Saudi Review

The Saudi Arabian paradox

The Kingdom is transforming itself into a fully integrated energy hub

The Kingdom of Saudi Arabia (KSA) is regarded as the most exciting energy infrastructure market in the world today.

The country has huge untapped oil and gas reserves, is the world’s largest oil producer, and has the capacity to support future unmet global demand for energy.
The kingdom is transforming itself from a tier 1 exploration and production centre to a fully integrated energy hub, and the country’s increasing energy infrastructure project investments place the KSA high on investment agendas and corporate growth plans. The KSA is positioning itself as a major energy capital of the world, with government entities such as the Saudi Arabian General Investment Authority (Sagia) helping to increase levels of transparency and simplification in policies and procedures.

About this study
This market analysis report provides existing and potential investors and operators with insights into the main opportunities, challenges, trends, and success factors for operating in the KSA energy infrastructure market. The study blends first-hand insights from business leaders and decision-makers working in the market with Contax’s 25 years’ experience in the Middle East and Contax’s proprietary data, to highlight how to do business in the kingdom’s energy infrastructure market.

Key Trends
Our primary research has identified a number of key trends, with some evidence to suggest that the KSA presents a paradox for the business community:
The main driver for investment is the size of the market opportunity. Contax’s analysis of the project pipeline found that the KSA will invest $119 billion in its energy infrastructure projects over the 2007-2009 period, putting the kingdom high on many investment agendas. The biggest growth opportunities will be from refining and petrochemicals projects, with investments in these segments during 2007-2009 worth $52 billion and $48 billion respectively. Investments in the refining sector will grow by a staggering 2,189 per cent during 2007-2009 compared to 2004-2006.
It is imperative that foreign companies have a physical local presence in the KSA. Organisations that build a physical local presence are better equipped to develop key relationships, gain trust, and demonstrate the long-term commitment needed to win hearts and minds.
Relationships are key for pre-qualifying or winning projects … but contractor pricing strategies still play a critical role. Strategic partnering and an ability to develop owner/contractor collaborative teams is a key differentiator for winning projects. Pricing strategies are also important, and continue to evolve: whilst lump sum turnkey and converted lump sum are the dominant approaches, strategies such as sole source and reimbursable have also been introduced.
 The KSA continues to fight the talent war. Acquiring, retaining and training staff remains a key challenge for the KSA and the GCC region. The talent shortage is impacting successful project execution, and is compounded by increasing demands on contractor workloads. The KSA faces challenges in attracting an experienced and willing workforce because the attractiveness of other GCC countries continues to draw talent away from the kingdom. However, the paradox is that the KSA energy infrastructure sector also represents a fantastic learning curve for graduates and young engineers.
Perceptions about the KSA around security and quality of life are a challenge. Whilst security still remains a topic of debate, there is a perception that improvements are being made and recognised. The KSA needs to strike a balance between providing a dynamic habitat and maintaining the rich cultural and historic fabric of the kingdom. Whilst the KSA does present a recruitment challenge from a personal perspective, the paradox is that the energy infrastructure market also provides a considerable opportunity from a professional perspective due to stability, longevity of earnings, and the aforementioned learning curve.
Resource shortages continue to impact project delivery. Projects continue to suffer from resource and labour shortages, increased costs for in-demand items, and longer lead times for key equipment. Owners and contractors need to cost and schedule projects based on resource availability and price.
Many foreign companies see Saudisation as an obstacle. Whilst domestic companies in the KSA view Saudisation favourably, the initiative is seen as a challenge by foreign contractors. However, Saudisation cannot be ignored and a key management issue for the future is how to achieve it. Saudisation is a paradox: it is a difficult problem to solve, but those companies who solve it will be successful.
New entrants suffer from lack of market knowledge and loss of brand identity. New entrants face an uphill struggle to establish themselves because they do not know the market and do not have proof-point points in the KSA. Whilst new entrants can benefit from their pedigree internationally, they suffer from a loss of brand identity in the KSA because they do not have relationships or a proven track record in the kingdom.

Conclusion
The KSA presents a paradox for the business community. The kingdom provides substantial energy infrastructure investment opportunities for all players involved in financing and directly delivering projects, or supporting and enabling their delivery.
However, there are also significant challenges around attracting talent, brand identity, and resource availability. Nevertheless, the scale of the market opportunity is such that foreign investors and operators would ignore it at their peril.
*With offices across the GCC, India and Cyprus, the company is a premier growth advisor in the Middle East specialising in GCC energy and infrastructure projects.