The Mariana Trench – the 6 mile deep canyon in the Pacific Ocean, not the misspelled pop band – is notable for at least two things: First, The Onion, the world’s best “alternative” news site, described it as “once again the worst place to raise a child” and secondly, it may be the only place in the world yet to be explored for hydrocarbons.
True; there are probably other undrilled places like the top of Mount Everest or under St. Paul’s cathedral. But considering that the largest global petroleum finds of the last 30 years were from places like Kazakhstan, Angola and offshore Brazil, there clearly aren’t many new places to hunt. The eagerness with which the super majors re-entered Iraq after the Gulf War was telling; there can’t be many sizeable options left if the top-ranked investment locale is covered in still-smoking shell craters.
While the global petroleum search touched most corners of the earth, Saudi Arabia was the cornerstone of the petroleum world. Two hundred and sixty billion barrels of reserves, which they could add to at will but why bother. Saudi Arabia has been central to the world’s absolute confidence that we would never be without cheap energy. Every gold-plated Ferrari driven through the streets of London by some Saudi prince-brat was a soothing reminder that such piggery was proof that the Saudis were indeed in control.
Things are changing fast, however. The Kingdom began acting weird in 2014 when it abruptly changed its mind about supporting oil prices and let them crash. This was taken as a panicked response to shale and oil sands growth, as well as every other marginal development that came on stream at >$100/barrel oil.
Since then the pace of change has been remarkable. All signs point to a nation no longer confident in its reserves and doing anything it can to prepare for a future without them. All without saying so directly, of course.
The most recent news item to fall under the weird-even-for-the-Middle-East category is that SA is planning to spend approximately $80 billion over the coming decade or so on nuclear power. This warrants some further thought.
It makes sense for SA to work on diversifying away from crude oil for reasons beyond reserves. First, crude is becoming a villain around the world. There is a risk, a tiny but real one, that forces could overcome the demand for a sizeable portion of the world’s oil through, for example, revolutionary new battery technology or similar. It therefore makes sense for SA to develop other energy sources in its formidable arsenal.
Two sizeable ones spring to mind, both consistent with a lower carbon future – natural gas and solar energy. SA has substantial reserves of natural gas, and I won’t reference any data because the numbers may be as suspect as their crude ones, but nevertheless there is much potential for cheap natural gas production. As for solar, it borders on imbecilic to point out how vast those reserves are. They obviously know this too; the country has committed $50 billion to wind and solar power generation. To make solar or wind useful, the bugbear of modern renewables, SA also would have the option of pumping seawater into tanks as a turbine generating electrical system as well. That may not be cheap or efficient, but…
…it would surely be cheaper than building nuclear reactors from scratch, particularly with all the oil, natural gas, solar, and wind resources there for the taking. It makes as much sense as Monaco bulldozing the Monte Carlo Casino to plant potatoes. The announcement provoked several responses; a general “huh?” from the energy industry, and a kid-at-Christmas response from nuclear reactor salesmen, a lonely group that these days makes Willy Loman look like the class clown. Due to successful fear marketing, new nuclear installations are few and far between.
The biggest indicator though that SA is moving out the furniture at midnight, is the upcoming partial privatization of Saudi Aramco. The timing makes little sense. The difference in valuation between 5 years ago and now is almost too big to count. Then, oil was in triple digits and talk of $200/barrel oil was not considered crazy, and Saudi Aramco would have been worth trillions. Today, the forward curve is as flat as can be around $50, and there are question marks in some circles as to whether that oil will ever be used. Those circles consist of the hardcore wing nuts who think we can get off fossil fuels in a decade, but those same wing nuts are extremely good at fear mongering and they get listened to. Regardless, it is a strange time to be putting lipstick on the pig when it clearly is down to three legs.
These changes could of course be part of their “Vision 2030” plan which outlines their agenda to develop the country beyond the current oil/religion/Bugatti framework to an investment powerhouse that becomes a trading hub for three continents (with generous helpings of religion, of course). The Three Pillars of the vision make no mention of oil. The odd thing about Vision 2030 is that it hardly mentions energy at all, other than a few offhand remarks about the value of their natural resources “including gold, phosphate and uranium.” Oh yeah there’s that oil stuff but – phosphate! Imagine!
Diversifying an economy is a smart thing to do, and hats off to the Saudis for trying. Maybe it is the smartest path to now sell off Saudi Aramco given the potential to have reserves stranded. Maybe it makes sense to spend a hundred billion on nuclear and renewable power, while not developing their natural gas fields.
Whatever the ultimate outcome is though, it’s a remarkable shift in the energy world. As leader of OPEC, SA still has the power to manipulate oil prices any which way – it could shut in half its production tomorrow and we’d have $100 oil again, or announce an end to production quotas and send it crashing to $20. That ability was, until a few short years ago, the handiest threat and tool of the country. No other nation can singlehandedly mess with the world’s economic lifeblood so easily. To see them turning their back on that strategy that has worked very well for them for 40 years is remarkable as is their combined $130 billion commitment to nuclear, solar and wind energy.
With tensions growing between SA and not only Iran but now Qatar as well, the last thing the region needs is more instability. Maybe the young new ruler, raised on golden Ferraris, was simply bored and wanted to shake things up. It might turn into quite a show.
Read more insightful analysis from Terry Etam here