A $500-billion smart city. A $200-billion solar farm. Billions of dollars in investments in gas and petrochemicals. These were all facets of Saudi Arabia’s Vision 2030—perhaps the most ambitious economic diversification in the world. Now, that ambition is in tatters. Can Saudi Arabia pick up the pieces and truly diversify its economy away from oil, or are its plans dead in the water, leaving the Kingdom’s survival forever tied to oil revenues?

Earlier this week, Saudi Arabia’s Aramco said it would shelve an investment of several billion dollars in Sempra Energy’s Port Arthur LNG terminal. It also said it would delay investments in a $20-billion refining and petrochemical project at home, at its Yanbu hub. The reason: cash conservation.

Earlier this year, Riyadh government sources told the Wall Street Journal that Saudi Arabia was not pursuing its $200-billion solar farm project it had conceived in partnership with Japan’s SoftBank. Nobody was working on the project, the sources said, and Riyadh was discussing a replacement with several smaller solar projects.

The $500-billion smart city project, Neom, is still on the table, it appears. The Kingdom’s oil ministry recently said it would help fund the project and make sure it was completed on time.

Neom is the flagship project of Vision 2030, Prince Mohammed’s brainchild aimed at reducing Saudi Arabia’s reliance on oil revenues. Ironically, this diversification drive relied on precisely these oil revenues to materialize. And now that these revenues have been significantly reduced because of the effects the coronavirus pandemic had on oil demand, Prince Mohammed’s vision is under threat.

There was always some doubt Saudi Arabia would be able to pull all of these projects off. They were simply too expensive, even for its massive sovereign fund. Of course, it was never assumed that the Kingdom would finance all of these major initiatives by itself, but it did rely heavily on Aramco—on its revenues and, of course, its public listing.

The company went public last year but with half the shares that were initially supposed to be listed. It did well in the beginning, becoming the world’s most valuable company. The oil price crash, however, led to Aramco’s share price crash. Pretty much all oil stocks crashed this spring, so that was not unique to Aramco. But what was special about it is that a whole economic diversification program hinges on it—utterly and completely. Aramco also has hefty dividends to pay, but cash is now tight.

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More projects are being delayed, too, projects that don’t have anything directly to do with Saudi Arabia’s economic diversification. These are projects that have to do with Aramco’s international expansion.

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The company is reviewing a $6.6-billion petrochemical production plan for its Motiva refinery in the United States, the Wall Street Journal reported this week, citing unnamed sources familiar with the company’s situation. The company is also freezing for a year its plans to boost oil production capacity to 13 million bpd. This decision, of course, is hardly surprising given the state of global supply and demand, and more importantly, the outlook for the latter. It is, nevertheless, telling of Aramco’s—and Riyadh’s—step back from their diversification ambitions.

It is an interesting development: a couple of years ago, there was concern among some observers that higher oil prices would discourage the Kingdom from pursuing its Vision 2030 diversification due to complacency, as history has proven time and again.

“When countries kick-start reform programs when oil prices are low, sometimes the enthusiasm wanes when commodity prices move higher. That is potentially a risk here. It will take continued focus on discipline to maintain many of those initiatives with higher oil prices,” Fitch Ratings’ global head of sovereign ratings said in 2017.

But the real threat to its grand diversification plans turned out to be exactly the opposite—lack of funds caused by low oil prices.

Perhaps Saudi Arabia’s enthusiasm did not exactly wane when prices were high: news of a multibillion-dollar project continued to flow in as the Kingdom sought to secure future markets for its main export product.

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And then the second price crash in five years came.

For the second quarter of this year, Saudi Arabia booked a deficit of $29 billion. Its GDP is shrinking, as it is across the oil-rich and oil-dependent Gulf. Austerity measures are back, spending cuts are being made, and Aramco must pay a dividend of $75 billion as it promised when it listed 5 percent of its stock in December last year. The company has to keep up these annual payments for the next five years. It doesn’t have the luxury of cutting these dividends like the international oil majors because its majority shareholder is the Saudi government and Aramco is its primary income source.

With all these stressors, is Vision 2030 still on the horizon?

It is, but it may well stay there like a mirage. A low-price environment is the right one for diversification efforts, but these efforts in Saudi Arabia are incredibly costly because of the scale of the program. Perhaps Riyadh will choose flexibility and substitute some of these multibillion-dollar projects for smaller ones, the way it reportedly did with its solar plans.

That might be the most sensible path to take, after accepting an economy cannot change overnight, even if you have hundreds of billions of dollars to spend on this change. Economic diversification takes not just money but time, as well as realistic planning. Hopefully, the pandemic taught the world’s second-largest oil producer a valuable lesson about unforeseeable events and their effect on diversification plans.

By Irina Slav for Oilprice.com

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