Old Habits Die Hard: Saudi Arabia Struggles to End Oil Addiction

Crown Prince Mohammed bin Salman's goal to ensure his country wouldn't be 'at the mercy of commodity price volatility or external markets' looks set to be missed

Saudi Arabia's Crown Prince Mohammed Bin Salman attends a meeting with Russia's President Vladimir Putin on the sidelines of the G20 summit in Osaka, Japan June 29, 2019.


Chief executive Amin Nasser arrived unannounced early on April 11, 2018, finalized the agreement and signed it later that day. Negotiators had just finished hammering out the details.


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The planned investment in the $44-billion refinery and petrochemical project on India's west coast is a prime example of how Aramco is trying to squeeze value out of each barrel of oil it produces by snapping up refining capacity, mainly in fast-growing Asia.

But it also underlines the challenge Saudi Arabia faces in reducing its heavy economic reliance on oil. The results of its program to diversify have been mixed, some projects are moving slowly and others are too ambitious, economic and energy analysts say.

Prince Mohammed's stated goal of being able to "live without oil" by as early as 2020 looks set to be missed.

"Saudi Arabia's oil addiction is as strong as ever... economically, of course, the Saudi economy runs on oil. Oil still dominates GDP, exports and government revenues," said Jim Krane, energy fellow at Rice University's Baker Institute.

"That said, Saudi Arabia is changing its relationship with oil. The dependence remains. But the kingdom is squeezing more value out of its oil," he said.

The slow progress means the Saudi economy is likely to remain hostage to oil prices for longer than planned. Any delay in implementing change also risks denting Prince Mohammed's image as a reformer.

Securing the future

Announcing his plan three years ago, the Crown Prince said Saudi Arabia must end its "oil addiction" to ensure the world's biggest oil exporter and second largest producer cannot be "at the mercy of commodity price volatility or external markets."



Aramco is central to the Crown Prince's reform plan in several ways, not least because its planned partial privatisation will generate income for the reforms.

The company has also been involved in most of the kingdom's high-profile deals in the last two years as it increased investment in refining and petrochemicals.


In March last year, Aramco finalized a deal to buy a $7 billion stake in a refinery and petrochemicals project with Malaysia's Petronas. A month later, Nasser and a consortium of Indian companies signed the initial deal that would give Aramco a stake in the planned 1.2 million bpd refinery in India's western Maharashtra state.


"This is what I call the back to basics approach to economic diversification in the Gulf," said Robin Mills, chief executive of energy consultancy Qamar Energy in Dubai. "The energy industry has the assets, capital and skills, so it's the engine of new projects - refining, petrochemicals, gas and so on."

Mr. upstream looks downstream

In March, Aramco said it was acquiring a 70 percent stake in petrochemicals firm Saudi Basic Industries (SABIC) for $69.1 billion from the national wealth fund, known as the Public Investment Fund (PIF).

Aramco is gaining new markets for its crude and building a global downstream presence - the refining, processing and purifying end of the production line. Its aim is to become a global leader in chemicals.

"We are not investing left and right, we are investing in the right markets, we are investing in the right refining assets, we are investing where we create value from fuels to chemicals," Abdulaziz al-Judaimi, Aramco's Senior Vice President for Downstream, told Reuters in May.

Nasser, previously known by Aramco employees as Mr. Upstream, is leading the downstream expansion. He wants to bring Aramco's refining capacity closer to its oil production potential, which is now at 12 million bpd.


"You want to secure your demand in key markets," said an industry source familiar with Saudi Arabia's oil plans. "You have to become more dynamic, to become more adaptable, you have to make sure that you secure your future. Malaysia was one example, India was another."


Yet while it has stakes in refineries or storage assets in other important Asia markets such as China, Japan and South Korea - and owns the largest refinery in the United States - it has not secured that same access in India, a fast-growing market for fuel and petrochemicals.

"India is a market that you just can't ignore anymore," an industry source said.


Slow progress 


Few details have emerged of a $200-billion solar power-generation project announced by the PIF and Japan's SoftBank in March 2018. It is unclear how or when the project will be executed, and Saudi's Arabia's energy ministry is moving ahead with its own solar projects.


Leading businessmen and politicians boycotted an investment forum meant to showcase the kingdom's new future away from oil, and it was only big deals with Aramco that saved it.



The PIF made its mark on the global stage three years ago by taking a $3.5- billion stake in Uber Technologies. But since 2016, the PIF's direct investments overseas stand at just $10.5 billion, according to Refinitiv data, and many of the fund's announced commitments have yet to materialize.

The funds' main investments over the past two years were in equity shares in companies such as electric car makers Tesla and Lucid Motors and Gulf e-commerce platform Noon.com.
