University of Surrey Multi-Disciplinary Design Project 2018/19 Saudi Arabia After Oil Final Report – Group 1 Group Members Supervisors Umar Ahmed Professor Jonathan England Faizal Mohammed Amin Professor Zoran Milosevic Daniel Caplin Amina Mohamed Osman Amr Mahmoud Soliman Saudi Arabia After Oil Group 1 Executive Summary Due to the Kingdom of Saudi Arabia’s (KSA) significant oil reserves, it is currently the world’s largest exporter of oil. However, this position is proving to be unsustainable. There are numerous reasons for this unsustainability. Firstly, oil reserves are declining with only 266.2 thousand million barrels remaining, which according to the reserve to production ratio, will only be sufficient for 61 years. Secondly, the cost of production in the KSA is currently one of the lowest in the world, however, due to ageing oil fields, the low production cost may not continue. Moreover, the demand for oil will peak between 2035-40 making it no longer strategic for the KSA to be a lead exporter for a product with diminishing demand. Thus, it is essential the economy of the KSA undergoes diversification so that the nation does not continue to rely on oil revenue alone for economic growth. The reliance on oil revenue poses a significant risk to the KSA as 44% of the nation's GDP is from the oil sector whilst also indirectly contributing to the entire economy. As a result of the dependence on oil, the government are the main employer of KSA citizens, which is unsustainable as the proportion of youth entering the workforce will increase in the future. Furthermore, unfavourable economy policy creates barriers for foreign investment and citizens are not taxed, decreasing the potential government revenue. From the evaluation of the current situation in the KSA, it can be concluded that there is an immediate necessity to reduce oil revenue dependant to prevent the circular economy from negatively affecting growth in the KSA. In order to sustainably reduce oil dependence, new industries require developing in the KSA which will be economically sustainable for the countries long term future. Following an investigation into the existing and potential industries in the KSA, 17 possible solutions were chosen and applied to a decision matrix. The decision matrix had 12 criteria, encompassing economic, social, environmental and implementation aspects, with each criteria being assigned an importance factor. Each industry was given a score out of 10 for every criteria which were then multiplied by the corresponding importance factor, resulting in a final score for each industry. The top two industries which the decision matrix deemed to be most suitable for the future of KSA was the petrochemical industry and the tourism industry. These two industries then underwent further detailed design. An implementation timeline was developed for KSA, briefly setting out development plans for the next 30 years. The timeline covers the period from 2020 to 2050, and in broad five-year periods establishes when development should begin on industries, and what that development entails. The most profitable industries, including petrochemicals and tourism, should begin development as early as possible, as well as the development and change of social policies which will add further benefit to the country. The implementation of the stated policies between 2020 to 2050 should provide KSA with a diversified economy by the time that oil demand is expected to start depleting in 2050. 1 Saudi Arabia After Oil Group 1 In order to develop the petrochemical industry in the country, refineries in Jubail and Ras Tanura will be expanded to increase production of more than 5 million tonnes of olefins and 2 million tonnes of aromatics. In Yanbu however, there will be a new crude oil to chemical complex greenfield site built, as opposed to an integrated expansion. The new complex will be the largest petrochemical producing site in the world built to cope with future demand, both locally and internationally. The combined cost of this expansion will be $34 billion and the overall payback time for the projects will not exceed 3 years and 10 months. The tourism industry of KSA has two sectors, Islamic tourism and general tourism. Islamic tourism is generated by the millions of people who visit Mecca and Medina every year to participate in Hajj and Umrah. Through the further development of these two cities, including expanding the capacity of the two Holy Mosques, construction of more pilgrim accommodation and improvements to infrastructure, such as metro links and airport expansions, millions more pilgrims will be able to come to KSA every year. Furthermore, by increasing options for general tourism tourists by opening up ancient historical sites which currently lie deserted and developing upon the pristine beaches and coral reefs which lie just off its west coast, the Saudi Arabian tourist industry will be a thriving revenue generator for KSA. Socio-economic issues are presented with Education, Women and Health being the topics of focus. A detailed recommendation and framework are made for the KSA to understand and follow. The aim is to boost the society’s productivity to contribute to the global economy. Not by copying foreign countries’ policies but by implementing successful methodologies of improvement. The framework acts as a guide to yielding successful education reform policies. The philosophy behind Islamic jurisprudence that restricts women’s contribution is revised and a simple health plan presents a solution to the KSA’s health needs. Investment for the petrochemical sector will primarily be sourced from state-owned companies including SABIC and Saudi Aramco, the KSA’s largest petrochemical company oil company respectively. The Islamic tourism sector will require investment from the government in order to expand the current infrastructure to hold more pilgrims and improve efficiency. Venture capitalist and private companies will provide the majority of the investment needed for the non-Islamic tourism sector. The proposed tourism and petrochemical expansion projects have a combined net present of 120 billion and the payback times for the proposed projects under 31 months after completion of construction of each project. A sensitivity analysis was undertaken for the proposed projects and it was concluded that lower than expected industry growth rates and low-profit margins will not severely detriment the profitability of the project. The overall cost analysis indicates that the projects are viable. 2 Saudi Arabia After Oil Group 1 Table of Contents Executive Summary.......................................................................................................................... 1 1 Saudi Arabia Oil Overview (AO, UA, AS) .............................................................................. 8 1.1 History of Saudi Arabia (UA) .......................................................................................... 8 1.2 Analysis of Oil Reserves (UA) ......................................................................................... 9 1.3 Cost of Production (AO) ................................................................................................ 10 1.4 Effects of climate change and renewable forms of energy on oil peak demand (AS) .... 12 1.5 Outlook (AO).................................................................................................................. 14 1.6 Key Issues ....................................................................................................................... 16 1.6.1 Economic (AO) ...................................................................................................... 16 1.6.1.1 Public Sector Reliance and Welfare State .......................................................... 16 1.6.1.2 Employment: Private vs Public Sector ............................................................... 17 1.6.2 Social (AS) ............................................................................................................. 17 1.6.2.1 Education (AS) ................................................................................................... 17 1.6.2.2 Women’s Rights (AS) ........................................................................................ 19 1.6.2.3 Health (AS) ......................................................................................................... 19 2 Analysis of Potential Industries .............................................................................................. 21 2.1 Methodology (FA) .......................................................................................................... 21 2.2 Results (ALL) ................................................................................................................. 24 2.3 Justifications ................................................................................................................... 25 2.3.1 Petrochemicals (AO) .............................................................................................. 25 2.3.2 Construction (AO) .................................................................................................. 25 2.3.3 Transport (AO) ....................................................................................................... 26 2.3.4 Manufacturing (AO) ............................................................................................... 27 2.3.5 Wholesale & Retail (UA) ......................................................................................