Saudi Arabia Energy Transition Strategy Explained: Geopolitics

This three-part series will analyze the geopolitical ripple effects of Riyadh's pivot from oil to energy transition renewables. Part III.

This article is part III of III-part series dedicated to analyzing Saudi Arabia’s energy transition strategy. The first report will layout the energy transition landscape globally, Riyadh’s efforts in this context, and the Kingdom’s critical minerals strategy.

The second will focus on hydrogen, solar, and the logistical considerations behind its supply chain initiatives. And the third part will layout the geopolitical implications both regionally and globally if KSA becomes an energy transition superpower.

Reshaping Regional Relations

Saudi Arabia’s investments into this frontier technology will likely yield economic and geopolitical dividends. Many of its regional neighbors are major gas and oil producing states such as Iraq, Kuwait and Iran — and the Kingdom’s energy transformation may inspire/put pressure on other countries in the region to follow in Riyadh’s footsteps.

Fostering a technological ecosystem has shown to stimulate innovation, attract international tech firms, and encourage the growth of domestic startups. In parallel, foreign direct investment (FDI) inflows from global firms looking to tap into a regional market would likely also grow.

To complement these modernization efforts, Saudi Arabia has begun to gather data directly from company and investors financial statements to calculate FDI. While the majority of inflows came into the country’s eastern oil-producing region in 2022, non-oil investment has also been growing in recent years.

Energy reform, diversification and adherence to standardized regulatory protocols and accounting will make the Saudi market more transparent and magnetize additional FDI. Furthermore, the publicity and image of a major, oil producing nation leading the charge in hydrogen production in a region characterized by fossil-fuel powered economies would enhance Saudi Arabia’s international standing.

By leading in the adoption and development of frontier technologies and updating its data systems and regulatory regime, Saudi Arabia can enhance its soft power. From a strategic geopolitical perspective, the concentration of hydrogen production, investment and innovation alone would give Riyadh significant geo-energetic leverage.

Access to the kingdom’s technological hub in sustainability, funding environment and strategic partnerships is a tool Riyadh could use to selectively extract concessions from regional states. In the case of more complex relations like Iran, diversification is as much a defensive strategy against domestic obsolescence as it is an offensive policy against a regime that depends on oil.

While the transition itself will likely be marred by delays and technical difficulties, the geopolitical dividends of a first-mover advantage are far too valuable to be left for others to take. As Saudi Arabia diversifies its energy portfolio, its role within the Organization of the Petroleum Exporting Countries (OPEC) and its influence over global oil markets are likely to evolve.

While the Kingdom may reduce its reliance on oil revenues, its position as one of the world’s largest oil producers will allow it to continue to play a pivotal role in shaping global oil supply and pricing strategies. However, its investment in renewable energy could lead to a shift in OPEC’s long-term strategy, potentially incorporating a broader focus on energy stability and sustainability.

Saudi Arabia’s transition could alter the geo-energetic calculus in the region. Historically, Saudi-Iranian relations have been partly defined by their roles as major oil producers. As Riyadh moves toward becoming a leader in renewable energy and potentially green hydrogen, it may shift the parameters of regional power.

This does not necessarily mean a reduction in tensions but could lead to a reconfiguration of how energy resources influence regional politics. For instance, competition might increasingly focus on technological advancement in renewable energy and sustainability measures rather than solely on oil production and prices.

Strategically, Saudi Arabia’s investment in renewable energy and the resulting economic diversification could enhance its security posture. By reducing its vulnerability to oil market volatility and potential sabotage of oil infrastructure — a concern given past attacks attributed to Iran — Saudi Arabia lessens potential leverage Iran might hold.

Furthermore, as Saudi Arabia develops its renewable energy infrastructure, it might also invest in fortifying these assets, creating a new security dynamic in the region.

Global Influence

As a major oil producer, Saudi Arabia’s investment in renewable energy and related technologies could position it as a leader in the global energy transition. The strategic shift could enable Saudi Arabia to shape international norms and standards for renewable energy, much like it has with oil pricing and policies.

It could leverage its investments in renewable energy to advocate for global energy policies that favor its economic and strategic interests, positively influencing international trade regulations, environmental standards, and even security alliances.

This would not only ensure its long-term energy security but also give it a key role in shaping the future of global energy markets, much in the way it has with oil for over half a century. In emerging and developing economies, Saudi Arabia will be able to leverage its renewable energy capabilities to partner with emerging and developing countries, especially those in Africa and Southeast Asia.

By offering access to affordable and clean energy technologies, the kingdom could play a critical role in their economic development, in turn securing favorable trade terms and diplomatic support on international platforms. Countries like the DRC, which boasts 70% of the world’s cobalt, could strengthen their ties with Saudi Arabia through trade agreements.

This would complement Riyadh’s increasing interest in playing a more prominent role on the African continent. Coupled with its strategic pivot toward renewable energy, this suggests a potential for positive bilateral relations with African nations rich in critical minerals and renewable energy potential.

Within the Asia-Pacific, Japan and South Korea are spearheading the drive toward clean energy solutions utilizing blue hydrogen technology. This momentum is fueled by a confluence of private sector investments and proactive government initiatives in the region.

Saudi Arabia’s $362 billion worth of exports — of which close to 80% come from mineral oils and fuels and products of their distillation — roughly 10% goes to Japan and South Korea, respectively.

Leveraging existing trade networks with Saudi Arabia’s economic and financial opening of its country will further catalyze intra-regional adoption of alternative forms of energy while solidifying geopolitical ties in a new energy paradigm.

Regional uncertainty vis-a-vis China and tensions in the South China Sea will continue to be a global risk and could dampen trade. Across the EMEA region, Europe stands out in its active pursuit of blue hydrogen development as a cornerstone strategy for achieving its stringent low-carbon energy objectives.

The European Union’s Hydrogen Strategy underscores the critical need to ramp up production of both green and blue hydrogen, aiming to fulfill its decarbonization targets and cultivate a robust hydrogen market. Of the $45 billion worth of exports Saudi Arabia sends to Europe, approximately 44% goes to France, Italy, and the Netherlands.

Europe’s hydrogen strategy and Saudi Arabia’s efforts can complement each other in several ways. Firstly, Europe’s emphasis on blue hydrogen aligns with Saudi Arabia’s abundant natural gas resources, which can be used to produce hydrogen through SMR and CCS technology. Saudi Arabia’s existing infrastructure in the energy sector can therefore help make it a key supplier of blue hydrogen to Europe.

Geopolitically, this partnership offers the kingdom an opportunity to diversify its economy away from its heavy reliance on oil exports. By tapping into the growing hydrogen market in Europe, Saudi Arabia can reduce its dependence on oil revenues and mitigate the risks associated with fluctuations in oil prices and demand.

Moreover, strengthening ties with Europe through hydrogen cooperation can enhance Saudi Arabia’s geopolitical influence and stability. By becoming a reliable supplier of low-carbon hydrogen, Riyadh can strengthen its diplomatic relations with European countries, particularly those with which it already has a strong trading relationship and who are major players in regional politics such as France.

This could lead to closer political alliances and increased investment opportunities for Saudi Arabia in Europe’s clean energy transition initiatives. Additionally, as the global energy landscape shifts towards cleaner alternatives, Saudi Arabia’s participation in the hydrogen market can help bolster its international standing as a proactive player in combating climate change.

What’s Next?

Saudi Arabia’s ambitious foray into the global clean energy landscape presents a compelling case study. By weaving itself into the fabric of renewable energy supply chains, the kingdom seeks to solidify its regional dominance and establish itself as a key player in the post-oil era.

This strategic shift, however, presents a complex chessboard with both opportunities and challenges. The continued work on Vision 2030 and its associated renewable energy targets can significantly diversify the Kingdom’s economy and mitigate its reliance on a finite resource like oil.

Additionally, proactive measures to secure a foothold in the burgeoning clean energy market hold the potential to establish Saudi Arabia as a central node in the new energy paradigm. This, in turn, could translate into significant geopolitical influence and secure the Kingdom’s position as a global powerbroker well into the future. However, the path forward is not without hurdles.

The success of Saudi Arabia’s clean energy gambit hinges on its ability to navigate several key challenges. First, ensuring the efficient and transparent execution of large-scale renewable energy projects remains paramount. Second, fostering a robust domestic clean energy ecosystem, complete with skilled labor and cutting-edge research and development, will be critical for long-term sustainability.

Finally, navigating the complexities of a rapidly evolving geopolitical landscape and managing the potential disruptions of greenflation require strategic foresight and agility.

The world watches, wondering not just if the Kingdom can secure a sustainable future, but who will ultimately write the rules of this new energy era.

After all, who wants to be remembered for losing their place in the sun?

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*This report is a re-publication of a paper I was commissioned to author for the Rasanah Institute to analyze the risks and feasibility of Saudi Arabia’s energy transition strategy.