On Monday, Saudi Arabia released a blueprint for the future, a plan for
the Kingdom that could alter the course of its history. The "Vision for
the Kingdom of Saudi Arabia" could radically transform Saudi Aramco, the
Saudi economy, and the country's social structure.
The plan has been pioneered by the 30-year-old Deputy Crown Prince
Mohammed bin Salman, the second in line to the King, who has emerged as one
of the most powerful figures in the Saudi government. Just a week ago his
influence was on display; while it is difficult to know exactly what went on
behind the scenes, all signs point to the Deputy Crown Prince overruling the
long-standing and respected oil minister Ali al-Naimi to kill
off the OPEC deal in Doha.
The prince has provided some clues into the roadmap, telling Bloomberg in
a wide-ranging interview several weeks ago that the government plans on
spinning off parts of the massive state-owned Saudi Aramco in an IPO. He also
said that Saudi Arabia wants to create the world's largest sovereign wealth
fund, which would be built up with $2
trillion in assets, to be used to help diversify the Saudi economy away
from oil dependence. "So within 20 years, we will be an economy or state
that doesn't depend mainly on oil," the prince told Bloomberg.
For a long time, however, oil will remain a mainstay. Saudi Aramco
produces about 10 million barrels per day (mb/d), the largest volume in the
world and more than double that of any other company. It is the only company
with sizable assets sitting on the sidelines, acting as spare capacity.
Aramco has the capacity to produce about 12 mb/d, and some say it has even
more than that. Aramco also is the fourth largest oil refiner in the world.
Despite its size and importance, the company is not sitting idle. Even though
most of its oil production comes from huge aging oilfields, Aramco continues
to drill
to avoid seeing its position erode over time. By the end of May, for example,
Saudi Aramco will complete the expansion
of its Shaybah oilfield, adding 250,000 barrels per day to its capacity.
The prince and his advisors revealed to Bloomberg
that the country was in a much worse fiscal situation a year ago than many
had believed. In early 2015, everyone knew that Saudi Arabia was burning
through its cash reserves to keep the economy going and maintain the
stability of its currency. The IMF predicted that at low oil prices, Saudi
Arabia could maintain that rate of cash burn for another five years before
going broke. But the Prince's financial advisor recently revealed that before
the latest austerity campaign, Saudi Arabia probably had about only two years
left, and was on track to go "completely broke" by early 2017.
Wasteful spending and a collapse in oil revenues put the government in a
fiscal calamity.
Since then, Saudi Arabia has introduced some taxes for the first time, cut
spending by about a quarter, trimmed energy subsidies, and raised money
through the bond markets. The fiscal breakeven point has successfully declined
from $94.80 per barrel to just $66.70 per barrel. Even still, it is burning
through its cash reserves. The latest IMF assessment
finds that oil-exporters from the Middle East lost $390 billion in 2015 alone
from low oil prices. The Fund calls on these governments, including Saudi
Arabia, to reduce the presence of the state in the economy and to focus on
private sector job growth. About two-thirds of Saudi workers are employed by
the government.
That is what the prince is trying to do with the new 2030 roadmap, a plan
to transition the economy to something beyond oil. Diversification has always
made sense, but the collapse of oil prices has made reform much more urgent.
Elements of the plan will commence within 45 days. The prince wants to
focus on job creation, as well as raise $100 billion in annual non-oil
revenue by 2020. Lowering energy subsidies could save
$30 billion per year by the end of the decade. Taking about 5 percent of
Saudi Aramco public - mostly downstream assets - will provide a lot of cash
that can be used for non-oil investments. Prince Mohammed also hopes it will
increase transparency.
The prince wants to attract more international investment, and part of
that could include loosening the country's strict social and moral rules,
which could result in gradually granting more rights to women. Many
international companies stay away because of Saudi's oppressive social
structure and poor human rights record. Prince Mohammed faces a tough
challenge - modernizing the economy and society will require him to confront
religious conservatives, a faction that the government has allied with for
many decades.
For now, he appears willing to take on that challenge, as building an
economy that is no longer exclusively dependent on oil is his top priority.
"I think by 2020, if oil stops we can survive," Prince Mohammed said.
"We need it, we need it, but I think in 2020 we can live without
oil."
