Saudi Arabia holds one-sixth of the world’s oil reserves and remains a major player in the global oil market, producing 9.61m b/d of crude oil in 2023. The discovery of the Dammam oilfield in 1938 marked the beginning of Saudi Arabia's economic transformation, driven by oil.

This development led the country to become a founding member of OPEC in 1960. Over the decades, oil revenues fuelled significant economic growth, positioning Saudi Arabia as a member of the G20 with a GDP of $1.07t in 2023. In fact, oil revenues accounted for 62.29% of the national budget in 2023, underscoring the country’s deep reliance on the sector.

However, the Saudi government has recognised the economic and environmental risks of this dependence, including vulnerability to oil price fluctuations and the environmental consequences of being one of the largest carbon emitters. In 2021, Saudi Arabia ranked as the world’s 11th-highest CO₂ emitter, releasing 497.25mt of CO₂. This realisation prompted the launch of Saudi Vision 2030 (SV2030) in 2016—a national strategy aimed at diversifying the economy and reducing reliance on oil. A central pillar of SV2030 is the energy transition, with a focus on shifting to a low-carbon energy system.

Climate change, which is driving extreme weather events, has made the energy transition an urgent global socioeconomic and technological necessity, especially in countries such as Saudi Arabia, which is already feeling the heat.

The global energy transition, however, presents considerable challenges for oil-exporting economies, particularly in the hydrocarbons sector. Global oil demand could peak as early as the end of this decade, according to some long-term outlooks, and if so could lead to falling oil prices. This, in turn, could destabilise the fiscal health of oil-dependent countries. Oil plays a critical role in economic development, particularly in sectors such as transport, where demand remains strong in the medium term.

The risk of peak oil demand poses a risk to economic stability for economies such as Saudi Arabia, where oil exports constitute a significant portion of GDP. Saudi Arabia’s sensitivity to oil price fluctuations is significant; one 2016 macroeconomic analysis found that a 60% drop in oil prices would reduce the country’s GDP by 14.5%. For oil-exporting nations with limited economic diversification, the effects of oil price volatility can be particularly severe. The most effective solution to reduce this sensitivity is economic diversification—lessening the reliance on oil revenues.

Another approach to mitigating the impact of fluctuating oil prices is reforming government spending. Oil-exporting countries such as Saudi Arabia should adopt counter-cyclical fiscal policies—where government spending increases when oil prices are low and decreases when prices are high—replacing the procyclical policies currently in place.

Despite the challenges, the global energy transition also offers Saudi Arabia opportunities to emerge as a diverse energy hub. Saudi Arabia holds the world record for the levelised cost of energy and has abundant renewable energy sources, providing a unique advantage. The country has the potential to become a global leader in renewable energy as well as blue and green hydrogen. One study in 2020 projected that covering just 1.24% of Saudi Arabia’s land with solar panels could generate 470GW of solar energy, highlighting the vast potential for renewable energy development.

The energy transition will also impact the NOCs of oil-dependent nations, including Saudi Aramco. The transition's effect on NOCs is expected to be more profound than on oil-exporting countries as a whole, given their core business is oil production. The dilemma is thus: should NOCs become early adopters of the energy transition or wait until the new energy landscape matures? Saudi Aramco, like other NOCs, must accelerate its transition for three key reasons.

First, NOCs should ensure revenue sustainability by diversifying their portfolios to include oil and gas alongside carbon-negative solutions and new low-carbon technologies. Second, securing sustainable funding is critical and lowering operational greenhouse gas emissions will allow NOCs to attract lower-interest bonds, as investors increasingly favour low-carbon companies. Finally, NOCs should prioritise national interests over external pressures by establishing venture capital initiatives to drive domestic green investments.

Inevitable change

The Paris Agreement of 2015 allowed each country to design its own energy transition strategies. Some nations have crafted feasible plans tailored to their unique social and economic contexts. However, the global energy transition is struggling due to the failure of a uniform strategy. As Aramco CEO Amin Nasser noted: "In the real world, the current transition strategy is visibly failing on most fronts as it collides with five hard realities."

Oil and gas continue to play a significant role in boosting the prosperity of developing economies, particularly in the Global South. Nasser emphasised that global policymakers should reconsider the idea of phasing out oil and gas, as demand is expected to grow in the coming years. For countries with abundant oil reserves, such as Saudi Arabia, a viable transition strategy should enable them to continue benefiting from oil revenue while adopting a cleaner value chain.

Saudi Arabia, the largest oil producer within OPEC, was the third-largest oil exporter globally in 2021. That same year, its carbon emissions dropped by 9.09% compared with 2015, when emissions reached 531.4mt CO₂. In response, the Saudi government launched the Saudi Green Initiative, a central component of SV2030, aimed at reducing emissions. A key policy under this initiative targets an annual reduction of 278mt CO₂e by 2030 (relative to 2019 levels) and the planting of 10b trees by 2060. The government also committed to achieving net-zero emissions by 2060. By 2030, Saudi Arabia aims to generate 50% of its electricity from renewable sources, with the remaining 50% coming from gas.

In 2020, during its G20 presidency, Saudi Arabia introduced the Circular Carbon Economy (CCE) framework, which was endorsed by other G20 member nations as a roadmap to reduce carbon emissions. The CCE framework is based on the four Rs:

Reduce: Cutting greenhouse gas (GHG) emissions by adopting better technologies, such as renewables and nuclear, and improving energy efficiency.

Reuse: Converting carbon emissions through carbon capture and utilisation.

Recycle: Offsetting carbon emissions by integrating new energy sources, such as bioenergy and energy carriers.

Remove: Eliminating carbon emissions through CCS.

The Public Investment Fund (PIF) is pivotal in driving Saudi Arabia's economic diversification and achieving SV2030 goals. With a target of reaching $2t in assets by 2030, the PIF is investing heavily in green sectors, with a focus on renewable energy. It also aims to achieve net-zero emissions (scope one and two) by 2050 for all assets and investments. As part of its contribution to the national target of 58.7GW of renewable energy by 2030, the PIF owns a 50% stake in Saudi Arabia’s ACWA Power, a major player in renewable energy. In 2022, the PIF also launched its Green Finance Framework, which facilitates the issuance of green bonds and other debt instruments, as well as the Regional Voluntary Carbon Market Company to establish a carbon market in the Middle East.

Saudi Aramco has committed to achieving net-zero scope one and two emissions by 2050. Its energy transition framework is built on four key pillars:

Differentiate: Leading efforts to reduce upstream carbon intensity by enhancing energy efficiency, reducing flaring and managing emissions.

Sustain: Cutting emissions across the entire value chain by using renewable energy and incorporating hydrogen and ammonia products.

Diversify: Developing a low-emission value chain through material transition and converting liquids into chemicals.

Enable: Investing in low-carbon solutions such as CCS and carbon markets.

Aramco is at the forefront of adopting CCUS technology in Saudi Arabia. The company plans to open a facility in Jubail by 2027 that will capture 9mt/yr of CO₂, with plans to expand to 44mt by 2035. Additionally, Aramco is focusing on blue hydrogen production. A significant portion of the gas produced from the Jafurah Gas Development Project, a $100b initiative, will be used for this purpose. In 2020, Aramco also exported its first shipment of blue ammonia to Japan.

This article is the first in a three-part series based on a Master’s thesis of Nawaf Bin Awshan, completed with a distinction in the Energy Systems course, Department of Engineering, University of Oxford. Dr Adi Imsirovic and Dr Anupama Sen were his supervisors. Dr Imsirovic edited the thesis down for publication.

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Author: Nawaf Bin Awshan