2018 DIVERSIFYING THE SAUDI ARABIAN ELECTRICITY SUPPLY AND ITS EFFECT ON THE RENTIER STATE MAGNUS BIGUM GYLDENKÆRNE COPENHAGEN BUSINESS SCHOOL MSC. THESIS – INTERNATIONAL BUSINESS AND POLITICS STU: 141.406 Magnus Bigum Gyldenkærne MSc. IBP Thesis Hand-in: 15 January 2018 Abstract This thesis concerns the future diversification of the Saudi electricity supply. Volatile global fossil fuel markets and increasing domestic demand for electricity have made the costs of a continued reliance on fossil fuels for near 100% of electricity production economically unsustainable. Applying Schoemaker’s model for Scenario Development, key issues, stakeholders, trends and uncertainties are identified and assessed. Economic factors include the price development in fuel production, assessed by the levelized cost of electricity (LCOE), global fossil fuel fluctuations, electricity demand and subsidies. Political factors include the stability of government, demographics, employment and the presence of religious, conservative values and norms. Political factors are analyzed by applying Rentier State theory, as well as theories on the legitimacy of Middle Eastern regimes. Five artificial scenarios for year 2030 are formulated and assessed, and the correlation between the diversifications of the electricity supply and the overall Saudi economy is also analyzed. The findings show that the most uncertain factors affecting the diversification of the Saudi electricity supply are the global fossil fuel prices and the resolve of the Saudi government and population to fulfill the announced ambitions. Finally, the overall economic diversification and how it will end Saudi Arabia’s status as a rentier state is discussed, and future challenges to the Saudi monarchy are proposed. 1 Contents Abstract ......................................................................................................................................................... 1 List of Tables & Figures ................................................................................................................................. 3 Background ................................................................................................................................................... 4 Research Objective ....................................................................................................................................... 5 Research Question .................................................................................................................................... 6 Limitations ................................................................................................................................................ 7 Methodology ................................................................................................................................................. 8 Philosophical Perspective ......................................................................................................................... 8 Research Strategy ................................................................................................................................... 10 Research Design ...................................................................................................................................... 11 Literature Review .................................................................................................................................... 11 Data Collection ........................................................................................................................................ 14 Validity of Study ...................................................................................................................................... 15 Theoretical Framework ............................................................................................................................... 17 Sustainability Assessment ....................................................................................................................... 17 Scenario Planning .................................................................................................................................... 19 A Social Contract: Rentier State Theory .................................................................................................. 21 Political Legitimacy.................................................................................................................................. 25 Combining the theoretical approaches: Ensuring economic and political sustainability ....................... 26 Diversifying the Electricity Supply in Saudi Arabia ...................................................................................... 28 Defining the Issues .................................................................................................................................. 29 Government Budget............................................................................................................................ 31 Oil Price ............................................................................................................................................... 32 Sources of electricity ........................................................................................................................... 35 Subsidies ............................................................................................................................................. 38 Demographic Issues ............................................................................................................................ 39 The Social Contract ............................................................................................................................. 41 Stakeholders ........................................................................................................................................... 42 Saudi Government .............................................................................................................................. 42 Saudi Aramco ...................................................................................................................................... 44 OPEC .................................................................................................................................................... 45 Investors .............................................................................................................................................. 46 Trends ..................................................................................................................................................... 46 Key uncertainties .................................................................................................................................... 47 Fluctuations in fossil fuel prices .......................................................................................................... 47 Reaction of the Saudi population ....................................................................................................... 50 Commitment to diversification of the electricity production ............................................................. 51 Scenario Development ............................................................................................................................ 52 2 Magnus Bigum Gyldenkærne MSc. IBP Thesis Hand-in: 15 January 2018 High Fiscal Situation ............................................................................................................................ 54 Low Fiscal Situation ............................................................................................................................. 54 High Political Resolve .......................................................................................................................... 55 Low Political Resolve ........................................................................................................................... 55 Base Case Scenario.................................................................................................................................. 55 High/High Scenario ................................................................................................................................. 56 High/Low Scenario .................................................................................................................................. 56 Low/High Scenario .................................................................................................................................. 57 Low/Low Scenario ................................................................................................................................... 57 Plausibility of Scenarios .......................................................................................................................... 58 Decision Scenarios .................................................................................................................................. 59 Discussion: Deconstructing the Rentier State ............................................................................................. 60 Theoretical Implications and Final Comments............................................................................................ 63 References .................................................................................................................................................