Saudi Arabia is in a hole deeper than most of its oil wells


January 22, 2016

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Saudi Arabia is in a hole deeper than most of its oil wells.

Over the last year, the Middle Eastern oil giant has kept up high levels of production even though demand has been slowing in key markets such as China. This has driven down oil prices to around $30 a barrel, which has enabled it to put significant pressure on political rivals such as Iran and Russia as well as other energy sources, including the US fracking industry.

The problem is that these low prices are also unsustainable for Saudi Arabia, which has a budget deficit of $100bn. In response, it is looking at measures including cutting subsidies that keep water, electricity and petrol prices very low; and has also confirmed it is looking to list part of state-owned oil company Aramco, which is the largest company in the world and valued at anywhere between $1trn and £3trn. This is one of Saudi’s crown jewels.

But the problems that Saudi Arabia is facing is also opening the door for the introduction of clean energy projects in the country.

Historically, Saudi Arabia has kept renewable energy at a distance, which is hardly surprising for a nation that is so dependent on fossil fuels. The government established the King Abdullah City for Atomic & Renewable Energy in 2010 to develop alternatives to fossil fuels, and in 2013 it revealed plans to develop 54GW of renewable energy projects by 2032, including 9GW of wind.

Last January, the nation said it was pushing back this target by eight years to 2040; and then, in February, Saudi’s incoming ruler King Salaman announced he was disbanding the group overseeing K.A.CARE as part of a government reshuffle. This threw its renewables plans into doubt. In the end, K.A.CARE survived but it is now focusing on nuclear power rather than renewables.

And yet the 2040 targets survive, and there are hints that the government is taking wind and other renewables more seriously.

For example, ACWA Power president and chief executive Paddy Padmanathan has said in an interview that the government is looking to roll out renewables because they offer cost-effective ways of filling its $100bn budget gap. Yes, wind is beginning to be seen as a low-subsidy option by the Saudi government.

Currently, fossil fuels used domestically in Saudi Arabia require high subsidies, so there is certainly a case that renewables would be cheaper. If the government can use low-cost sources like wind and solar to produce energy then it means it can sell more of its oil overseas, which is important when oil is at such low levels.

And it is even signing commercial deals with renewables firms. This month it has signed a contract with solar developer Al-Afandi Solar to set up a factory that could make solar panels totalling 120MW each year. It is set to be up-and-running in late 2016.

This does not directly benefit wind, of course, and we have not seen Saudi leaders make any new commitments to wind.

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