The Saudi’s 2030 Vision was perhaps one of the most hotly discussed news in the past couple of months. And rightly so, it includes some quite radical economic reforms and promises to significantly open up the Kingdom for more foreign investment.
At the core of these reforms is the intent to end the country’s ‘addiction’ to oil, as Crown Prince Mohammed bin Salman, the man behind the Vision, himself put it. The Kingdom is even planning to privatise 5% of its crown jewel – Saudi Aramco —and its subsidiaries through an Initial Public Offering (IPO) that would generate a staggering amount of revenue in the years to come.
But Saudi Arabia’s so called transformation plan isn’t new at all. The country’s leadership has long been working towards building a post-oil future by developing new downstream industries, integrating its existing assets and thus generating more job and investment opportunities for the local population.
“Saudi recognised some time ago that oil was losing market share to natural gas and renewables. Last December’s climate change conference in Paris reinforced this message, making it essential that the country moved quickly to reduce its current dependence on oil revenues, and diversify its economy,” Paul Hodges, special advisor to ICIS and chairman of International eChem, said.
Hodges cited Saudi’s major expansion of downstream product volumes over the past few years and some of its world-class petrochemical investments such as Sadara and Satorp as “evidence for its new policy” to move away from a crude oil economy.
“The oil-dependent Kingdom of Saudi Arabia has a long-term blueprint to transform itself into a more diversified economy, with non-oil government revenues projected to increase six-fold to 1trn Saudi Riyals ($27bn) by 2030,” said Nikhil Salvi, manager of investment research practice at Aranca.
“It’s an ambitious dream to transform an economy that relies on crude oil exports for more than 70% of government revenues. Deputy Crown Prince Mohammed bin Salman’s 15-year economic plan is the boldest attempt yet in the Kingdom’s history to spur additional revenue streams amid a steep fall in commodity prices. The shift from oil-dependent economy to “live without oil by 2020” , as foreseen by Deputy Crown Prince Mohammed bin Salman, is a huge step in this direction.”
Alongside government entities like the Saudi Arabian General Investment Authority or SAGIA, whose sole purpose is to encourage investment in the Kingdom’s non-oil sector, state-owned firm Saudi Aramco has increasingly been looking at ways to diversify its portfolio away from crude oil export into refining, petrochemical and chemical production. All of this has been in line with the government’s strategic vision to diversify revenue away from crude oil export and support the development of downstream industry in the Kingdom.
“What stands Saudi Arabia’s Vision 2030 apart from similar attempts by governments in the region over the past decade is the urgency of ground results rather than the luxury of dogmatic planning,” said Shashank Shekhar, PetChem editor, S&P Global Platts.
“The Kingdom ran a deficit of $98bn in 2015 and has been forced to tap the international bond besides opening 5% of its oil behemoth Saudi Aramco open to public. It’s this narrow opportunity of international investments that may act as a catalyst for the country’s downstream industry,” Shekhar noted.
“The Saudi government has for years promoted its downstream petrochemical industry to tackle high unemployment rates. Khalid Al Falih, the new Minister of Energy, is the former Aramco CEO who had led ambitious downstream focused projects like Sadara and Rabigh II ensuring they get the right feeds even as the Kingdom battled a gas crisis.”
According to Shekhar, opening Aramco to new investors will give the company access to competent downstream ideas, which in turn would expose the Kingdom to global downstream market influences. Already the largest oil producer in the world, Aramco is set to become the second largest refiner after the US. According to its own estimates, it has the capacity to process 5.4mn barrels per day of crude oil domestically and worldwide, and is planning to almost double that to 10mn barrels per day through expansion and greenfield projects in what it considers high demand-growth markets the Middle East and the Far East.
The oil giant has also been seeking to become a leader in chemicals — it currently operates world-class integrated chemical facilities in six of its refineries, with plans to take its production lines further downstream. All of these initiatives are designed to increase the local economic footprint of the company’s chemical investments. A big step forward in Saudi Arabia’s diversification efforts would be the development of downstream conversion industries. Saudi Aramco is also collaborating with the governmental authorities to build value parks and locate service providers adjacent to petrochemical facilities, such as Rabigh PlusTech Park at Petro Rabigh on the west coast and PlasChem Park adjoining Sadara in Jubail Industrial City 2.
With most of the Kingdom’s petrochemicals presently being exported as commodities, major opportunities exist to add value by turning them into high-value, semi-finished and finished products, and the development of conversion parks will play a key role in achieving this. According to some estimates, diversification into specialty chemicals is expected to increase returns from the current level of about $500 per tonne to about $2,000 by 2040.
Speaking at the 4th Saudi Downstream Forum in Jubail, Saudi Arabia, Amin Nasser, Aramco’s CEO, said: “To date, the Kingdom’s downstream economic growth has achieved global leadership in the manufacture and export of commodity products. While Saudi Arabia certainly needs its commodities production strength, we also need to radically alter the downstream equation to derive greater benefits in-Kingdom, through knowledge-based and innovation-driven small and medium sized enterprises. Saudi Arabia is already a global leader in petroleum and petrochemical commodities, but today we have a tremendous opportunity to also become a leader in downstream conversion.”
However, Nasser said, more needs to be done to support the development of home-grown downstream technologies – an area in which the Kingdom can make major advances – such as breakthrough crude oil-to-chemicals technologies that will make oil a viable petrochemical feedstock, he said.
Last month, Aramco announced it is planning to work closely with Sabic on a revolutionary project that aims to produce chemicals directly from crude. According to a report by Bloomberg, the two companies are studying a plan to build a joint refinery in Yanbu that would utilise the innovative technology. The move was described by one analyst as “long overdue” as both companies are competing in the same markets, and said potential cooperation would eliminate the duplication of projects.
In lean times like these, using more economic feedstock will prove crucial to further developing the Kingdom’s downstream industries, which in turn is poised to play a central role in the Kingdom’s 2030 Vision.
“The recently announced Saudi Vision 2030 has anointed the petrochemical industry as a ‘promising industry’ that enables diversification,” said Dr. Abdulwahab Al-Sadoun, Secretary General of the Gulf Petrochemicals and Chemicals Association (GPCA).
“The petrochemical industry has also been recognised for its multiplier impact, enabling development and employment opportunities in support functions like transport, logistics and marketing,” he said.
“Public support will continue to rely on the chemicals industry, while petrochemicals and its associated industries will continue to expand, attracting more government investment in the near future, Dr. Al-Sadoun concluded.
