Special Report Q2 2019

Energy security enables civilizations to thrive, to push intellectual and geographical boundaries. The need for an unshakeable foundation of supply – of fossil fuels and increasingly, renewables – binds us all. Therein lies the deep-rooted relevance of the how the 4th Industrial Revolution (4IR) is unfolding in one of the world’s most successful and influential energy economies: the Kingdom of Saudi Arabia. 

"Our country is witnessing a giant transformation, which requires doubling the size and diversity of the national economy, including the mining sector, to meet the increasing global and domestic demand for energy through the development and diversification of the energy mix. This includes traditional hydrocarbon sources, as well as renewable energy sources and nuclear energy."

H.E. Khalid Al Falih
Minister of Energy, Industry & Mineral Resources, Kingdom of Saudi Arabia 

Data science. Mobile supercomputing. Intelligent robots. Industrial Internet Of Things (IIoT). Predictive Analytics. Self-driving cars. Electrification. All these are possible because of the 4IR; a digital overhaul that is reshaping the global energy market and how we work within it. Have no doubt: the transformation will be unlike anything humankind has experienced. For nearly half a century, since the 1970s and in alignment with Moore’s law, computer power has doubled every year. This means more data has been generated over the past two years than in all previous recorded history. At this staggering rate of positive disruption, one fact is clear: slow movers will be left behind. 
Energy markets must be agile, creative and collaborative. Cornerstones of society in Saudi Arabia and beyond – government, industry, academia and the public – must work together to leverage this digital gold dust. If managed correctly, it will make the value chain much safer and more efficient, affordable and environmentally-friendly than ever – all invaluable features amid escalating market pressures. For one, BP Outlook expects energy consumption in the Middle East alone will rise by 55% by 2040. Adapting and thriving amid this overhaul will not happen automatically. Hard but rewarding graft lies ahead.

Game changers
This is especially pertinent as the 4IR coincides with the greatest paradigm shift in the energy markets for more than a century: the energy transition towards a lower-carbon world. As per the ambitious and much-needed Paris Agreement, Saudi Arabia and other governments in the Middle East have bolstered their environmental agendas to promote renewables, energy efficiency and green financing, among many other efforts. This is an inspirational period for youngsters in the Middle East and North Africa (MENA), many of whom are seeking job opportunities and modern career paths. The same applies to more experienced staff as this uncharted territory enables them to flex their wisdom and knowledge, garnered over decades.

Saudi Arabia pioneered its way to the top of the global energy league table throughout the 20th century, reaffirming its pole position ever since. The question marks that lie ahead abound; many successful energy entities are understandably left scratching their heads over the how to merge fossil fuels and renewables affordably and efficiently. But as highlighted in this Special Report, Saudi Arabia has already taken innovative strides towards a larger yet environmentally sustainable energy market. As we near the 2020s, the kingdom’s pace will only accelerate, carving out an entirely new roadmap that can act as a beacon to other countries still finding their way. Watch this space.

Manus Cranny (MC): Your Excellency, is the Saudi Aramco deal to buy PIF’s stake in SABIC one of the seminal moments of transformation for Saudi Arabia?

Khalid Al Falih: The kingdom is going through a phenomenal transformation. You see it in social activities, in economic activities, amongst the youth, amongst business enterprises. You see it present in the reforms and every government agency. And you see it in the sound strategies that have always been on paper but that have previously found difficulty in getting implemented. Vision 2030 is now making it possible to implement these and one of those has been the dream to create the world’s largest oil and energy petrochemical companies. As a former CEO of Saudi Aramco, we had a vision within the company to create an integrated energy petrochemical giant that would add value to the hydrocarbon value chain. SABIC is the way to do this because there is a lot of overlap geographically and in terms of the molecule flow from upstream to midstream to downstream, as well as complementarity between the two portfolios. It would have been unthinkable a few years ago because SABIC has always been seen as a national champion with a standard of their own. But with the vision of breaking barriers and paradigms, it is now turning into a reality. This acquisition will realize synergies and integration opportunities not just for Saudi Aramco, but more importantly for SABIC and its minority shareholders. So, it is value creation all round and we hope to close the SABIC deal in the coming six months. 

MC: Will the funds that flow from this deal reenergize the ambitions of the kingdom to deliver on Vision 2030?

Khalid Al Falih: The vision of the PIF is very bold and goes way beyond the $69 billion that Saudi Aramco will provide through the SABIC deal. The vision is both domestic and global. It’s about the mega projects that will turbo charge many of the pillars of our future economy. This will need capital also from other assets that are non-strategic, that the PIF may own that they choose to exit. 

MC: What kind of assets? 

Khalid Al Falih: It’s premature to specify, but my point is that the PIF is going to be an active and not a passive investor. The objective is to create value for the kingdom, first and foremost, through in-country investments and also by looking globally and strategically to acquire emerging companies and industries, creating value for them. At the same time, leveraging those acquisitions and investments for the benefit of the kingdom’s strategy.

MC: Was the recent Saudi Aramco bond roadshow a curtain raiser to perhaps coming back to the bond market again?

Khalid Al Falih: I think Saudi Aramco will establish a permanent presence in the capital markets that will have both debt and capital. It is the world’s largest company and is obviously going to have all the tools at its disposal to access capital markets. Paying for the SABIC deal was not the primary or only reason for accessing the bond market; the company needs to lever up and have some debt and instruments on our balance sheet.

MC: In terms of the kingdom’s economic transformation, what are the ambitions for gas? 

Khalid Al Falih: There are two dimensions to gas. One is domestic where gas is the feedstock of choice for our petrochemicals. It’s low cost to crack and it’s plentiful and it’s reliable and we need to increase that. There is also a second wave of gas development that has emerged over the last few years by Aramco, which is to develop our own unconventional resources, mostly shale gas, in eastern Saudi Arabia, but also other formations in the north that have been used to fuel phosphate mining and manufacturing development. Gas is also the fuel of choice for power generation, so dry gas or natural gas will be used to displace 600,000 – 800,000 barrels of liquids that are going mostly to power, but some to water desalination. Both sectors will be reformed, and their efficiency improved dramatically, by changes in the fleet and power generation by switching a lot of our water desalination to reverse osmosis technologies.  The second dimension for gas is global. We realize that oil will continue to grow, but gas will grow faster.  

MC: Does that mean that you’ll have to buy assets globally?

Khalid Al Falih: Anything in excess of our domestic needs in power, water and petrochemicals, will be exported. We do see an opportunity to be a significant gas exporter.

MC: How soon can you achieve that?

Khalid Al Falih: I would say by 2025 is realistic. We’re already in discussions with our brothers in the GCC about interconnection through pipelines, all the way from Oman to Kuwait and Iraq.

MC: Have you committed a capex number to that?

Khalid Al Falih: Not yet, but we’ve dedicated the teams from our side and our colleagues from the GCC have indicated that they’re ready to start undertaking the technical studies. I think what will happen after that is the commercial framework through which gas is traded through pipelines in the region and this will be a significant move forward that the kingdom will enable because we are the country that interconnects most of the GCC countries and Iraq as well. The next phase beyond this is LNG trade. We know that growing and sizable economies around the world, from China to India and other countries in Asia, will need to displace a lot of their existing coal generation facilities to meet their climate change targets. But we also know that there are billions of people who don’t have access to clean energy and with population growth set to increase by another 2 billion, the demand for this is set to increase. Clean energy is going to be a combination of gas and renewables and the kingdom is ready to play a leading role in these emerging economies.
 
MC: What has changed that Saudi Arabia now wants to make the commitment to be a gas exporter in a few years? Has there been a significant shift in terms of policy?

Khalid Al Falih: The resource base has changed for us. We have always looked at conventionals as the limit of resource availability and we’ve always thought of ourselves as resource constrained. With the unconventional gas resources going deep into the shale formations in the kingdom, we are not only able to access natural gas, but wet rich gas that is going to power our growth for the petrochemical industries as well as give us these resources. We are also able to produce some associated gas at higher levels now.

IN FOCUS: OPEC+ 

MC: Will the group extend output cuts beyond June this year?

Khalid Al Falih: Our objective to bring inventories back to a reasonable level remains unchanged. We have seen how sensitive oil markets are to inventories and how when production is increased in the second half of the year for the usual reasons, how quickly markets react. We want to avoid that scenario materializing again. Given the kingdom’s financial position and our scale, our volumes can probably withstand some of these shocks more than others. We have seen companies having to change investment plans and some of the poorer countries hurt, so we want to stabilize markets. We are getting to a stage where inventories are starting to stabilize and come down, but they’re still significantly above what I would consider a normal level.

MC: Is 1.2m barrels still your baseline to balance the market?

Khalid Al Falih: The 1.2m barrels was based on certain other countries keeping their October 2018 production level. So, we have to watch them. We need to see what happens with Venezuela and with the sanctions, which the US waived in November. All these factors will impact the fundamentals. Ultimately, the 1.2m barrels was a balancing based on assumptions of demand and supply and US production. The closer we are to June, the more informed our decision will be on the next steps.

MC: Is Russia on board in general about a possible extension?

Khalid Al Falih: The dynamics in Russia are different from any other country. It also has different geopolitical considerations than most other producers, so it has to weigh all of those factors. But I believe strongly that the OPEC + agreement has been good for Russia from multiple angles. As a key producer, it holds a lot of resources, not just oil but gas as well. The value of gas in the international markets is impacted by the oil outlook and oil prices. 

MC: You’ve been producing 9.82m barrels, which is a four-year low. Many people are applauding you and saying you have done the big job. Are you prepared to cut further to achieve market balance?

Khalid Al Falih: If you look at 2017-2018, by the time it was all said and done, the kingdom was almost exactly on the dot with the voluntary production level that we agreed to back in December 2016. During that two-year period, we were able to stabilize the market’s response with market dynamics that changed unexpectedly. But at the end of the day, we were on track and we met our obligations. The kingdom is the world’s largest exporter and the country that has, by far, the largest spare capacity. With our policy and the relationship that we have with the industry within the kingdom, we’re able to swing production faster than ever, so we’re driven by our policy objectives of stabilizing markets. Sometimes we do more than others, but it goes both ways.

MC: Would you be prepared to do more if you needed to?

Khalid Al Falih: The market is on its way towards balance. We’ve obviously done a lot more than others, but I’ve been assured that they’re catching up with their obligations. I was in Iraq a few days ago and the Minister reassured us that Iraq will do more and would be on track. Russia has reached its objectives on its commitment and the UAE and Kuwait have too. The majority of countries have met their obligations and the implementation is moving in the right direction.

MC: Are you comfortable with the recent speed of recovery in the oil price? 

Khalid Al Falih: Our policy has never been, nor will it be, driven by price objectives and we always need to look at what the appropriate baseline is to measure from. We can feel it when the market is healthy. We can feel it when investors are comfortable. You saw in early April that for the first time in almost two months, the number of rigs in the US rose. Many would consider this bearish, but I would consider it as one of the vital signs that the market is coming back to health.

MC: What is the most under-priced risk for the market in your mind? What’s the next shoe to drop?  

Khalid Al Falih: Geopolitical risk. There are times when the market overprices this and times when it under prices it. It’s unfortunate that many countries – from Venezuela to Algeria and Libya, Syria and Yemen, all of which have oil – are in civil and security distress. That could squeeze supply in the mid to long term if things don’t improve. But given the fact that we have a glut today, the market seems blind to that risk. The saving grace is that the spare capacity that the kingdom has means we can always reduce the level of cuts like we did last year.

*Edited transcript 

Sean Evers (SE): Does industry in Saudi Arabia need to access the tools available under the 4IR umbrella and is it doing enough to stay ahead of the digital transformation curve? 

H.E. Dr. Khaled Bin Saleh Al-Sultan: The 4IR can be harnessed effectively to improve the energy sector, and in particular the power sector. We can manage the electricity sector better by predicting energy consumption and production through data accumulation. The electrcity sector in the kingdom is already becoming more digitalized and decentralized and consumers are able to select from different sources, such as renewables and fossil fuels. They can use the 4IR to manage their demand and costs more efficiently. Today, 18%-20% of total energy consumed in the world is for electricity. By 2030, this number is expected to reach 26%-30% and 50% by 2070.

SE: Aramco, SABIC’s new partner, recently opened the first 4IR Center in the kingdom, announcing in doing so that it was not an option to be left behind. What are your thoughts?  

Yousef Al-Benyan: There are a lot of people that don’t have clear definitions of what exactly the 4IR is all about and we need to make sure we are speaking the same language when we judge whether we are moving fast enough. At the same time, we need to also be candid with ourselves and manage expectations. There are many countries that have still not even benefited from the previous three industrial revolutions – the light industry, heavy industry and technology, computers and the internet. There is no doubt traditional industries in Saudi Arabia are being disrupted and we need to be mentally prepared as to how we are going to manage our organizational research and development (R&D) and organizational competence. If we just look at the chemical industry, it has had 4% year-on-year growth, producing 100mn tons of chemicals. What is the energy source for this? It’s national gas and we have a national mandate to increase our efficiency. Today, we are only using 30% of our asset data, so the challenge for chemicals in this space is that we don’t have real time visibility of our assets liability nor a proven digital support system. This is where the 4IR is going to be very crucial. It can provide clear forecasted outcomes and will enable us to reveal the hidden relationship between our assets.

SE: Is SABIC actively pursuing this?

Yousef Al-Benyan: We are but we have not yet reached deployment. If you look at the research, we are talking about a minimum 8%-12% of improvement in EBITDA. For the last three years, we were able to generate more than $7 billion revenue from investments in technology innovation. But as of today, we still don’t have a connected, general information system for our assets. If we can achieve that, this is where the real improvement will be for our companies and for the market.

SE: ACWA Power seems to be doing everything very fast and making headlines in recent years with its innovative and pioneering pricing records on power generation, and solar to power. Would you say that speed is the defining factor for success in the 4IR digital transformation? What are your thoughts on the accelerator that the 4IR can be?

Mohammad Abunayyan: Our industry does not have an option. Organizations should have a dedicated department capable and knowledgeable to lead the impact. Who would have believed a few years ago how far we have come with solar and renewables. We have to be part of the 4IR because it is an enabler to competitiveness and value addition. We have two operation centers, one in Jeddah and one in Dubai. Why? Because we want to have all our 49 plants operating today, connected in real-time, with real data, to enable us to monitor information, to benchmark and share knowledge more efficiently. Thirteen of ACWAPower’s plants are currently connected to these two centers. By the fourth quarter of this year, all 49 assets will be.

SE: What is the consequence of lagging behind?

Mohammad Abunayyan: Either you want to be proactive, engaged and invest in the future and really commit to change and ride this wave and advantage. Or not, and possibly be bankrupted. It’s also about how to leverage it for you own business to improve competitiveness, reliability, and serving your customer in a timely manner. That is the key to keeping ahead. People have to be open-minded and accept change. There are industries that are going to retire and new ones that are going to be realized. If you look at the disruption happening in the private sector in Saudi Arabia today, we are sitting on a bullet train. If you dont take that risk, you will be left behind. What we do need to do is have the right positioning to be able to synchronize appropriately with all this change.

SE: KAPSARC is a major knowledge center here in Riyadh. Clearly, a lot of people are still struggling with the concept of industry 4.0 as part of the 4IR. Can you play a facilitating knowledge role? 

Adam Sieminski: For a non-governmental organization like KAPSARC that is involved in doing research in the field of energy, we need continuous learning and to make sure that the skillset of researchers are updated. It’s no longer about getting your degree and going to work; the toolbox keeps changing. This is what we’re trying to promote. Training and development that will help enable the industry and others to fulfill the goals of the 4IR. 

H.E. Dr. Khaled Bin Saleh Al-Sultan: Like many ideas in the Vision 2030, the human resource aspect is extremely important. We can always purchase technology, put in rules and regulations and encourage the industrial sector to use industry 4.0. But we will always be short of well-prepared people. The challenge is to prepare young people in the skill of lifelong learning. If there is one value to industry 4.0, it is that it is very interdisciplinary. You won’t find an electrical engineer or a physicist, or a biologist who can do all of this. We need to introduce more interdiscliplinary courses and training to make sure poeple can fit because most likely you will find that it is teams implementing projects in the future, rather than individuals.  

SE: The National Industrial Development and Logistics Program (NIDLP) has established capacity development centers specialized in industry 4.0 technologies to enable leading industrial players to use modern technologies that will assist them and increase competitveness and productivity. Would it be useful to go one step further and introduce a rating system to measure and rank companies and institutions on their success in adopting the 4.0 toolbox? How would Ma’aden react if they were informed they would be rated on the use of 4.0 technologies today? 

Darren Davis: Commercial pressures are the best way to implement industry 4.0 in companies. Government can certainly help enable, but it would be best focused by encouraging new industries. We already see initiatives to finance SMEs, for example. That is what is going to create the new jobs. That’s where these people of the future, the young, will find jobs that don’t yet exist. One concern in industry 4.0 at a national level is that there’s a danger there could be fewer jobs as a result. That’s the opposite of what’s needed in the kingdom. We need more jobs here and that’s why there should be a focus on encouraging new industries. 

Mohammad Abunayyan: It’s not just about the number of jobs we create – it’s about quality and better value jobs. 4.0 is great news. We should create roles that can bring young talented Saudis to jobs that they can aspire to. Of course, we must always bear in mind 4.0 cannot be adopted in all industries. But Saudi Arabia’s economy is changing and we need to have the latest technology so we can transition and become a player on the global market. 

Yousef Al-Benyan: I would not be supportive of the idea that governments should be checking companies on innovation nor for increased regulations for 4.0 or any future technology transformation. It’s the market, commercially, that has to pressure companies and they need to be judged based on the value they bring.

SE: But government could take away the inefficiencies that delay the implementation of 4.0.

Yousef Al-Benyan: That’s a different angle. That could be part of an incentive program, like enabling efficiency and pushing companies to leverage technology and innovation. For example, in our case, we have excellent incentivizing energy efficiency programs. Everything that we do is basically about risk management but as we enter into the 4.0 race, we should also bear in mind that it is not necessarily the big fish who win, because they can be rather slow. This is where SMEs are going to be crucial for the future transformation of technology. At SABIC, we have an executive reporting to the CEO, taking into account digitization and innovation and assessing how this can influence not only our assets, but everything that we do. We need to look at the business – oil refineries, petrochemicals and chemicals – as an connected system and not just from one angle.

Adam Sieminski: What we really want to measure is how companies are performing financially and within the social context in the kingdom. We need to be careful on what we pick from the industrial 4.0 toolkit; not everything is appropriate for each company. The mains drivers of the thought process behind Vision 2030 are a thriving economy, a vibrant society, and an ambitious nation. That includes creating space for non-governmental organizations like KAPSARC and others. Everyone in the kingdom – industry, academia and government – has to be jumping on this and making it work. I sense that there’s a strong feeling, certainly among the young people, about making this a success.

*Edited transcript

Dyala Sabbagh (DS): How significant is the speed of adoption of digitization in Saudi Arabia? Are downstream industries moving fast enough to take advantage of the new technologies available?  

Mutlaq H. Al-Morished: I’ve been in the industry long enough to see these things come and go. We have to be careful and make sure it always adds value to our business. Yes, digital technology can be used for efficiencies but it’s not for everybody. You have to assess if it really brings tangible improvements.  

DS: The regional petrochemical industry has faced a major competitive challenge in the last few years with its natural feedstock advantage disappearing versus its global competitors. It also struggles to compete internationally on high value products. Would adoption of industry 4.0 tools not make a difference? 

Mutlaq H. Al-Morished: The chemical industry is, in fact, ahead on technology in many ways. We deploy thousands of transmitters, for example, which add value to processes and communication, but again, we should not look at this with one brush stroke. Not everybody needs to adopt this technology and there is also still a lot of ignorance on what industry 4.0 actually represents.

DS: From the refining perspective, what impact are these technologies having on profitability?

Sulaiman M. Ababtain: SATORP (Saudi Aramco Total Refining and Petrochemical Company) is a relatively newly-built facility. What is important is that when we develop a strategy for digital transformation, we understand what value it brings and how to then achieve it. I agree that application will not be at the same level for all industries. What fits one refinery may not fit another. But it is very necessary. Digital transformation is not automation. It’s much more than that. It’s the change in the way we do business and a total ecosystem between stakeholders that will need to be developed. The technology we are going to witness in the next 20 years is going to move fast and it’s going to touch a lot of businesses. We must be ready.

DS: From a commercial point of view, does integrating these tools into operating systems give enough of a timely payback? 

Sulaiman M. Ababtain: Today, we may look at digital transformation as a commercial investment but later, it will be a necessity to survive. As a refinery, our only concern is reliability and that comes with the safety of our most valuable assets. The other factor is productivity. We want to ensure that our plants satisfy demand. 

DS: How important is it that the C-suite incorporates digital technology into strategic decision-making? Should it be a top-down approach or should operations managers on the ground dictate what’s needed?
 
Michael Train: The answer is yes to both. The C-suite has to provide the vision and has to have a dialogue with the organization. On the one hand, they have to give their people permission to consider change and on the other, they have to push for some change themselves. A lot of this activity is a change in management exercise and the middle of an organization is often resistent to change. It’s a space with up to 50 years of operative experience, and when we make a mistake, it could kill people. So, there’s a good amount of reluctance there. But we do need the change, as ultimately it will bring more uptime and safety. 

DS: Saudi Electricity Company (SEC) is the largest electricity distribution company in the region. How is all of this impacting the sector? Is there a negative to implementing 4.0 technology into your systems? We have seen how the more sophisticated the linkages in operations, the more exposure there is to having malware attacks. As a huge provider of a very important resource, how fast do you think we should be moving ahead with adoption?

Fahad Al-Sudairi: SEC is serving ten million customers, so we are quite unique in this way, but we are also behind in digitization and in transforming to using smart solutions to serve our customer base. We’re still operating mechanical meters to read the electricity consumption of each consumer. The customer wants accuracy and to be able to manage his energy needs with confidence. Smart meters would also help the utility company to project demand and to run operations and transmission into the distribution network more efficiently and control costs. The power sector today has been given a big mandate to restructure, so in line with that, we have to introduce a lot of digital solutions into our operations.

DS: In terms of cybersecurity exposure, statistically industries in this region are being attacked 2-3 times more than the global average. Why is that? Do they not have protective systems in place?   

Sulaiman M. Ababtain: The cyber security issue has always been a concern, and this will increase with digital transformation, so we are preparing the infrastructure and security measures required for this. At the same time, we need to remember the advantages that technologies like machine learning, data collection and artificial intelligence bring. More dilaogue between humans and the machines leads to stronger safety and efficiencies.

Michael Train: Everybody has cyber security concerns and we do need to be on our guard. But before companies expose themselves to remote connections, they should consider the balance of how much of this enhanced connectivity is needed externally versus internally and I would say that 70% of the benefits would be for the latter. 

DS: At the National Industrial Development & Logistics Program (NIDLP), you are working with the Saudi Vision 2030 strategy. How much direction is being given to the various industries on their restructuring and should they all be working in tandem in terms of the speed of digital change?

Eng. Rasheed Al-Shubaili: In my previous industry role as CEO of Dussur – an industrial investment company created by the Public Investment Fund, Saudi Aramco and Sabic – the installation and integration of 4.0 tools was always an area of focus with potential partners. At NIDLP, we are primarily focusing on integrating and synergizing four key sectors in Saudi Arabia: energy, mining, industrial and logistics. One of the key pieces of our strategy is to introduce and enable industry 4.0. There are many elements to put together: the legal framework, capacity centers, labs, etc. And also helping existing industries transform operations to becoming more digitized via the ’100 Companies Program’.  

DS: The more industries digitize, the more they accumulate valuable data. Are companies using this to monetize new business opportunities?  

Fahad Al-Sudairi: There is a gold mine of huge data that can be transformed to generate additional revenue. Our customer base is growing by nearly 400,000 annually and we already have comprehensive partnerships in place with leading universities in the kingdom to look at how we can add value to the company with this data.   

DS: Saudi Aramco generates billions of data points a day on surface and sub-surface operations. The technology is there and already capturing this, but is it being used or integrated to make decisions on efficiencies?

Sulaiman M. Ababtain: Data is a treasure. When we can monitor compressors for example, it not only protects equipment and avoids the cost of repair, it also helps us avoid the commercial consequences of unplanned shutdowns and improves safety. So, it hits the triple bottom line via operational maintenance, environmental efficiency and people. In cooperation with our partners, we will continue to explore how we can add value with all of this information.
*Edited transcript

When we talk about Saudi Arabia and technologies as part of the 4IR, we should focus on digitizing mechanisms in production systems, particularly within manufacturing. Digitalization is spreading across all sectors; in the banking sector, it has advanced to a point that we now have digital currencies. But when it comes to manufacturing, we see much less application. 
Manufacturing is capital intensive and is also one of the most labor intensive industries, so applying 4IR tools is hard as it requires getting through many layers. Ironically, this same toolbox should enable us to leapfrog into the future of production processes. It can help manage supply chains for example; factories in Saudi Arabia use both locally manufactured and imported parts. The 4IR allows vertical and horizontal communication to occur between suppliers and operators to monitor and track when products are needed to be replaced.   
The manufacturing system in Saudi Arabia has traditionally targeted low value, low margin products. But we need to be focusing on higher margin, high value items similar to the ones we see in the defence, medical and healthcare sectors. How do we go about establishing 4IR capabilities in industry in Saudi Arabia? How can we facilitate individuals to learn about it, investors to use it and government to support it?
We have developed a strategy that focuses on one important pillar – contact between government and industry. We have identified five ‘capability centers’, which will be built and financed by the government and located mostly in MODON (Saudi Authority for Industrial Cities and Technology Zones).  These centers will have four main functions.
Firstly, they will be a place where individuals and companies can enquire and learn about 4IR technologies and how they could be adopted in Saudi Arabia. The second purpose will be to function as a RD&I (research, development and innovation) system where academics and students can connect their laboratories in an interactive way. The third function is to showcase examples of the latest global Industrial Revolution 4.0 technologies. Lastly, we want to model a ‘future factory’, which will demonstrate how SMEs can use these technologies in a shared manufacturing facility. 3D printing equipment is very expensive to purchase and maintain for example, so if we can provide these machines to be shared by SMEs and start-ups, they could have time to build enough demand for their product before committing to investing in their own equipment. With these four elements, we are building a strong interface between the government and the industrial sector with a focus on production. 

Embracing Unknowns
Industrialization encompasses around 50% of Saudi Arabia’s Vision 2030, which also aims to create 1.6 million new jobs. How do we reach these targets? We need to use technology and train the workforce to use it. The current generation, both in the kingdom and around the world, is simply not getting the same focus of manufacturing training that others did in previous decades. If we are not careful, countries will lose their capacity for production. Let’s also remember that the need for a service sector is built on the back of manufacturing. If you lose the latter, you could start losing your RD&I ecosystem.
Initiatives to address this are under way, but the challenge remains that investors are often reluctant to switch from established processes. MODON is leading a very interesting ‘lighthouse’ project, to transform 100 factories by helping them digitize under a process of assessment and accreditation and so they know what can be achieved with new technologies at hand. This project will likely face delays and difficulties, but we need to persevere as we simply don’t have a choice.  If we are serious about realizing Vision 2030 and diversifying our economy, production systems and investment in industry is the key. 
A foundation of our strategy is a concept called ‘Product Life Management System', which is a digital platform where an idea can be translated into engineering drawings that can be used by individuals, SMEs and government for analysis or production. The tools that we establish at King Abdulaziz City for Science and Technology (KACST) will be available, in addition to an incubation system. In essence, we are creating a virtual industry before we realize it on the ground. This should also help the development of human capital. We have started aiding universities to establish this. At Prince Sultan University, there are two courses and a lab for students. This example of contact points between technology, strategy and students can be replicated and scaled up. We can get vendors to supply e-learning platforms and make them available for students and SMEs, helping them navigate the otherwise very expensive access to these tools. This digital mapping, which shows where resources are needed, can also guide investors in the right direction.  

The production of shale oil in the US has been a revolution, turning all conventional wisdom on its head. Shale output has increased by about 7m b/d in seven years. By contrast, it is going to take electric vehicles (EVs) 30 years to lead to a decrease in demand for oil of 5m b/d to 6m b/d. So, it’s easy to see which of the two technologies have been most disruptive.
Putting technology aside, the real secret of shale oil’s growth has been private ownership. Even when oil prices declined in 2015-2016 and cashflow dropped, production continued to increase on the hope that higher reserves and production will yield large profits when the company is sold. The stars are aligned for shale producers, who are blessed with massive reserves, technology, know-how, a strong legal and institutional framework and established infrastructure.
This also explains why the majors are moving in. With conventional production, there’s a risk of drilling a dry hole whereas with shale, at the right price, operators can deliver within six weeks. Companies like ExxonMobil, Chevron and BP have made significant moves into the Permian basin, creating a shift in capital from longer to shorter investment cycles. Another incentive is that most of the risk is above ground, whereas internationally, especially with conventional resources, there is both above and below ground risks. Shale oil reduces risk and accelerates cash flow. Majors can also achieve economies of scale through their large integrated supply chains, enabling them to easily market the oil, especially outside the U.S.
International oil companies’ (IOCs) investment in US shale is also positive for several countries around the world. They have large refineries worldwide and can send all and any excess shale oil overseas. In turn, this helps Saudi Arabia lower oil storage costs in the US. Another benefit of the entry of IOCs into the shale market is that it lowers production volatility, which helps price stability in those areas.

Misconceptions about Shale
What is the right price for shale oil given the cost factors? You may be surprised to hear that it is in fact lower than the price that OPEC members seek to finance their economies. We should not compare the cost of producing or extracting oil in Saudi Arabia to the cost of shale oil extraction. Instead, we need to compare what prices are needed for that economy to grow versus the total cost of production in shale. That is what has made the difference in the global argument for shale.
The regulatory environment in the U.S. has also made a big difference to the economics of shale. When oil prices went into severe decline four years ago, the general conception worldwide was that there would be major bankruptcies amongst shale oil companies. But that didn’t happen. One reason is the conditions and time frames around booking reserves. When a company wants to acquire another, in most cases they must pay a premium of between 20%-40% due to the reserves value, even though they are not allowed to be accounted on the books. So, you can actually have a situation of negative cash flow and a low stock price, but you know that those reserves exist. There is a misunderstood negativity towards shale based on these financial and accounting structures.
Another misconception comes from when we judge through averages. Average price or average breakeven for the U.S. shale industry is meaningless.  Averages must be replaced by ranges. The cost of producing oil from shale varies widely, even within the same basin. Some oil companies were making profits at oil prices that were way lower than the report average breakeven cost.
Another misconception is related to the cost that matters during downturn. During a downturn in the economy and lower oil demand, what matters is not your total cost, but rather the operating cost. The operating cost for shale is between $18/bl and $22/bl. So, generally speaking, as long as prices are above $22/bl, companies can continue to operate and survive.

Can shale be developed outside the U.S.?
When we look at whether other countries can consider developing shale deposits like the U.S., the general belief is that the U.S. shale experience and results cannot be replicated, especially on the oil side, for several reasons. But on the natural gas side, we see that Saudi Arabia is considering opportunities. The justification of developing shale gas in certain areas, such as in the northwest of the country near Tabuk, is similar to the justification of building renewable power plants in these areas:  the cost of shipping oil from Ras Tanoura to these areas is very high. The higher cost of shale and renewables is way lower than the cost of oil when considering the shipping costs: products must be shipped all the way around the Arabian Peninsula to Yanbu and trucked for 400 kilometers just to reach power stations.
The other challenge is water. For example, in Libya and Algeria, there is plentiful shale gas, but it is in areas where it only rains once a decade. New technologies that negates the need to use water are needed.

Hurdles to Scale

On the negative side, sheer abundance is killing shale. We have on occasions seen natural gas coming out of the Permian Basin in West Texas at negative prices (average prices in the U.S. have been around $2.70/bl). We also have a high decline production rate; it used to be around 70%-80% and is currently probably in the 60s% because of improvements in various technologies and management. But we need to be constantly reinvesting, even at those lower rates. The IEA expects shale oil to peak and then plateau by 2025. Taking the average capital expenditures in recent years into account, and assuming that continues, we will reach a point where investments will only go to compensate for the rate of decline. But with higher capital expenditures than in the past, shale can continue to grow, as long as there is a market for light sweet crude and condensates.
Shale oil deposits are also getting gassier. The deeper you go, the more gas there is, and this then risks having more gas at negative prices, thus driving down company values.
The other issue is multi-pad drilling where too many holes are drilled in the same area, creating ‘parent child’ wells, which are connected and therefore cumulatively reduce pressure and productivity. In some cases, all of a sudden, instead of having an oil well, you could end up with a natural gas well, which is calamitous if oil is at $70/bl and yet gas prices are very low.
Another challenge is crude quality.  Shale is a light sweet crude – good for gasoline, naphtha and some other products. This crude quality creates two problems: mismatch between the additional crude produced and refining capabilities to refine it, and another mismatch between products produced profitably from shale and petroleum products demanded. We’ve already reached saturation point or what we call ‘the refining wall’ in the U.S., which is why we are exporting any excess to the rest of the world. The only way shale production can keep growing is to export all the additions.  We will also at some point hit a similar wall with global refiners. Shale oil will continue to grow by more than a 1m barrels year-on-year for the foreseeable future, but most of the growth in demand is in Asia. This will be for heavier products, so this will eventually limit the growth of shale oil as crude price differentials could widen substantially.
Ironically, the shale revolution did not reduce U.S. dependence on crude oil imports from the Middle East (the recent reduction was caused by OPEC cuts).  Since shale reduces light sweet crude, it replaced imports of similar quality, especially under the U.S. crude export ban that ended in 2015.  Shale production replaced oil imports from Nigeria and Algeria, but did not replace the heavier more sour grades from Iraq, Kuwait, and Saudi Arabia.
The most important impact of shale on OPEC is that it split OPEC into two halves: those who lost market share vs. those who did not, based on crude quality. As a result, shale caused OPEC-on-OPEC competition. Prices declined.
Those who lost market share in the U.S. had to look elsewhere for market share, and the only choice was to compete with other OPEC members. This has been compounded with a simultaneous drop in world oil demand growth. In the medium to long term, there will be a bigger market for Gulf crude quality, which will play into those countries’ favor.
Another obstacle in the U.S. that few pay attention to is the fact that post deregulation in 1980, the industry was separated into producers, pipeline operators, distributors and exporters. It became widely segmented. With shale oil, you have all kinds of crudes. Coupled with new environmental regulations for products and the fact that the pipeline systems and storage facilities in the U.S. have not adapted, there is a risk of contamination for exports that is ultimately not acceptable to foreign refineries. If the system in the U.S. was integrated, you would not have this problem.
In the Arabian Gulf and other places by contrast, there are dedicated pipelines for different crudes. Asian customers have used this system for the last 50 years or so, but when they started shifting to take product from the U.S., they found they were getting contaminated oil. How long can this continue?

A growing, energy-hungry and increasingly prosperous population means the impressive growth in the trajectory of Saudi Arabian electricity demand might accelerate without a strong committment to price reform and energy efficiency measures. Up to $20 billion must be invested in the kingdom’s power sector over the next five years to meet demand, detailed Apicorp. Aside from industrial demand, the United Nations (UN) said the population will climb by nearly 40% to 45 million by 2050. More people, more industry, more demand – and greater the need for creativity.  
Reforming the electricity market is a key part of Saudi Arabia’s economic transformation agenda, as set out in the Saudi Vision 2030 goals. Accordingly, new pricing models and tariffs are being proposed and set to be tested in order to be able to reflect true network costs, with the aim of sending the correct signals to network users and informing network investment decisions. And new business models are beginning to take shape with restructuring and privatization plans under consideration, including services that offer enhanced reliability, convenience and flexibility to better address consumer needs and preferences (see: Speak Customers’ Language). The same applies to providing testbeds for trialling new business models (see: Calling all Regulators), as explored in one of KAPSARC’s workshops on integrated approaches to decentralized systems in February this year.  

Digital aid  
Transformational technologies under the umbrella of the 4IR – advanced robotics, predictive analytics, automation, Industrial Internet of Things (IIoT) and many more – are rehaping the value chain. This encompasses more direct and real-time feedback from customers, self-guided autonomous devices in remote inspection areas, maintenance in plants and greater energy efficiency in the distribution network. Many have already clocked the opportunities, with global investment in digital electricity infrastructure and software rising by more than 20% annually since 2014, reaching $47 billion in 2016, according to the IEA. The 8th Saudi Arabia Smart Grid Conference (SASG 2018) held last December illustrates how this topic has long topped boardroom agendas in the kingdom, a country globally lauded for its digital expertise.  
Transparency and ease of access to data is key. Lacking analytical expertise runs the risk of being blinded by the massive volume of data generated by the 4IR. Improving the level of digitally fluent talent in the kingdom, especially those who can decipher the key trends revealed by data, is pertinent. More dialogue between government, industry and academia is also imperative to creating a relevant workforce in the 2020s and beyond, therefore supporting the Saudi Vision 2030 to become a knowledge-based economy. One of the most recent examples of progress is Saudi Aramco’s new ‘Fourth industrial Revolution Center’ to enhance technical skills. Easy digital access is also critical; again, huge progress is underway. Dawiyat Integrated Telecommunications & Information Technology Company, wholly-owned by SEC, now has more than 70,000km of fiber optics – nearly the distance of circumnavigating the globe twice – at more than 1,500 locations. The kingdom is home to aspirational and creative talent and a swathe of the latest technologies. Ensuring the positive trajectory of supply-meets-demand continues, means leveraging this intellectual and digital gold dust.

20,000 years of progress on innovation could be crowded into the 21st century alone, predicted Ray Kurzweil, Futurist and Chief Engineer of Google. While the outlook seemed ambitious when it was made, the astonishing pace of progress thanks to the 4IR has surpassed all expectations. Ray’s comments now seem almost prophetic. Endless opportunities await, but they must be managed correctly.

The effectiveness of the digital transformation is not just in the application of tools – from artificial intelligence (AI), predictive analytics, advanced robotics and many more – but also how processes and people must evolve to seamlessly use and integrate the tools. The human side of digital transformation must keep pace with the technological perspective – a unique and demanding goal. Therein lies the importance of creating, nurturing and spurring a culture of innovation in industry, government, academia and society. In turn, this creates a competitive and inspired 21st century workforce in Saudi Arabia. 
Oil and gas operators can accelerate from average to top quartile performance and capture up to $7 billion in profits annually, through advanced automation technologies and new processes, studies by Emerson revealed. Overall, digitalization has the potential to unlock up to $2.5 trillion in industry and societal value for the global oil and gas markets in the medium-term, according to the World Economic Forum (WEF). SAP and Oxford Economics Digital Transformation Executive said 58% of the region’s digital leading organizations cite digital skills investment as the most important profit growth driver in 2018 and beyond. A digitally naïve and creativity stumped workforce means falling behind.

Speeds Matters 

Saudi Arabia’s public investment fund has made external investment commitments worth $95 billion since 2016, with a high concentration on technology, according to the International Monetary Fund (IMF). The kingdom’s economic intent is clear (and building), but the pace of progress needs to accelerate. More than three quarters (76%) of respondents to a GIQ Industry Survey in Saudi Arabia agree that speed is the defining factor for success in the 4IR. So, it is perhaps a wake-up call that 82% don’t believe the Saudi industry is doing enough to be ahead of the digital transformation curve. The seemingly endless opportunities of the digital revolution also have a global dark side: the rise of cyberattacks, the world’s fastest growing mafia. Cybercrime cost the world almost $600 billion, or 0.8% of global GDP, in 2017, estimated McAfee. ‘Digital sheriffs’ in house, or hired via third parties, will be integral to reinforce the digital brick walls protecting operations, sensitive data and intellectual property (IP). Ignore their importance on your payroll at your peril. 

Let’s Talk

Energy companies must increasingly build partnerships to bolster cross-sector knowledge exchange. Emerson’s memorandum of understanding (MoU) with Saudi Aramco focuses on bridging advanced digitization and automation technologies. This includes a $25 million technology and innovation center in the Saudi city of Dammam’s Dhahran Techno Valley, which provides technology expertise to stakeholders in the kingdom. Looking further afield, ExxonMobil is partnering with Microsoft to crunch trillions of bits of data into readable information as the oil major seeks to more than triple shale-oil production in the Permian Basin in less than a decade. Plus, seven global petroleum corporations, including ExxonMobil, have created the Oil and Gas Blockchain Consortium with one aim being a pilot project to identify applications for industry. As tech giants like Amazon and Microsoft become more eager to work with energy stakeholders – data dissemination, for example – how best to thread cross-sector talent together? One route is tech-sponsored centers of excellence in energy hubs and secondments so staff from both ‘worlds’ can gain hands on experience. Creating an ecosystem is vital to giving energy companies much-needed guidance on what they can – and sometimes should – do. Many cannot hire 50 data scientists on a whim to restructure their digital management. Their capacity is already stretched navigating the great energy transition, unpredictable oil prices, geopolitics and economic trends.

The world’s new, largely invisible and well-armed cyber “mafia” has its eyes on the mountains of hackable data being generated every millisecond in the energy industry, spurred by the 4IR. Energy stakeholders must master three defensive skills quickly: coordination, cooperation and speed. 
The 4IR is not just a case of purchasing digital protection and injecting it into the operational fabric of a company. The response to cyberhackers, armed with deep pockets and sophisticated capabilities, must be far more sophisticated to safeguard Saudi Arabia, a regional hegemon and one of the world’s biggest energy producers. 
This is especially pertinent as threats worldwide escalate from online harassment that may have once temporarily shut down a website, to advanced cyber weapons that can paralyze a nation’s energy grid. Attacks on cross-border digital infrastructure could also trigger a domino effect.   
It pays to think long-term, which means building cybersecurity indigenously into the system now with the acceptance that you can’t escape working with multiple vendors later. Nobody has the full spectrum of protection, so collaboration gives companies as much of an educated view as possible. Key questions that companies new to the cyber game need to ask include: What are the cybersecurity consequences for the technology the company has adopted and is it enough to buy insurance as protection, especially as it is increasingly part of regulatory compliance? Or must I do more?  

Collaboration also creates a more centralized view. The more data you have, the more you can correlate trends targeting certain sectors at certain times. Some attacks target organizations on Friday afternoon. Why? Because the staff has gone to Friday prayer. A centralized security intelligence center can address more predictable attacks, allowing resources to focus on preventing the most damaging digital assaults.
Communication is key to our defensive ability and speed of innovation. Feedback from clients, knowledge-sharing within industry and engagement with academia on skill development must be continual efforts. It also pays to learn from other sectors that have already had decades of trial and error, such as banking.
This is not a sprint nor a marathon; this road has no end and one solution does not fit all. But we do all have the same problem; hackers do not respect budgets or borders. Protection means working together; our combined minds are brighter than theirs.  

Adjust Your Lens!

Cyber resilience when – not if – a company gets attacked means continuing operations at even a basic level to preserve business continuity while the disaster recovery gets underway. Building this resilience is not an overnight effort; it requires proactivity. Managers’ viewfinders tend to be restricted to the cost implications of training, installation and monitoring, especially as there is no direct return on investment (ROI). But the negative financial impact of a cyberattack on an organization’s health and safety executive (HSE), reputational value and the willingness of other companies to partner could easily exceed the cost of installing defensive measures now. Plus, the complexities of operational technologies (OT) will exponentially grow alongside intensifying market pressures and energy demand. Laying a solid foundation now will pay dividends in the 2020s and beyond. 

An environment conducive for innovation is borne through a symbiosis where technological development drives a positive disruption of science, balanced by entrepreneurialism and commercial vision. This must be supported by pioneering and enabling government policies. This encourages investments to be channeled into human capital and governments to actually put pen to paper, to drive economic and social incentives. But the most important ingredient is collaboration between the three cornerstones of a sustainable innovation ecosystem; academia, industry and government. 
A culture of innovation is of course not new in Saudi Arabia and the Middle East region, where for centuries development has been driven by novel approaches to meet a demand for constant adaptation to a rapidly changing world. Today, at the onset of the 4IR, the kingdom’s penchant for ingenuity and creativity can be pro-actively applied to the context of the Vision 2030 and beyond. A successful adaptation to 4IR requires sustainable, affordable and efficient routes through the unchartered territories of the great digital transition for the energy industry, unpredictable oil prices, talent shortages and constantly fluctuating economic trends. 
Tough questions need answering. How to affordably and efficiently meet the 55% rise in the Middle East’s energy consumption by 2040, that the BP Outlook anticipates? How to leverage R&D policies and incentives to spur innovative technologies? How to educate the next generation of skilled workers to embrace the work of the future – i.e. digital fluency? How to create effective communication and dialogue between industry, academia and government, to ensure that they all understand and consider their respective drivers for innovation and the challenges they each face? 

Part of the answer lies in stakeholders collaborating through innovation partnerships for a more applied research approach – efforts that aim to answer specific questions – and in making associated data and technical breakthroughs more transparent and accessible. Opaque information may result in inefficient allocation of time and resources. It is better to collaborate on the next step with a credible partner that may have carried out a similar process recently, or that may have valuable input on how to bring innovation forward to implementation and, as applicable, commercialization. 
Managing risk while challenging the status quo also needs careful management of change, for example when recruiting and integrating millennials in the workforce. Equally, the experience and wisdom of the older generations must be sustained to manage expectations, guide progress and ensure legal and regulatory safety nets are in place through the change process. Whatever the generation, there must be a sense of ownership and pride in an idea to reinforce cultural and national pride in pioneering R&D.
The kingdom has the advantage of being able to support a culture of innovation partnerships, sound R&D, and commercialization more readily than other nations. Few countries are in a better position than the kingdom to quickly leverage on 4IR to strengthen its competitive standing on the global energy stage. Exciting times of innovation and transformation lie ahead.

$138 billion in savings is one driver of energy stakeholders’ appetite for a ‘circular economy’. The multi-billion benefit of this economic model equates to nearly 1% of the GCC’s cumulative GDP between 2020 and 2030, as detailed by the World Government Summit and Strategy&’s Ideation Center. Another big incentive is Gulf countries’ commitment to the Paris Agreement, the world’s most comprehensive climate-related agreement. 
But these are just two factors in a regional effort that resembles an octopus. There are many ‘legs’ – from economic growth, government will and public buy-in – that must all move in harmony to achieve progress (see: What is a Circular Economy?). This is a very tall order and good stewardship – a healthy mix of both private and public – of finite resources is critical amid an ever energy-hungry world. 
The kingdom is playing an active role as per the aims of Saudi Vision 2030. Saudi Aramco is supporting a research program on the Sustainability of Bio-based Materials in a circular economy at the Aachen-Maastricht Institute for Biobased Materials (AMIBM) in The Netherlands and the kingdom’s petrochemical giant SABIC has signed a memorandum of understanding (MoU) with chemical recycling experts to supply recycled plastics waste for production facilities in Europe. Through this, the company has developed plans for a commercial refining plant for recycled low-quality, mixed plastics waste in The Netherlands. And as part of its sustainability initiative, Ma’aden commits to facilitating responsible and innovative product design, use, re-use, recycling and disposal of products. The company has embedded circular economy principles into its operations and has developed measurable key performance indicators (KPIs) to monitor progress. 

The growth of a circular economy is a fine line to tread. Existing energy capacity – from production, storage, downstream, transport and so on – must lower its carbon footprint rather than pulling back on operations. Cutting capacity now would be perilous; BP Outlook expects the Middle East alone to have a 55% rise in energy consumption by 2040 and Saudi Arabia’s population to climb by 37% to 45 million by 2050. Such pressure points do not point to reducing capacity but increasing it – just much more intelligently.

What is a Circular Economy?

A circular economy means changing processes and mindsets to enable companies and countries to do more with less. It seeks to replace today’s linear ‘take-make-dispose’ approach to resources and aims for materials, including energy, to be re-used and recycled through the value chain. The result? It gives companies and countries more gold stars for what is an increasingly strict environmental check list, it creates a sustainable job and manufacturing market and has the potential to narrow the global wealth divide in the long-term. Also, on the long list of benefits are cost effectiveness and optimization of supply chains. 
The purpose of the circular economy is to protect the environment while maintaining a market driven economy. There are two main channels to achieving this. One is letting the market dynamic work through incentive mechanisms, as seen with subsidy reforms and the rise of renewables. The other is regulatory changes, such as reducing high public and industrial consumption of energy to products, like household utilities.
Under this umbrella, there are a range of application options: waste-to-energy, fuel conversion, recycling materials from energy production plants, utilization of the energy industry and other industries’ excess energy. Another popular method to spur a circular economy is improving existing technologies, like efficiency for internal combustion engines (ICE), carbon capture and storage (CCS) for hydrocarbons in the power sector and renewables in enhanced oil recovery (EOR). Plus, capturing the billions of cubic meters of natural gas flared at oil production sites worldwide to use onsite, or reuse in operations, would be a major leap towards a circular energy economy. This would be especially meaningful in Saudi Arabia and the wider Gulf, the global epicenter of hydrocarbon production. Progress will also give the energy markets some much-needed career kudos for the more environmentally aware millenial generation; good news amid a global talent shortage.