Protecting Saudi Arabia’s petrochemical birthright

Published October 7th, 2010

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Insight from Christopher Gasson, GWI publisher

I have been in Jeddah this week for the Saudi Water and Power Forum. The big news for me was the evolution of the water minister’s position on paying for water. Previously, he has always preferred the idea of promoting water saving rather than tariff rises, but at the SWPF this year he was quite explicit about the need to increase water tariffs for the first time.

The current situation is crazy: users are charged just 10 halalas per cubic metre ($0.027/m3) for the first 100m3 consumed in any given month. If the full capital, energy and operating costs were taken into account, the delivered cost of water in Riyadh is likely to be in the region of $6.00/m3 (the current regime represents a subsidy of 99.6%). At that level of pricing, it is not just the Kingdom’s current cashflows which are going down the drain every time someone turns on a tap, but the future wealth of the country as well. Water production is gobbling up the country’s oil reserves at an increasingly alarming rate.

The minister, Abdullah Al-Hussayen, is a very thoughtful man. He is fully engaged with the Kingdom’s water challenge – and also its politics. In the past, it has not made for good politics to advocate higher prices for water because of the social tensions this might cause. However, the priorities are changing. Over the past year, the state oil company, Aramco, has been taking a much greater interest in the amount of oil consumed by the power and water sector. Each barrel used by the Saline Water Conversion Corporation is a barrel deducted from Aramco’s OPEC production quota, and a barrel less oil that can be sold for export. With the Shoaiba and Shuqaiq power and water plants now in production, there is a growing feeling in the Kingdom that demand for water and power is almost unlimited at the current prices.

Al-Hussayen expressed the situation brilliantly when he said: “We think that we are helping people by lowering the price of water. In fact, we are making things worse.” Low tariffs are not in the consumers’ own interest, he argues, because they encourage wastage and under-investment in infrastructure. It is the first time I have heard someone at ministerial level in any country make this point. In general, politicians are so afraid to talk about tariffs that they never explore the positive reasons why consumers might be willing to accept an increase.

The key issue is the renewability of resources. Where water resources are renewable, the question of whether water is paid for by customers or through government subsidy can be a matter of debate. Where water resources are non-renewable (i.e. from fossil aquifers), or where production relies heavily on the use of non-renewable fossil fuels (as in Saudi Arabia), even the most pig-headed consumers can see why heavy subsidies are not in their own long-term interest.

Saudi Arabia has been ahead of the rest of the world in terms of its experience with extreme water scarcity. The fact that the Kingdom now seems prepared to tackle the thorny issue of tariff reform head-on is good news for everyone involved in the business of water sustainability.