The Top 10 reasons why Saudi Arabia should be in the energy transition strategic planning mix
The last two weeks have brought a distinct downturn in confidence as politicians have conceded that COVID-19 is heading for its second wave.
There has also been the implicit message that we are in for a long hard winter and need to “hunker down” for the next two quarters given the anticipated trajectory of the virus until the next Spring. But the question remains, what happens next and where do energy sector and technology businesses position themselves strategically?
There seems to be little argument that petroleum companies across the food chain from operators to major EPC contractors to technology and know-led suppliers are going to have to go through the energy transition and adapt or die. But in the short to medium term what does this mean in terms of sales, profits and cashflow? As the Kingdom travels towards its Vision 2030 objectives, I remain of the view that Saudi Arabia offers one of the best opportunities to achieve this essential survive-adapt-thrive strategic outlook and there are ten key reasons as to why:-
- Although the Saudi Aramco investment programme has been cut back it still anticipated to offer up US250 billion of investment over the next 10 years. It has been hard to find a competing scenario in other territories. In addition to its near 100% dominance of the upstream sector, it is also the dominant player in the downstream sector thanks to key strategic JVs with the likes of Exxon-Mobil, Total , Sinopec and Dow Chemicals but also its 70% stake in SABIC which dominates the petrochemical sector. The supply chain is going to have to have clear lines of sight on the cashflow which is going to underpin them as they move through that energy transition and business revenues are always better than equity dilution or debt. Any petroleum sector player who is not on the Aramco vendor registration list needs to ask themselves why?
- Saudi Aramco Energy Ventures has given a shot in the arm to technology driven supply chain players by announcing a second US$500 billion investment fund. This implies that 40 or so new investee companies will line up with the 40+ companies who are already portfolio or alma mater members of SAEV. The portfolio is lined up into the upstream, downstream, renewables & water and fourth industrial revolution (4IR) sectors. It also needs to be remembered that SAEV is especially focussed on how these technologies can be deployed successfully in KSA;
- The drive to stay ahead of the game in 4IR technologies will not only reside in the petroleum sector but will clearly flow into the power (there are 80 licensed power plants in the country), telecoms, industrial and defence sectors; the Saudi Electricity Company, Saudi Telecommunications Company, Ma’aden state mining company and the two major defence procurement houses will be potential target clients for many of the new technologies which have a cross-over across these sectors;
- Although the renewables sector is anticipated to be dominated by solar and onshore wind programmes (which has a less direct cross-over with European and North American technology providers), blue hydrogen, CCSU and energy efficiency & storage technologies will undoubtedly offer up opportunities for technology providers;
- The Kingdom has the highest global deployment of water desalination capacity with 45 desal plants in operation and anticipated population growth and (very) scarce natural water resources means that desalination will continue to dominate and grow. MSF technologies are clearly been supplanted by reverse osmosis technologies but what comes next after RO?
- The infrastructure and transport sectors are undergoing major investment with new ports, airports, roads (including a new direct link to Oman), high speed railways and a second causeway to Bahrain in the pipeline. This is a huge boost to the construction sector, to business functionality and to quality of life for business and private travel within and to/from the Kingdom;
- While the Kingdom is dominated by state owned enterprises (SOEs), the Saudi Government is committed to a major privatisation programme and the halfway house of public-private partnerships. This will give ample foreign direct investment opportunities which is facilitated by the (general) 100% foreign ownership laws and the competitive taxation regime (20% corporation tax and no personal income tax, although the recent VAT and customs duties jumps have moved the needle in the other direction);
- There is a major demographic challenge and opportunity arising from the rapidly growing population. This is anticipated to jump from 33 million to 40 million by 2030 and bringing in a huge need for education suppliers, health services, financial services and housing;
- The demographics will clearly cross over into the entertainment and tourism sectors with huge landmark projects planned for the NEOM futuristic city in the north-west corner of the country, the Qiddiya entertainment city south-west of Riyadh and the Red Sea Project north of Jeddah; and
- Looking outwards and forwards, Saudi Arabia is expected to be just outside the top 10 economies by GDP PPP in 2050 according to PriceWaterhouseCoopers and it is central to the region, with Egypt, Israel, Jordan, Iraq, Kuwait, Bahrain, Qatar, United Arab Emirates and Oman all on its doorstep. A solid KSA base camp may well therefore offer up other regional opportunities.
This set of opportunities might offer more than just short term breathing space as businesses ponder where does the energy transition take them next?