Partnering for an Energy Future

The Indo-Saudi energy agreement was signed on 8 October 2023 in Riyadh.

The timing of the signing of this MoU is significant as it coincided with the Middle East and North Africa (MENA) Climate Week 2023. Broadly, this deal covers the following areas: electrical interconnections, green and clean hydrogen and supply chains. Overall, it is a substantially broad framework; the world’s biggest energy producer and one of the largest energy consumers are coming together in search of new avenues.

Background

Energy has always been an important geo-political tool for Saudi Arabia.

As the world has industrialized, the significance of Saudi Arabia has grown and reached a stage where it can calibrate the decisions of OPEC. Saudi ARAMCO, officially known as the Saudi Arabian Oil Group, is the state-owned petroleum and natural gas company of Saudi Arabia. As of 2022, it is the second-largest company in the world by revenue.

The huge oil revenues that the Saudi government has acquired over the years have helped in the development of the Saudi economy. Saudi Arabia is a typical example of a rentier economy. Taxes are low. Citizens are covered by a high level of social security. All this is covered by the oil money.

Even though Saudi Arabia has many more years of energy reserves, fossil fuels are being increasingly looked at with growing suspicion by the international community. This is due to the growing threat of global warming. To tackle climate change, the world was expecting leading energy producers like Saudi Arabia to take the first steps towards transition. This has finally happened- the Saudi Crown Prince Mohammad bin Salman has shown interest by launching the Saudi Green Initiative under his Vision 2030 Plan. India, too, is now playing a leading role in the global fight against climate change through various forums. It is emerging as a leader in the field of green energy. Thus, there is a growing convergence of interests between India and Saudi Arabia in this area.

Analysis

Transition to green energy is not easy for any country. This is true even for the developed countries in the West. For a country like Saudi Arabia, this is more so the case. The Saudis know that they cannot rely on fossil fuels as a source of revenue forever. Energy income has set up the foundation of their economies. But now they need to move their economy forward from being an energy-dependent one.

Like its Gulf Arab neighbours, Saudi Arabia faces some common challenges in this regard. Through the decades, the economy has become accustomed to the easy money from oil revenues. Large parts of the Saudi economy are closely linked to the energy sector. Expatriate oil workers make up a large part of the economic system. This has to change in the future if Saudi Arabia has to move away from fossil fuels.

The Saudi government, under its green initiative, has laid down a framework to achieve this objective. The main targets that have been elucidated here are environmental protection, energy transition, and sustainability programmes with the overarching aims of offsetting and reducing emissions, increasing the Kingdom’s use of clean energy, and addressing climate change. These are all bold objectives. They will have an impact on both the domestic and foreign policies of Saudi Arabia. A fixed timeframe has been set to achieve these policies. However, Saudi Arabia cannot fulfil all of these requirements on its own.

As a fossil fuel-dependent country, Saudi Arabia has not yet developed the technology for green energy at a level that would help it in a smooth transition. The engineers and oil workers working on projects in the country have a strong set of skill sets. However, this expertise is mostly non-transferable. In the green energy sector, different types of expertise are needed. This new labour pool cannot be created in a single day.

India recognized the threat of climate change a long time ago. As a growing economy, it has to have more and more energy. At the same time, it is also facing the full brunt of global warming.

So, New Delhi began to establish a green energy ecosystem a long time before Riyadh. The transition has been smoother for India. It had a powerful incentive in this regard. The volatility of the international oil markets sometimes creates high uncertainties. India’s economic growth has suffered in the past by being tied up with these uncertainties.

Therefore, both in green energy infrastructure and in having an appropriately skilled labour force, India is ahead of the game compared to Saudi Arabia. This is why the recently signed MoU between the two countries has placed a special emphasis on co-production and co-development. Here, the Saudis are interested in green and clean hydrogen, which is being touted as the future of global energy production. It is comparatively cheap to produce, but the requisite technology has to be mastered effectively. Other than this, India also has good knowledge about solar energy. Large parts of Saudi Arabia, including the huge desert in the centre of the country, are baked by the Sun for a major part of the years. With Indian assistance, this desert could be made to bloom through the setting up of solar farms.

What does India get in return for all this? For one, all this is a part of India’s energy diplomacy. The West is happy with continuing to keep Saudi Arabia as a permanent energy reserve. New Delhi knows that fighting climate change is not the responsibility of any one country; It is the responsibility of the whole world. So, if any country is a late starter in this arena, then India should lend out a helping hand. The resulting goodwill from Saudi Arabia will be immense.

There is also an additional advantage here for India. The green energy sector in India needs a lot of money. Financing constant technological upgradation is an imperative. This is where Saudi Arabia comes in.

Infrastructure will be the key to the Indo-Saudi green energy cooperation. Without the proper infrastructure, setting up green energy facilities will remain a pipedream. India has the tools and equipment in this area. Saudi Arabia has begun to move in this direction. Transferring Indian infrastructural facilities in this context to Saudi Arabia will necessitate a lot of logistical arrangements. Ecological conditions in Saudi Arabia are vastly different from that in India. The most critical thing here, though, will be the creation of a smooth supply chain between India and Saudi Arabia in the renewables sector so that parts and appliances can move easily between the two countries.

As more electrical interconnections are laid down between India and Saudi Arabia, this will benefit New Delhi. India’s electricity demand has always been high. Its growing population is consuming power at a higher rate. With a comparatively much smaller population, Saudi Arabia does not need so much electricity. So, the excess electricity that it has can be transported to India. The Saudis want to expand their electrical grid to their sparsely populated areas. Here, India can help with its technical know-how and capabilities.

Energy was not the only issue that was discussed between the Indian and Saudi governments in this meeting. Trade was also a key area of focus. The booming Indian economy is an attractive destination for Saudi Arabia. This includes both the public and private sectors in that country. Indo-Saudi trade has not yet reached anywhere near its actual potential. A Free Trade Agreement (FTA) will change the ground reality here. Both governments have agreed to expedite negotiations towards such an agreement.

At the end of the day, the economic and energy relationship between India and Saudi Arabia complement each other. The synergy between the two economies would increase through both pathways. India has a golden opportunity here to have a comprehensive partnership with a country with so much economic potential, like Saudi Arabia. The geo-strategic benefits for India from all this would also not be anything less. Therefore, it can be said that the implications of this Indo-Saudi agreement go