Saudi Arabia to cut oil spending as focus shifts to non-oil economy in $1tn splurge

Kingdom is expected to channel 73% of total estimated investments into non-oil sectors by 2030 in 'capex super-cycle', Goldman Sachs says

Saudi Arabia will look to boost digitalisation, transport and logistics with the kingdom's National Aviation Strategy which aims to attract more than $100 billion in investments. Reuters

Saudi Arabia is expected to invest more than $1 trillion in strategic sectors of its economy by 2030, spending less on its oil and gas industry as focus shifts to boosting non-oil sectors that will contribute to the kingdom's sustainable goals, a study from Goldman Sachs has shown.

In what the US bank called a "capex super-cycle", the Arab world's largest economy is projected to invest about 73 per cent of the funding into non-oil industries, up from a previous 66 per cent estimate, it said this week.

Spending in the oil sector, Riyadh's biggest source of revenue, is expected to decline by $40 billion to about $280 billion across the upstream and downstream sectors, it noted.

In particular, Goldman Sachs lowered its estimates for potential investments in the upstream oil and gas sector to between $190 billion and $220 billion, from the previous estimated range of $230 billion to $260 billion.

However, natural gas will remain “a key contributor to the country's decarbonisation, economic development and diversification plans", Faisal Al Azmeh, head of equity research for Central and Eastern Europe, the Middle East and Africa at Goldman Sachs, wrote in the report.

Investments in clean energy sectors, which include renewable energy, clean hydrogen and carbon capture, is projected to receive about $235 billion in funding, up nearly 60 per cent from a previous forecast of $148 billion, it said.

Riyadh has doubled down on its renewable energy agenda over the past year, with the US investment bank identifying about 11 gigawatts of solar photovoltaic capacity in the execution pipeline. That is in addition to 16.7GW in solar and wind capacity, which is in the planning stages.

"The capex super-cycle will likely remain an important theme in Saudi Arabia for the foreseeable future,” Goldman Sachs analysts said.

Saudi Arabia, which is diversifying its economy away from oil under its overarching transformation programme, has introduced reforms to improve its business environment and boost foreign investment in the kingdom.

It is broadening its industrial base and aims to bring more foreign direct investment into some of the giga-projects it is executing as part of the Vision 2030 plan.

The energy industry in the kingdom, Opec's biggest oil exporter, is also moving rapidly towards cleaner forms of energy and environmentally friendly solutions as the world transitions to a lower-carbon future and focuses on sustainable development goals.

The kingdom in 2021 said it planned to neutralise carbon emissions by 2060. Saudi Aramco, the world's biggest oil-producing company, joined the efforts that year, pledging to achieve net-zero carbon emissions by 2050.

Last week, the Ministry of Investment approved an updated investment law into one framework intended to provide investors with greater transparency, flexibility and confidence, levelling the playing field for domestic and international investors.

The Goldman Sachs report indicated that metals and mining, digitalisation, and transport and logistics – sectors that are key to the kingdom's economic diversification drive – are expected to get $170 billion, $164 billion and $200 billion in investments, respectively, by 2030.

Mining, in particular, is poised for a major increase. Saudi Arabia is planning to award more than 30 mining exploration licences this year, Industry and Mineral Resources Ministry Undersecretary Khalid Al Mudaifer said in January.

Riyadh at the time also announced a $182 million mineral exploration incentive programme, in an effort to attract more foreign players and encourage further investment in the sector.

Transport and logistics is another area of focus for Saudi Arabia as it seeks to become a global logistics hub and an international travel destination. The kingdom's National Aviation Strategy has set out a goal of attracting more than $100 billion in investments for opportunities across airports, airlines, ground services, air freight and logistics.

Goldman Sachs said the spending spree by Saudi Arabia would not necessarily be straightforward. The kingdom is facing an estimated funding gap of $25 billion a year and might have to look for alternative sources of financing for its capex super-cycle, Goldman Sachs added.

With oil prices hovering in the $80 to $85 range and production down to nine million barrels per day, the kingdom is experiencing "a modest rise in pressure on the government’s budget", the report said.

Goldman Sachs estimates the kingdom's budget deficit to widen to 4.3 per cent of gross domestic product this year, from 2 per cent last year. About 2.6 percentage points of the deficit is the result of increased spending, with the rest driven by lower oil revenue, it said.

"It’s uncertain how a higher deficit will affect the pace of planned investments," Goldman Sachs analysts said.