Saudi Arabia Eyes a Future Beyond Oil

At a two-hour drive from Riyadh, Saudi Arabia’s capital, rows of solar panels extend to the horizon like waves on an ocean. Despite having almost limitless reserves of oil, the kingdom is embracing solar and wind power, partly in an effort to retain a leading position in the energy industry, which is vitally important to the country but fast changing.

Looking out over 3.3 million panels, covering 14 square miles of desert, Faisal Al Omari, chief executive of a recently completed solar project called Sudair, said he would tell his children and grandchildren about contributing to Saudi Arabia’s energy transition. “I’m really proud to be part of it,” he said.

Although petroleum production retains a crucial role in the Saudi economy, the kingdom is putting its chips on other forms of energy. Sudair, which can light up 185,000 homes, is the first of what could be many giant projects intended to raise output from renewable energy sources like solar and wind to around 50 percent by 2030. Currently, renewable energy accounts for a negligible amount of Saudi electricity generation.

Analysts say achieving that hugely ambitious goal is unlikely. “If they get 30 percent, I would be happy because that would be a good signal,” said Karim Elgendy, a climate analyst at the Middle East Institute, a research organization in Washington.

Still, the kingdom is planning to build solar farms at a rapid pace.

“The volumes you see here, you don’t see anywhere else, only in China,” said Marco Arcelli, chief executive of Acwa Power, Sudair’s Saudi developer and a growing force in the international electricity and water industries.

The Saudis not only have the money to expand rapidly, but are free of the long permit processes that inhibit such projects in the West. “They have a lot of investment capital, and they can move quickly and pull the trigger on project development,” said Ben Cahill, a senior fellow at the Center for Strategic and International Studies, a research institution in Washington.

Even Saudi Aramco, the crown jewel of the Saudi economy and the producer of nearly all its oil, sees a shifting energy landscape.

To gain a foothold in solar, Aramco has taken a 30 percent stake in Sudair, which cost $920 million, the first step in a planned 40-gigawatt solar portfolio — more than Britain’s average power demand — intended to meet the bulk of the government’s ambitions for renewable energy.

The company plans to set up a large business of storing greenhouse gases underground. It is also funding efforts to make so-called e-fuels for automobiles from carbon dioxide and hydrogen, notably at a refinery in Bilbao, Spain, owned by Repsol, the Spanish energy company.

Aramco’s computer scientists are also training artificial intelligence models, using nearly 90 years of oil field data, to increase the efficiency of drilling and extraction, thus reducing carbon dioxide emissions.

“Environmental stewardship has always been part of our modus operandi,” said Ashraf Al Ghazzawi, Aramco’s executive vice president for strategy and corporate development.

Still, pressure to accelerate the energy transition may grow in Saudi Arabia and elsewhere in the Middle East and North Africa, a region that has young, environmentally aware populations and that could be especially vulnerable to climate change.

“Countries from the MENA region, including Saudi Arabia, will face the impacts of climate change and extreme temperatures, water scarcity,” said Shady Khalil, lead campaigner for Greenpeace Middle East and North Africa, an environmental group.

Although it insists that petroleum has a long future, Saudi Aramco, the world’s largest oil company, seems to also be trying to signal that it is not locked in a pollution-belching past but is more like a Silicon Valley company focused on innovation.

Recently, the company invited a group of journalists to a presentation during which young Saudis described green practices like using drones rather than lumbering fleets of trucks when prospecting for oil or restoring mangrove swamps along tropical coastlines to soak up carbon dioxide.

In the last two years, Saudi Arabia has instructed Aramco to sharply pare back oil production to nine million barrels a day, in line with agreements in the group known as OPEC Plus. In January, Aramco announced that the Saudi government had told it to halt an effort to boost the amount of oil it could produce.

In Aramco’s view, these decisions are not harbingers of declining fossil fuel consumption. Executives insist that the company will continue to invest in oil and, at the same time, sharply increase output of natural gas.

These fuels will continue to “play a very important role” up till 2050 and beyond, Mr. Al Ghazzawi said, arguing that both renewables and oil and gas would be needed to meet growing demand. “We’ve always felt there has to be a parallel and concurrent investment in new and conventional sources of energy,” he said.

The executives said Aramco was well positioned for the coming decades. The combination of some of the world’s largest fields and careful stewardship, they said, means it can produce oil at very low cost — $3.19 a barrel on average. The company is also betting that it can make its oil more attractive by chipping away at the emissions caused by producing it — an attribute that is not rewarded by markets now but could eventually command a premium.

“I think ultimately the market will value low-carbon products and the pricing will become even more profitable,” said Ahmed Al-Khowaiter, Aramco’s executive vice president for technology and innovation.

It is easy to see why Aramco and the Saudi government would be wary of damaging a business that dates to 1938. Aramco continues to be one of the world’s most profitable companies: For the first quarter of this year, it earned $27.3 billion and said it would pay out $31.1 billion in dividends, mostly to its main owner, the Saudi government.

It follows, though, that if Aramco cuts back its investment in oil, it will be able to pay even higher dividends to the government that could be used in a wide range of efforts to diversify the economy.

Aramco says it will be putting around 10 percent of its investments into lower-carbon initiatives, but these moves have not shown up much in the financial results. “I just don’t think it moves the needle,” said Neil Beveridge, an analyst at the research firm Bernstein. “Oil production really accounts for the vast bulk of earnings.”

Some of Aramco’s initiatives are likely to take years to bear fruit, but conditions already look ripe for solar energy. Saudi Arabia has blazing sun and vast stretches of land that can be populated with solar panels. Add in a close relationship with China, which is supplying much of the renewable equipment including the panels at Sudair, and “they are building at a very low price,” said Nishant Kumar, a renewable and power analyst at Rystad Energy, a research firm.

Sudair, for instance, will sell its power at about 1.2 cents per kilowatt-hour, a near record low at the time it was agreed.

“They know very well that the economy can only be efficient if they can continue to take advantage of that ever-reducing solar energy cost,” said Paddy Padmanathan, a former chief executive of Acwa Power who is now a renewable entrepreneur.

The kingdom is betting that abundant, low-cost electric power could attract energy-intensive industries like steel. Acwa is helping to build what is likely to be the world’s largest plant for making green hydrogen, with an eye to exporting to Europe and other places with higher costs.

The only problem, analysts say, is Saudi Arabia is not moving as fast as it could be. Mr. Kumar figures that it may achieve only about half of the ambitious 2030 goal for solar installations. Wind is lagging even more. One reason: The government has not created the conditions that could bring in competing firms that might bolster output, analysts say.

Acwa, for instance, will be heavily relied upon for meeting the ambitious renewable targets. “We think it is difficult to ignore the operational — and financial risks,” analysts at Citigroup wrote recently. The company is listed on the stock exchange, but 44 percent is owned by the Public Investment Fund, the key financing vehicle for the initiatives of Crown Prince Mohammed bin Salman.

Still, renewable energy is already creating jobs. Acwa, for instance, has 3,840 employees with about 1,900 in Saudi Arabia. The opportunity to work in cleaner energy businesses appeals to younger Saudis.

Acwa set an example by installing large arrays of solar panels at a plant it recently built on the Persian Gulf to convert seawater into drinking water. Desalination requires enormous amounts of electricity; the solar energy reduces the need to tap into the power grid and, consequently, cuts emissions.

The developers of two adjacent plants are following suit. “Using this technology is very important,” said Nawaf Al-Osimy, chief technical officer of the plant known as Jazlah. “The more you use, the more sustainable it is.”