Meeting of Prince Muhammad bin Salman with Vladimir Putin, 18 June 2015. (cc)

As Middle East goes nuclear, climate change goes critical. Part 2: Saudi Arabia

Here we publish the second part of Brian Parkin’s article, where he looks at Saudi Arabia’s own nuclear ambitions, and an emerging reconfiguration of imperial alliances in the Middle East. (See part one here.)

4. The regional nuclear domino effect: Saudi Arabia and ‘friends’.

To a large extent eclipsed by Iran’s more controversial bid for nuclear technology, Saudi Arabia’s nuclear ambitions- although well advanced, have largely gone unnoticed[1]. Although its interest in nuclear has been partly driven by fears of an Iran with nuclear weapons at some future date, the Saudi interest has in many ways been a pre-occupation with maximising hydrocarbon production for export earnings. And although much smaller than Iran in terms of population – 25 million compared with Iran’s 78 million, the energy load and demand characteristics of Saudi Arabia still means around 25% of oil and gas output being consumed for domestic power needs.

With its population being largely located in the South East desert region of the Arabian Peninsula and mainly living in new modern, high energy consuming cities, Saudi Arabia has a high energy demand per head of population. Power demand for air-conditioning is actually higher than the winter energy demand per capita of most North European countries and when the absence of any substantial natural aquifer resource is added, the power for water desalination plants represents a high year-round cost.

In the kaleidoscope of inter-imperialist rivalries in the region combined with the increased uncertainties of world energy markets, Saudi Arabia has been vying for advantage- both as the dominant hydrocarbon player in OPEC but also for its leadership position in the Muslim world through the control of the sacred Muslim sites of Mecca and Medina and through its use of Sunni Wahhabi Muslim charities to spread largesse far and wide to the poorer regions of Islam.

In 2013 Saudi prince Bandar bin Sultan met Russia’s Vladimir Putin to explore the possibility of cooperating on matters of mutual interest – not the least of which being how to contain Iran’s huge oil and gas potential in the post-sanctions era. Of concern to both of them was the prospect of the markets being overwhelmed by US shale production:  for the Saudi’s the loss of North American oil markets and for Russia the prospect of US shale-derived LNG (Liquefied Natural Gas) challenging its prospective European market.

For any of these things to work, Saudi Arabia was going to risk the wrath of the US regarding an oil price war, whilst for Russia, the price to be paid would be a withdrawal from Iran’s nuclear programme in which it had been the principal technical vendor[2] with already advanced preparations for two VVER reactor stations at sites on the Gulf coast. This would also mean Russia having to abandon its nuclear cooperation with Iran as well as cease its support for the Assad regime in Syria. And with certainty this would create a nuclear business opportunity for China. This did indeed happen when on 22 July Iran’s Atomic Energy Agency struck a deal with China to build two twin-reactor stations at Makran on the Gulf of Oman. The reactor design is a Pressurised Water Reactor (PWR) of the ‘Hualong One’- a tried and tested third generation model which has the enviable reputation to date of not yet having a major system failure. As far as we know. The next day it was announced that Iran had also put out a tender for two further stations based on the same design[3].

But by way of compensation for the probable loss of future Iranian nuclear business, it seems that Saudi Arabia has offered Russia much more. In June 2015 Saudi Arabia confirmed an order for two twin reactor stations from Russia’s Rosatom state owned nuclear development agency who in the initial $10bn phase will be a 49% stakeholder. In the meantime Russia has also agreed to partner Saudi Arabia to the full extent of its nuclear ambitions which will total 21 Gigawatts of capacity. On the basis of the standard VVER compact PWR[4] design the overall programme will entail 30 reactors in 15 station sites[5]. In April 2015 Russia was also involved in negotiations with Turkey, Egypt, Jordan and Algeria regarding nuclear programmes. Then on 14 April Turkey announced a $20bn deal with Russia for a four reactor development at Akkuyu on the Mediterranean coast.

These developments mean that the wider MENA region will be unique in being the only part of the world where nuclear power is growing. And where nuclear capacity is installed it will not result in a reduction of hydrocarbon production. It will simply reduce domestic consumption, thus allowing a growth in exports and with the new revenues, further investment in the hydrocarbon infrastructure which in turn will lead to greater export volumes.

Calculating the fuel equivalents for installed nuclear capacity is difficult – largely because nuclear stations rarely perform to specification both in terms out attained output or planned availability. But if we give the new Saudi reactors the benefit of the doubt and assume an 80% load factor and a 70%[6] availability, then on the basis of net calorific values we can obtain the following:

Table 3.Nuclear fuels displacement effect. 21 Gwe planned Saudi Arabia nuclear capacity.

21Gwe capacity by fuel equivalent[7] per annum.

Coal                       52.5 million tonnes
Oil                           40 million tonnes or 293.2 million barrels
Gas                        31 million tonnes oil equivalent or 1,935.12 billion cubic metres

By opting for nuclear power Saudi Arabia (and its friends and Iranian foe) are taking a considerable risk. Certainly a very large base-load capacity is useful for round the clock power demand for continuous processes such as petroleum refineries and LNG terminals. And certainly for Saudi Arabia which is the hub of the Gulf Cooperation Council states shared grid, there is the prospect of power sales to its other hydrocarbon neighbours. But as with all nuclear programmes to date, back-end radiological waste costs and environmental impact and safety implications are unlikely to have been factored in. And as the real cost of its nuclear choice becomes apparent, then covering the cost through bigger oil or gas export revenues is bound to ramp-up production.

5. Saudi Arabia: counting the cost of US wrath

According to many analysts, Saudi Arabia is about to pay the price of the oil price war against US shale producers as well as its continued role in destabilising the MENA region through prosecuting its proxy war against Iran in particular and Shia Islam in general. Some of the same analysts are also suggesting that under Saudi leadership OPEC is becoming a busted flush[8].

Saudi Arabia is almost unbelievably now on the verge of a major fiscal crisis as its economy enters both recession, and for the first time ever, a budget deficit. On its 2015 current account a deficit had grown within six months to 20% of GDP- or $140bn. Entirely petroleum generated reserves which stood at $737bn in August 2014 fell to $672 by July 2015 and are now estimated to be falling at $12bn per month.

In an economy which has no income from income tax, interest on dividends, internal corporation tax or VAT, this is bound to impact hard on domestic finances. Hitherto subsidies have pegged electricity at 1.3 cents/kw hour and petrol at the forecourt has sold at 12 cents/litre. Petroleum surpluses have also bankrolled the tradition of Wahhabi ‘charity’ which has done so much to keep the lid on social tensions as well as spread the House of Saud’s influence elsewhere in Islam.

In anticipation of largely US ‘unconventional’ oil and gas making inroads into the European markets, whilst at the same time denying Gulf oil or gas a share of the North American market, Saudi Arabia took a gamble by driving down world oil prices by increasing output to 10.6m barrels per day. And using its dominant position within OPEC it encouraged the other petroleum states to do likewise. In a short time much high cost production was either capped or in the case of many US shale debt financed projects, bankruptcy threatened.

By February 2015 the low oil price had taken some significant scalps. Projects in Northern Siberia were suspended, deep-water exploration in the Gulf of Mexico was all but abandoned, the Canadian tar sands were put on hold, deep-water exploration in Brazilian waters was suspended and the North East Atlantic (Scotland) exploration and developments were halted. According to one analyst[9] the oil ‘majors’ between them had abandoned some 46 large scale projects amounting to a $200bn of investments.

But the Saudi gamble has in many ways been at best a pyrrhic victory. The US shale sector has proved to be more resilient and although the US rig count has fallen from 1,068 in Oct 2014 to 664 by July 2015, output in June reached a record high of 9.6m barrels per day[10]. And although many small drillers have gone bust, this has meant a considerable availability of cost written-down rig equipment which the bigger producers have cashed in on. This has seen rig costs per barrel come down from $8 to just $2.78 which has seen output rise over 30% above the June 2009 level[11]. It is now estimated that with a sustained oil price as low as $55 per barrel most US shale producers could at least break even.

US shale producers have also been able to benefit from a number of technical innovations[12] as well as increasing the number of wells per platform up to 10- which according to some industry sources has resulted in savings of $300,000 per well[13]. This has resulted in drilling cost savings of 50% with further cuts of 30% in the near future. Also drilling times have been cut drastically with a 18,000 ft deep well in the Permian Marcellus Shale of the Appalachian basin being cut from 30 to 16 days.

Saudi Arabia’s price war gamble has had a number of unintended outcomes. Firstly it has exposed how high cost and vulnerable many OPEC producers actually are and the extent to which they have been forced to the edge of ruin within just nine months. Secondly this development has brought into question the long-term viability of OPEC as well as the fitness of an increasingly capricious Saudi Arabia to lead it. And thirdly it has shown how resilient and potentially long-term[14] the US shale sector has proven to be. A recent survey of the Permian basin of West Texas has revealed a field that could yield between 5-6m b/per day and could hold reserves in excess of the giant Ghawar field in Saudi Arabia.

But the oil price gamble plus a more wayward foreign policy drift has probably done much to undermine the trust between Saudi Arabia and the US. Hence in all probability Obama’s nuclear diplomacy initiative with Iran and the drift towards a reliance on Iran for training anti-ISIS Shia militia in Iraq. More recently the sudden and bloody assault on Yemen and the increased tendency of Saudi Arabia to use armed force as a first resort must be worrying US strategists who through Obama’s ‘strong power’[15] variant of the Munroe doctrine have clearly been placing more effort on diplomacy – albeit a diplomacy backed up by drone strikes if necessary.

Some analysts[16] have gone so far as to suggest that Saudi Arabia, largely of its own making, is about to see a strategic realignment take place in and around the MENA region in which a triangulation of power will emerge with Turkey, Iran and Israel exerting the diplomatic and economic tensions in a largely post-OPEC period. In such a scenario Iran possibly in alliance with Qatar and Oman (through the joint development of the giant North and South Sars gas fields they share beneath the Persian Gulf) would become the dominant hydrocarbon power, possibly managing the governance of a Shia eastern Iraq as a protectorate.

It is already rumoured that in anticipation of such developments the Gulf Cooperation Council is planning an alternative triangulation of power based on a more easterly GCC-Turkey-Pakistan axis.

In the meantime Saudi Arabia’s foreign policy drift to Russia and its possibly long-term and futile grudge match against the US shale oil and gas sectors is bound to further distance it from Washington. But whatever the medium-term developments, we are likely to see a heightening of competition within the global hydrocarbon markets that in holding down prices is bound to drive both production and consumption of oil and gas in the opposite direction of the global CO₂ targets needed to arrest an already accelerating trend to irreversible global warming.

In the final part of Brian Parkin’s article tomorrow, he shows that imperialist wars, arrested development and impending climate catastrophe are all linked through industrial capitalism’s continuing dependence on oil.

Notes

[1] ‘Saudis make oil and nuclear deal with Russia’, Northern Star, Issue 12, 27 July 2015, p.6.

[2] Russia had built Iran’s first twin-rector nuclear power station at Bushehr which under UN sanctions was unable to receive fuel.

[3] Indo Asian News Service 23 July 2015.

[4] This design is fully approved and licensed by the International Atomic Energy Agency (IAEA).

[5] Due to the very high demand for secondary circuit cooling water and with the Peninsula having no river sources, Saudi Arabia nuclear stations will have to be located at coastal sites.

[6] These performance data are based on current IAEA performance assessments of this reactor type.

[7] Figures based on net calorific values of fuels as follows:

Coal                    40 kw/kg

Fuel oil               43.6 kw/kg

Natural gas        51.6 kw/kg

[8] Bank of America. Interim Energy Digest, New York July 2015.

[9] Wood Mackenzie. May 2015.

[10] Rex Tillerson, Exxon Mobil quarterly report August 2015.

[11] Wood Mackenzie, ibid.

[12] Enhanced Oil recovery (EOR) methods such as Plasma Pulse Technology is now being deployed for ‘revisiting’ existing well and ‘unclogging’ oil-bearing strata, thus avoiding repeat the high capital costs of opening up new wells. At a later stage (when higher costs permit) further EOR like high pressure CO₂ injection may be considered.

[13] John Hess, CEO Hess Corporation. Quoted in Oilprice.com July 2015.

[14] An interesting and so far unpublished paper on the ‘shale revolution’ by Jonny Jones, ‘What the Frack? Behind the shale revolution’, 2013 has examined the possible impact of unconventional oil and gas; both on the traditional producers and also regarding the long-term impact on fossil fuel economics. Unfortunately this draft was written before the oil price crash of early 2015.

[15] A doctrine of ‘strong power’ was what Obama used to allay Israeli concerns over the Iran nuclear power deal. Probably in order to give Obama a lasting place in the history books, more sycophantic supporters have hailed strong power as the ‘Obama doctrine’.

[16] For instance see Ambrose Evans-Pritchard of the Daily Telegraph.