US$10.40 per MWh. Once completed, Shuaibah will produce the cheapest electricity produced by solar power in the world.
Saudi Arabia is also encouraging businesses and households to produce solar power themselves, recently introducing regulations to allow Saudis to install solar panels on their homes, with citizens able to sell electricity back to the Saudi Electricity Company.
Considerable government resources have gone into developing Saudi Arabia’s renewable energy sector, with new government agencies created and sovereign wealth invested. In 2019, the US$28 billion Saudi Industrial Development Fund announced it would invest in renewable energy projects and in 2020 the government announced it would invest US$30 billion in renewables by 2025.
This emerging sector has further potential to grow should solar technology continue to become cheaper, and as giga-projects such as NEOM, a futuristic city on the Red Sea, and ‘The Line’, a 105-mile carbon-free city built on a straight line develop, both of which have renewables at the core of their founding visions.
Saudi Arabia aims to reduce domestic oil consumption by one million barrels per day. It currently consumes around a quarter of the oil it produces and four times the global average, on a per capital basis. Oil is used to produce around 40 per cent of Saudi electricity – 10 times the global average. Its reliance on energy-intensive desalination to produce water, and heavily subsidised electricity and fuel prices, all contribute to high domestic energy consumption.
Renewables are one way to reduce the amount of oil being used for electricity, but Saudi Arabia is also looking at ways to make households and businesses more energy efficient, thereby reducing domestic emissions and preserving its oil supplies for petrochemicals and other industries that will be less impacted by a decline in global oil demand.
Subsidy removals would help cut energy consumption, but this would be domestically unpopular, particularly given the imposition of new taxes, such as excise duties and VAT, over the last few years. Subsidy removal would also increase costs on households when purchasing electricity and fuel, which could depress spending elsewhere to the detriment of Saudi Arabia’s economy.
Saudi Arabia is looking to reduce energy consumption in a number of ways:
3 – Promoting the Circular Carbon Economy (CCE) and developing a hydrogen sector
During its presidency of the G20 last year, the Saudi government secured the G20’s endorsement of its CCE approach to climate change. CCE supports the development of carbon capture/storage technologies to reduce carbon emissions into the atmosphere.
CCE underpins Saudi Arabia’s strategy of ensuring its oil reserves remain profitable into the future, since the development of carbon capture/storage technologies could allow economies to continue burning fossil fuels for energy without the negative environmental impact of their emissions.
Technology upgrading is needed for the successful implementation of CCE. Carbon capture/storage is currently expensive; the current market for products created using recycled CO2 is small, due to high costs. One application of CO2 that has proven marketable is in enhanced oil recovery.
Despite the challenges, Saudi Arabia is forging ahead with developing real-world applications of CCE, including within the hydrogen economy. In September 2020, Saudi Arabia sent “blue” ammonia to Japan in a world-first shipment. Ammonia is a store of hydrogen that is produced using fossil fuels, with CO2 being released as a by-product. Blue ammonia is produced by capturing the CO2 emitted during its production and in Saudi Arabia’s case, using it as feedstock for methanol and for enhanced oil recovery.
Crucially, ammonia does not emit any CO2 when burned for energy. Saudi Arabia could use its oil reserves to produce blue ammonia to export to other countries to use as a clean source of energy. Blue ammonia also has potential as a fuel for shipping, which currently contributes around 2.5 per cent of global carbon emissions.
Saudi Arabia has stated its intention to become a pioneer within the hydrogen sector. Japan’s ENEOS oil company recently signed a MOU with Saudi Aramco to explore establishing blue ammonia supply chains. Aramco is also exploring similar opportunities with China.
Saudi Arabia is also developing “green” ammonia/hydrogen capabilities, which is produced using renewable energy rather than fossil fuels. ACWA Power is collaborating on a US$5 billion deal with US-based Air Products & Chemicals Inc., to build the world’s largest green hydrogen plant in NEOM. Currently blue ammonia is cheaper to produce than green ammonia.
CCE approaches to climate change and hydrogen offer Saudi Arabia a path to becoming more sustainable. But further investment in technology underpinning CCE and hydrogen development is needed. Critics of CCE say the technology is not yet there and could distract governments from making more meaningful interventions to reduce emissions such as implementing carbon taxes.
One of the more eye-catching elements of the Saudi Green Initiative is the plan to plant 10 billion trees in Saudi Arabia, and 40 billion other trees across the Middle East. This afforestation programme would be twice the size of the Sahel’s Great Green Wall, currently the world’s largest afforestation programme.
Afforestation is another application of CCE since forests can serve as natural carbon sinks and in the Middle East can also reduce the threat of desertification and its associated negative impacts on food and water security.
Saudi Arabia’s afforestation programme was met with some media scepticism regarding how a country that is largely desert with very limited natural water resources, will be able to undertake such a massive project.
Details remain thin, but Saudi Arabia has completed afforestation projects before, most recently between October 2020 and April 2021, when 10 million trees were planted across Saudi Arabia under the “Let’s Make it Green” campaign. Species of trees also exist that are particularly adept at growing in desert with little water, such as the ghaf tree and date palm. Saudi Arabia has previously said it would use cloud seeding and recycled water to assist with afforestation.
Still, the scale of afforestation needed to achieve the Saudi Green Initiative is far greater than what Saudi Arabia has achieved so far in afforestation. Coordinating with other Middle Eastern governments to plant 40 billion trees also adds a layer of complexity.
Ultimately afforestation is not a cure-all for climate change, but the Saudi government is utilising it as one tool in their bid to become more environmentally sustainable.
Saudi Arabia recognises that it needs to diversify its economy away from oil, become more sustainable, and shift towards cleaner and greener technologies. The government has clearly given thought to how it can achieve this, has developed strategies to do so, and has allocated resources to deliver them.
Saudi Arabia still has some way to go to meet its renewable energy production targets of having 50 percent of its energy production linked to the renewables sector, but there is momentum behind the development of this sector. There also remains pressure on Saudi Arabia to increase its Nationally Determined Contribution under the Paris Agreement to reduce carbon emissions by 130 million tonnes by 2030.
The paradox inherent within Saudi Arabia’s move towards greater environmental sustainability is that initiatives that reduce domestic carbon emissions, such as investment in renewables and cutting domestic energy consumption, serves to free up more oil for it to export onwards, releasing CO2 further down the supply chain.
To solve this paradox, not only are advances in CCE technologies and hydrogen technology needed, but Saudi Arabia also needs to convince the world’s policymakers of their viability as part of the solution to climate change. Without this, policymakers will push for global solutions to climate change that focus on decarbonisation and keeping oil in the ground.
Freddie Neve leads the Asia House Middle East Programme, convening briefings and events with leading business and policy figures and conducting research focused on the region. To find out more about the Middle East Programme, please email Freddie at: freddie.neve@asiahouse.co.uk
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