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Saudi Arabia’s “Vision 2030”: What It Means

China, Company Strategy, Middle East, Oil & Gas, Technology
By John Richardson on 27-Apr-2016



Demand: The New Direction for Profit


By John Richardson

SAUDI ARABIA’S “Vision 2030”, which was released on Monday, underlines what has been clear from government statements for a long while – that the Kingdom knows it has to move beyond just exporting crude oil. It needs to break what Saudi Deputy Crown Prince Mohammed bin Salman has called an “addiction to oil”.

If you have been caught blindsided by Vision 2030, it is worth looking again at the above triangle. Many people were similarly caught unawares by China’s change in economic direction in 2014. This again had been clearly flagged-up by government officials well in advance.

The message that needs to be repeated is that you cannot depend on cost curve analysis alone to understand the oil, gas and chemicals businesses, as too many people still tend to do. You instead must keep track of changes in the wider social and political context.

What “Vision 2030” further underlines is the following:

  • Saudi Arabia realises that oil will end up being left in the ground, like coal.  This means that it makes no sense for the Kingdom to support high oil prices.  It has the lowest production cost in the world, and high oil prices simply allow other, higher-cost producers, to sell more of their oil at Saudi Arabia’s expense.
  • This is why it is assuming future oil prices of $30/bbl. Yes, that’s right – not $80 or $100/bbl – but $30/bbl. An assumption of $30/bbl makes a lot of sense. So, ask yourself this question: “Do I really know better than the world’s biggest, and most experienced, oil producer?”
  • This is not a new strategy.  Saudi Arabia 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.
  • Social factors are the other key driver for the new policy.  With a median age of just 28 years, Saudi Arabia urgently needs to create jobs, if it wants to avoid the social unrest that has been spreading across the Arab world.  And this can only be achieved by abandoning the focus on oil exports, and diversifying its economy downstream. Evidence for the new policy can be seen in Saudi Arabia’s major expansion of its downstream volumes over the past few years.  It will soon be the world’s second-largest exporter of refined products – with 3mbd of production in 2018.  It has also developed world-scale joint ventures with Dow Chemical (Sadara) and TOTAL (SATORP) in petrochemicals.
  • These volumes are in addition to its actual oil exports – and confirm that the days of OPEC oil quotas are in the past.  The Vision therefore reinforces existing Saudi policy and creates the basis for the new Transformation Plan, due by the end of June.

Exactly like China again, these are the two key takeaways from Vision 2030 for overseas refiners and chemicals players:

  1. The viability of future new Saudi investments cannot be measured solely on how many dollars per tonne a particular project may, or may not, make over variable or cash costs – and on standard measures of returns on investment. Success will instead be measured over decades from a national perspective, as Saudi Arabia transforms its overall economy. This will require companies that do operate on these standard measures to think again about their own investment strategies.
  2. That’s the challenge. But the fantastic opportunity is working with the Kingdom, through providing the technology and expertise it needs, to help it realise this vision.