OIL

How a deal with GE sheds light on Saudi Arabia's life after oil

Last November, General Electric Co. announced the completion of an initial $1 billion investment in Saudi Arabia, the world's largest crude oil exporter.

The Saudi GE Technology and Innovation Center aims to help modernize the nation's electric grid and make inroads in industrial applications and health care. The U.S. conglomerate wants to double its Saudi Arabia workforce in four years, getting a strong foothold as Saudi Arabia moves aggressively to diversify its economy and government revenues away from oil exports.

The aim is to free Saudi Arabia from the pitfalls of oil's boom-bust cycles by as early as 2020.

To GE CEO Jeffrey Immelt's ears, the Saudis' rapid realization that oil revenue alone cannot guarantee a stable economy is a signal for GE to invest big in the kingdom.

"Our initiatives are aligned with the strategic development priorities of the kingdom," Immelt said.

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Information has been trickling out about Saudi Arabia's economic plans. And according to The Wall Street Journal, the government is expected to provide more detail about reforms in the coming weeks. What we do know is this: Saudi Aramco, the largest oil exporter in the world, will sell off a 5 percent stake to investors, and the revenue will seed a $2 trillion sovereign wealth fund designed to stabilize government revenues.

What's being called the Vision 2030 plan is also meant to attract foreign direct investment, like the kind from GE. There's even talk of expanding tourism beyond the religious pilgrimages to Islamic holy sites.

Saudi officials have said that as early as 2020, the country could rid itself of dramatic budget shortfalls and economic pain whenever the price of oil falls. Saudi Arabia ran a nearly $100 billion budget deficit last year, and the plunge in oil prices has forced the government to draw down on reserves and tap global credit markets for the first time in decades.

Oil prices have fallen nearly 70 percent since the summer of 2014, partly as a result of a Saudi strategy to keep pumping oil and drive out high-cost U.S. shale oil producers. Crude has rebounded, but prices struggle to stay above $40 per barrel, after selling at around $100 a barrel a couple of years ago.

Economic diversification could be a tall order for Saudi Arabia, according to economists.

In its World Factbook, the Central Intelligence Agency estimates that Saudi Arabia's central government relies on oil exports for more than 80 percent of its revenues. Oil and petroleum products constitute 90 percent of exports, and the oil business generates 45 percent of Saudi Arabia's gross domestic product.

The CIA notes that Saudi Arabia has made inroads into greater economic diversification but says much of it revolves around the energy industry: power generation, telecommunications, natural gas exploration and petrochemicals. Putting citizens to work is also a high priority. The CIA estimates that up to 80 percent of Saudi Arabia's workforce is "non-national."

That is where GE's plan to hire locals caught the kingdom's attention. GE says it wants to boost "training in energy, health care and localized research for over 10,000 Saudi professionals through local and global programs."

Middle East expert Jim Krane, a professor and energy studies fellow at Rice University's Baker Institute, argues that the press reports on the Saudis' economic drive exaggerate the extent to which the country is turning away from oil. Saudi Aramco has been diversifying its business up and down the petroleum value chain, he noted, expanding into refining and petrochemicals. It's branching out into retail gasoline and diesel sales, including in the United States.

"They want to sell a piece of [Saudi Aramco] off, but they also want to vertically integrate it so it's like a big company that's got businesses all the way upstream, all the way downstream," Krane said.

This strategy will help Saudi Arabia secure market share for its heavy sour crude oil in growing economies, particularly in Asia.

But Krane added that Saudi Aramco's managers have fretted about the future of oil demand for some time.

"They are worried about peak demand, and they're also worried about climate change policies," he said. "When they look at the long term, they see an increased risk to their main business line, so for the Saudis it makes more sense, I think, to shift gears a little bit."

So-called peak demand says that a shift to less carbon-intensive economic growth will result in global crude oil demand peaking and then gradually begin declining over the next decade or two (EnergyWire, May 28, 2015).

The investment partnership with GE shows how serious the kingdom is at becoming less reliant on oil and petroleum products exports as a driver of the economy. The deal sees GE helping the country on manufacturing and exports of components for heavy GE energy equipment such as gas turbines. The goal is $100 million worth of exports and an expanded local supplier base.

How Saudi Arabia proceeds in diversifying its economy could serve as a model for its neighbors. Krane said the 80 percent government revenue, 40 percent GDP dependence figure is about average for the major oil exporting nations of the Gulf Cooperation Council.

Email: ngronewold@eenews.net

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