Saudi Arabia's energy system must undergo a significant transformation to meet its net-zero target by 2060, with renewable energy set to play a crucial role. The country is projected to exceed its 2030 target of 58.7GW of renewable energy generation.

Alongside renewables, the government is also focusing on expanding the electric vehicle (EV) industry. The Public Investment Fund (PIF) has allocated $1b to localise EV production, and in 2022 Saudi Arabia launched its own EV manufacturer. Additionally, PIF owns more than 60% of Lucid, a US-based EV maker that has opened a production facility in Saudi Arabia. The Saudi Ministry of Investment has also secured a $5.6b deal with a Chinese EV manufacturer to collaborate on local EV production.

Beyond energy, the Saudi government sees the minerals industry—especially critical minerals—as a key economic driver, third only to oil exports and petrochemicals. A mineral strategy was introduced in 2016, making critical minerals a core pillar of development.

The dominance of state-owned enterprises and the continuation of fossil fuel subsidies restrict private sector engagement

The estimated value of Saudi Arabia’s mineral reserves exceeds $2.5t. To tap into this potential, the Ministry of Industry and Mineral Resources launched the Regional Geological Survey Programme, covering more than 25% of the country's landmass. In 2024, the government announced the National Minerals Program to strengthen the mineral supply chain, secure domestic mineral needs and ensure a stable supply to local industries.

The plan includes $32b in investment for the sector. Saudi Arabia's mineral resources could meet 4% of global iron and aluminium demand, with further exploration potentially raising its contribution to global copper and zinc supplies to 6%.

To enhance competitiveness and support its evolving energy landscape, Saudi Arabia has introduced local content requirements. These requirements are used as eligibility criteria for government tenders, encouraging localisation and attracting foreign direct investment (FDI). This initiative is designed to accelerate Saudi Arabia’s progress towards a sustainable and diversified energy system.

Key drivers

There are eight key drivers that have propelled Saudi Arabia towards an energy transition. These drivers operate at different levels. At the macro level, factors include oil price volatility, global political and environmental pressures, and advances in renewable energy technology worldwide. At the meso level, domestic drivers such as the growing demand for energy, the need for additional fiscal revenue, and the negative fiscal impact of fossil fuel subsidies have been significant. At the niche level, small-scale renewable energy projects and the exploration of minerals in Saudi Arabia have emerged as additional motivators. Each of these drivers contributes to shaping Saudi Arabia's evolving energy system.

While Saudi Arabia is endowed with abundant oil reserves and continues to generate significant economic rent from oil, it is also able to maintain a competitive edge with a low upstream lift cost of just $2.8/bl and low carbon intensity. This cost advantage will allow Saudi Arabia to be one of the last economies to exit the oil market as global demand declines. Despite this, Saudi Arabia has demonstrated a commitment to transitioning its energy system in line with global trends.

The momentum towards reducing fossil fuel dependence has driven Saudi Arabia to take steps to diversify its economy and reduce its reliance on oil. However, oil will continue to be a vital source of fiscal revenue in the foreseeable future. Bassam Fattouh, director of the Oxford Institute for Energy Studies, outlines how oil-producing economies can remain competitive during the energy transition era. The strategy is built on five pillars: increasing efficiency across the oil and gas (O&G) value chain, decarbonising O&G production, enhancing domestic energy efficiency, expanding the oil value chain and adopting the circular carbon economy (CCE) framework.

Saudi Arabia's petrochemical giant, SABIC, already plays a critical role in the backend of the petrochemical industry but has the potential to extend its value chain to cover front-end production as well. Petrochemicals offer a key hedging strategy against the global shift away from oil, providing a sustainable business opportunity as oil demand wanes. Given Saudi Arabia’s low barrel cost, expanding the petrochemical value chain could be particularly lucrative and help position the country for long-term success in the energy transition.

Neither the PIF nor Saudi Aramco serves as the primary driver of Saudi Arabia's energy transition. Instead, the Saudi government, specifically the Ministry of Energy, plays the leading role in setting policies and initiating energy transition efforts, with the PIF and the private sector following and implementing these directives. Saudi Aramco, alongside other private sector players, is focused on enhancing the efficiency of its value chain and exploring business opportunities beyond its traditional O&G model. Meanwhile, the PIF is tasked with spearheading the adoption of low-carbon technologies—including EVs, renewable energy, and other clean technologies.

$2.8/bl – Saudi upstream lift costs

The policy development process in Saudi Arabia's energy sector follows a top-down approach, where government authorities, particularly the energy ministry, steer the direction of the sector. The private sector, including large state-owned enterprises such as Saudi Aramco, supports national priorities, contributing to the broader economic objectives. The Saudi Green Initiative and the CCE framework further highlight the government's role in leading the energy transition, with private sector players and sovereign wealth funds supporting these efforts. This reflects the state-led energy transition model prevalent across the Gulf Cooperation Council countries, where governments define policy frameworks and financially back the transition.

However, this top-down model has a notable limitation: low participation from the private sector in shaping the energy transition. The dominance of state-owned enterprises and the continuation of fossil fuel subsidies restrict private sector engagement. This lack of involvement could reduce the potential benefits of FDI, capacity building, and knowledge transfer, placing a long-term financial and economic burden on the government.

In contrast, the US Inflation Reduction Act promotes private sector involvement through mechanisms such as the Investment Tax Credit, which incentivises participation in low-carbon systems. To accelerate Saudi Arabia's energy transition, increasing private sector participation through incentives for both local and international firms is crucial. This would distribute the financial load and drive innovation and investment in clean energy solutions.

This article is the second 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. Click here to read the first part.

---

Author: Nawaf Bin Awshan