Saudi Pushes for Renewables to Reduce Crude Burn

Kingdom to develop almost 10 gigawatts of renewable energy by 2023

Saudi Arabia, the largest crude producer and exporter among the Organization of Petroleum Exporting Countries (OPEC), is turning to renewable energy to generate most of its power supply domestically, thereby helping it to export more crude oil and generate more revenue, as reported by Bloomberg on February 14th, 2017. Starting 2017, Saudi Arabia plans to develop almost 10 gigawatts of renewable energy by 2023, starting with wind and solar plants in its northwestern desert. These efforts could replace the equivalent of 80,000 barrels per day (bpd) of oil that is now being used to generate power in the kingdom. Saudi will also set up a slew of natural gas projects later this decade, which could replace crude used for heat generation during the winter season.

Saudi aims to reduce oil burn

Without the alternative power sources, including gas and renewables, the kingdom would be forced to increase its crude burn, which could reach as high as 900,000 bpd during summer, according to data from the Joint Organisations Data Initiative, and as reported by Bloomberg. According to OPEC’s Monthly Oil Market Report released in January 2017, Saudi Arabia has already taken many measures to substitute natural gas for oil in power plants, which has a positive impact on crude burn reduction over the past few months. The use of crude for domestic power has fallen by nearly a third since the Wasit gas plant began operations in March 2016, according to the OPEC report.

These efforts are part of the kingdom’s plans to broaden the economy following two years of budget deficits tied to low oil prices. More industry, though, means more energy, with the amount of power used at peak times growing by 10% in 2016. However, with the current focus on renewables, the kingdom is looking to export more crude at a time when global crude prices have risen in recent months and are hovering nearer to $52 per barrel, giving the kingdom an opportunity to shore up its revenues and reduce its ballooning fiscal deficit.

Saudi to channel investments to renewable energy projects

Saudi Arabia is seeking $30 billion to $50 billion worth of investment in renewables, according to Energy Minister Khalid Al-Falih. The ministry will set up a division to handle the tenders until the country establishes a new independent buyer for all power supplies. The terms on renewable contracts will be motivating so that the cost of generating power from these renewable sources will be the lowest in the world. The kingdom will award its first tenders to build 700 megawatts of solar and wind energy in September 2017, Al-Falih said.

The government has already raised domestic energy prices to slow demand growth and called for greater efficiency, according to the Riyadh-based King Abdullah Petroleum Studies and Research Center. A failure to tap more renewable energy, natural gas or even nuclear reactors could reduce oil exports that are an all-important source of revenue to the economy. Many state-owned companies have already made efforts to generate renewable energy.

State energy producer Saudi Aramco or the Saudi Arabian Oil Company, already earns most of its income by pumping 1 in every 10 barrels sold every day. It is also driving the country’s first steps toward the renewable energy industry. At Dhahran, Saudi Aramco runs the country’s biggest solar plant, a 10-megawatt facility mounted on a parking lot roof. The solar panels atop the parking facility cut the need for the equivalent of about 30,000 barrels of oil and the wind turbines will eliminate demand for about 19,000 barrels, according to Aramco. In January 2017, it started the kingdom’s first commercial wind turbine to power a facility in the northwest region.

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 and the renewable projects planned for completion by 2023 could save about 300,000 barrels of oil from being burnt for power, according to estimates based on International Energy Agency (IEA) and OPEC data.

The Saudi Arabian Mining Co., another state-owned entity, operates a phosphate plant and is building a new industrial city in the northwest. Power for sections of the vast area where those projects are located will partly come from renewables and new gas projects.

Vision 2030 plan in progress

Improving the country’s energy efficiency by just 4% a year could save about 1 million bpd of crude by 2030. Saudi Arabia is going through an economic resurrection to reduce dependence on oil production and achieve diversification as part of its long-term growth strategy, named the Vision 2030 plan. The brainchild of Deputy Crown Prince Mohammed bin Salman, the son of King Salman, the plan aims to reduce fuel and utility subsidies. Also part of the Vision 2030 plan is the sale of as much as 5% stake in Saudi Aramco. With the company worth about $2 trillion, according to estimates from the prince, the share sale would be the worlds’ largest initial public offering.

Saudi Arabia, which is faced with an economic crisis, is predicted to grow by just 1.1% in 2016, the slowest pace since 2009. The kingdom’s economy, which is predominantly fueled by oil revenue, is faced with a crisis owing to stunted public sector growth, leading economists to predict a whopping $87-billion deficit in 2016. In 2015, Saudi Arabia saw its budget deficit widen to nearly $100 billion, or 15% of its GDP. In 2016, the International Monetary Fund expects the budget deficit to narrow to about 13% of the country’s GDP and below 10% in 2017. To narrow its ballooning budget deficit, Saudi is planning to sell its first international bonds.

OPEC calls for production cuts

Saudi Arabia’s focus on renewable energy and reducing crude burn assumes significance after OPEC members agreed to the first production cut in eight years in an effort to prop up global crude oil prices and normalize record global oil inventories on November 30th, 2016. OPEC, which met on the sidelines of the International Energy Forum (IEF) in Algeria from September 26-28th, 2016, agreed to reduce oil output to 32.5 million bpd from 33.24 million bpd, driving a sharp spike in crude prices, breaching past $50 dollar per barrel. International oil prices rose to an 18-month high of more than $58 a barrel on December 10th, 2016.

In January 2017, ministers from Saudi Arabia, Kuwait, Algeria, and Venezuela met counterparts from non-OPEC nations Russia and Oman to verify that the 24 signatories to the historic deal are following through on their pledge to remove a combined 1.8 million bpd of supply from the market over the next six months starting January 01st, 2017. They intend to prove that the group is serious about eliminating a three-year crude oversupply and dispelling skepticism stemming from previous unfulfilled promises.

On its part, Saudi Arabia promised to reduce output by 486,000 bpd to 10.05 million bpd. Saudi has delivered on its promise to cut production, and said that it pared production by 717,600 bpd in January 2017, its biggest cut in more than eight years, to 9.748 million bpd. OPEC’s overall production fell by 220,900 bpd to 33.085 million bpd in December 2016, led by declines in Saudi Arabia and Nigeria, according to OPEC data published on January 18th, 2017.

It now remains to be seen how Saudi Arabia will draw a balance between generating revenue from crude at a time when it is expected to adhere to OPEC production cuts and channeling vital state funds for its renewable energy push.

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