Riyadh's Energy Shift to Boost Saudi Regional Influence

Saudi Arabia's initiatives to capitalize on the energy transition will further reinforce its position as a regional powerhouse.

Despite tension in the Middle East, there is a desert bloom. Saudi Arabia's initiatives to weave itself into the fabric of global supply chains for renewable energy are poised to solidify its regional standing and enhance Riyadh's global influence.

But this is not happening in a vacuum.

Industrial Policy

The global economy is at an inflection point in geopolitics, energy, and technology. States concerned about being left out or falling behind are increasingly deploying government-backed capital to ensure they are at the very least neck-to-neck.

This is referred to as industrial policy, a strategic effort by a government to encourage the development and growth of specific sectors or industries within its economy.

As security takes precedence, governments are playing a bigger role in industries with geo-strategic importance by providing accommodative financing conditions. Whether in the form of interest-free loans or tax incentives, global leaders are looking to wield a number of policy levers to accelerate their position in this multi-dimensional race.

In industries with high costs and long time horizons for returns in an environment of high interest rates, the private sector will need a push - or a pull. Legislative measures like the US Inflation Reduction Act and European Chips Act are just two of many examples of targeted industrial policies.

Sovereign funds have also proved to be a popular conduit through which the state can inject capital to advance their industrial policies. One of the most well-known is Saudi Arabia’s Public Investment Fund (PIF).

The fund's strategic international investments are meant to "establish strategic relationships and partnerships with innovative companies, investment managers, and influential investors to allow Saudi Arabia to extend its global reach and influence", to "bolster Saudi Arabia’s position on the world stage as a leader and enabler of the future global economy" and to "support government-to-government relationships."

All that was needed was to re-define the direction of this capital.

Vision 2030

Launched in 2016, Saudi Arabia's Vision 2030 is a strategic framework aimed at reducing the kingdom's dependence on oil and fostering a more sustainable economy. The initiative sets ambitious targets, including boosting the contribution of non-oil exports to GDP from 16% to 50% by the end of the decade.

The King Abdullah Petroleum Studies and Research Center highlights the significance of non-oil exports in the kingdom's economic diversification efforts, emphasizing their role in sustainable development and job creation. Analysis suggests that venturing into hydrogen production could further reduce Saudi Arabia's reliance on oil revenues, leveraging its existing oil and gas infrastructure and supply networks.

The kingdom's National Hydrogen Strategy, which aims to produce and export 4 million tonnes of clean hydrogen annually, positions Saudi Arabia as a potential global leader in the hydrogen sector.

PIF is actively supporting this vision, with notable investments including a $5 billion partnership with Air Products to establish a green hydrogen production facility in Saudi Arabia.

Moreover, in October 2022, the PIF led a groundbreaking initiative by auctioning 1.4 million tons of carbon credits, establishing the first voluntary carbon market in the region and marking a significant step towards environmental sustainability.

Supply Chain Positioning

Saudi Arabia is strategically tapping into its rich reserves of minerals and precious metals to pave the way for a future that's less dependent on oil. The kingdom has recently reassessed the value of its mineral wealth, elevating it from $1.3 trillion to an impressive $2.5 trillion.

The kingdom is investing heavily in its future, committing $200 million to a comprehensive geological mapping project and the creation of a resource database, building on a previous $500 million survey investment.

This updated valuation brings to light substantial deposits of gold, copper, and zinc, which are expected to play a crucial role in the challenging energy transition ahead, where the demand for such resources is likely to exceed supply.

Look here for more details about the energy transition.

In line with this, Crown Prince Mohammed bin Salman (MBS) is steering the country to become a central resource hub, mirroring its pivotal role in the global oil market. Saudi Arabia is actively encouraging investment in its mining sector with several key measures.

This is on top of the Kingdom’s deal to become a minority shareholder in Brazilian mining giant Vale’s $26 billion-valued copper and nickel unit. According to the Financial Times:

“A joint venture between Saudi Arabian Mining Company and the country’s Public Investment Fund will own 10 per cent of the division, which supplies materials required for the transition to cleaner energy”.

Saudi Arabia is looking to position itself as a key node in the battery supply chain through the creation of lithium processing facilities. By 2030, it is anticipated that the worldwide need for lithium will surge to over four times the levels seen in 2022, growing from 720,000 metric tons to an estimated 3.1 million metric tons.

However, the projected lithium supply globally in 2030 is unlikely to satisfy this burgeoning demand.

Saudi Arabia's aggressive industrial policy, channeled primarily through generous allocations from PIF, outpaces even the substantial expenditures of America's Inflation Reduction Act.

The kingdom has established a dedicated Ministry for Industry and Mineral Resources, reduced license fees and royalties, and overhauled its mining laws to mirror the investor-friendly frameworks of countries like Australia, Botswana, and Canada.

These reforms have significantly cut down the time to obtain mining licenses to just two months, contributing to a 20% increase in active licenses since 2022, now totaling 2,300. Its forays into stimulating fossil-fuel alternatives is also yielding results.

According to The Economist:

“ACWA has 44% of its equity value owned by PIF, and received non-interest-bearing loans while it raises more equity capital. As a result, this state-backed effort vis-a-vis sovereign funds are helping to lower the cost for customers and simultaneously expand capacity. This has helped make the levelised cost of Saudi solar energy, which takes into account both construction and operation of a power plant, among the lowest in the world”.

Major obstacles still remain, including labor shortages for specialized positions necessary to transform Saudi Arabia as well as the ripple effects of regional tension and the geopolitical complications that follow.

A clear head with a steady vision will be necessary for leveraging all the political and financial capital necessary to catalyze these changes. So far, the industrial reforms have been encouraging, and vested stakeholders are hoping they will continue. Failure would come at a heavy price politically, economically, and financially.