Efficient industrial energy use: the first step in transitioning Saudi Arabia's energy mix

Efficient industrial energy use: the first step in transitioning Saudi Arabia's energy mix

Type	Journal Article
Author	Walid Matar
Author	Frederic Murphy
Author	King Abdullah Petroleum Studies and Research Center
URL	Free Full Text Source:  http://www.kapsarc.org/en/Publications/KS-1519-DP013A-Efficient%20Industrial%20Energy%20Use_The%20First%20Step%20in%20Transitioning%20Saudi%20Arabia%E2%80%99s%20Energy%20Mix.pdf
Date	2015
Abstract	External observers worry about whether Saudi domestic consumption of oil will crowd out exports. This is based on simple extrapolations which suggest that in a little more than 20 years Saudi Arabia may become a net importer of hydrocarbon fuels. However, our research does not support this. Based on the “baseline scenario” macroeconomic assumptions in Oxford Economics’ global economic and industry models, we project Saudi Arabia’s energy balances until 2032 using the KAPSARC Energy Model (KEM). We analyze several cases: - continuation of current pricing policies; - immediate deregulation of fuel prices; - phased deregulation of fuel prices; and - a combination of incentives and small price increases that capture many of the benefits of deregulation. Our projections suggest that implementing these alternative fuel - pricing and technology investment policies would likely encourage the adoption of more efficient power generation and water desalination technologies. The alternative policies alter the transfer prices of fuels between sectors, but maintain the prices at which energy is sold to households. Future analyses will examine the next logical step of adjusting household energy prices in transitioning Saudi Arabia’s energy economy to match the efficiency of developed nations. For the Saudi energy economy, we find these alternative policies achieve a total economic gain that ranges between $430 billion and $505 billion (in real USD 2014), compared with continuing the current policies. Policies that manage transition can therefore be implemented without materially reducing the economic benefits. Figure 1 deals with Saudi domestic consumption of oil and gas. Our model produces results that are very different from a simple growth extrapolation. According to our results, the continuation of current pricing policies (in real terms) leads to the consumption of 7.8 million barrels of oil equivalent per day (MBOED) domestically in 2032, whereas the growth extrapolation gives a domestic consumption of 12 MBOED. When the continuation of current real pricing of fuels to industrial sectors is assumed, our research suggests utilities will mitigate the growth in oil and natural gas consumption through the conversion of inefficient, single - cycle gas turbines to combined - cycle plants and by installing new combined - cycle plants. The alternative policies examined are seen to lead to a decrease in domestic consumption of oil and gas in 2032 by up to 2.07 MBOED, compared with continuing current policies. Made profitable by the alternative policies, renewables and nuclear power enter the generation mix. As a result, oil exports can be maintained in the future at current levels. Our analysis does not consider the implications of new higher residential and transportation efficiency standards on end - user demand. This means that future domestic consumption could even be significantly lower than projected by the model. Our results could be used as a benchmark for an efficient energy transition in the Kingdom. They apply whether decisions to invest in new capacity follow a reform of transfer prices of fuels, or simply result from collective stakeholders’ decisions.