- Saudi Arabia Just Announced Plans to Build a Mega City That Will Cost $500 Billion
Saudi Crown Prince Mohammed bin Salman announced plans to build a new city on the Red Sea coast, promising a lifestyle not available in today’s Saudi Arabia as he seeks to remake the kingdom in a time of dwindling resources.
The prince said the city project, to be called “NEOM,” will operate independently from the “existing governmental framework” with investors consulted at every step during development. The project will be backed by more than $500 billion from the Saudi government, its sovereign wealth fund and local and international investors, according to a statement released on Tuesday at an international business conference in Riyadh.
The new project will likely surprise investors still trying to take stock of a series of major announcements made by the prince during his meteoric rise to power as he seeks to prepare Saudi Arabia for the post-oil era. In less than two years, he’s revealed plans to sell a stake in oil giant Saudi Aramco and create the world’s largest sovereign wealth fund, and has ended a long-standing ban on female drivers.
The prince, 32, made a rare public appearance at the conference to promote the project, telling the bankers and economic policy makers in attendance that the kingdom is moving to a “new generation of cities.” NEOM will be powered by clean energy, he said, and will have no room “for anything traditional.”
It will likely be met with the same mixture of optimism and doubt that has greeted his previous headline-grabbing announcements. His supporters can be expected to cheer what they see as a bold drive to transform the kingdom, while others will point to past failed attempts to overhaul the Saudi economy that also included industrial cities in the desert.
The ambitious plan includes a bridge spanning the Red Sea, connecting the proposed city to Egypt and the rest of Africa. Some 10,000 square miles (25,900 square kilometers) have been allocated for the development of the urban area that will stretch into Jordan and Egypt.
Klaus Kleinfeld, the former chairman and chief executive officer of Siemens AG and Alcoa Inc., was appointed to lead the development of NEOM. SoftBank Group Corp.’s Vision Fund on Tuesday signed an initial agreement with the kingdom’s wealth fund to buy a “significant” stake in state-controlled Saudi Electricity Co., and will provide energy for the new city. Saudi Arabia this year agreed to become a cornerstone investor in the Vision Fund.
The project “seems to be broadly modeled on the ‘free zone’ concept pioneered in Dubai, where such zones are not only exempt from tariffs but also have their own regulations and laws, hence operating separately from the rest of government,” said Steffen Hertog, a professor at the London School of Economics and longtime Saudi-watcher. “In Dubai, this has worked well, but attempts to copy it have done less well in the region.”
A promotional video released on Tuesday features a lifestyle so far unavailable in Saudi cities. It showed women free to jog in leotards in public spaces, working alongside men and playing instruments in a musical ensemble. The one woman wearing a hijab had her head covered with a patterned pink scarf.
The kingdom has already announced a plan to transform hundreds of kilometers of Red Sea coast into a semi-autonomous world-class tourism destination and governed by laws “on par with international standards.”
Read More: Saudi Arabia Unveils Plans to Draw Tourists to Red Sea Beaches
The unveiling of the new project comes as Saudi officials, almost two years into the latest reform drive, are still grappling with how to speed up change without crippling the economy and clashing with the kingdom’s conservative religious establishment.
The world’s biggest oil exporter wants to overhaul the economy while creating enough wealth to avoid the risk of social unrest. Similar efforts over the past three decades have floundered, with plans losing steam as soon as crude prices recovered. Some landmark projects, such as a $10 billion financial district in Riyadh, are struggling to take off.
“Saudi Arabia has announced a number of mega-projects recently, but what investors will ultimately look for is greater details, progress with plans and initial investment,” said Monica Malik, chief economist of Abu Dhabi Commercial Bank. And while the planned, more liberal, regulatory framework for the city “could be positive for streamlining investment,” it didn’t gain traction with previous economic cities developed in the kingdom, she said.
Prince Mohammed, who became heir to the throne this summer after his older cousin was removed from office, has vowed not to repeat past mistakes, insisting that his Vision 2030 will proceed regardless of oil prices. His government has cut subsidies, slashed spending to trim the budget deficit and it plans to introduce value-added taxation next year to raise non-oil revenue.
Hertog said investors will want to see whether “circumventing some of the slow mainline bureaucracy and general social restrictions in Saudi Arabia in a special zone” can work. “If this is to be an international hub, it needs to offer something better than Dubai, which is a high bar to cross,” he said.
The crown prince indicated he understood the challenge. “Dreaming is easy, achieving it is difficult,” he said.
Oil Prices Recover Slightly Amidst Demand Concerns in U.S. and China
Oil Prices Continue Slide as Market Skepticism Grows Over OPEC+ Cuts
Global oil markets witnessed a continued decline on Wednesday as investors assessed the impact of extended OPEC+ cuts against a backdrop of diminishing demand prospects in China.
Brent crude oil, the international benchmark for Nigerian crude oil, declined by 63 cents to $76.57 a barrel while U.S. WTI crude oil lost 58 cents to $71.74 a barrel.
Last week, the Organization of the Petroleum Exporting Countries and its allies, collectively known as OPEC+, agreed to maintain voluntary output cuts of approximately 2.2 million barrels per day through the first quarter of 2024.
Despite this effort to tighten supply, market sentiment remains unresponsive.
“The decision to further reduce output from January failed to stimulate the market, and the recent, seemingly coordinated, assurances from Saudi Arabia and Russia to extend the constraints beyond 1Q 2024 or even deepen the cuts if needed have also fallen to deaf ears,” noted PVM analyst Tamas Varga.
Adding to the unease, Saudi Arabia’s decision to cut its official selling price (OSP) for flagship Arab Light to Asia in January for the first time in seven months raises concerns about the struggling demand for oil.
Amid the market turmoil, concerns over China’s economic health cast a shadow, potentially limiting fuel demand in the world’s second-largest oil consumer.
Moody’s recent decision to lower China’s A1 rating outlook from stable to negative further contributes to the apprehension.
Analysts will closely watch China’s preliminary trade data, including crude oil import figures, set to be released on Thursday.
The outcome will provide insights into the trajectory of China’s refinery runs, with expectations leaning towards a decline in November.
Russian President Vladimir Putin’s diplomatic visit to the United Arab Emirates and Saudi Arabia has added an extra layer of complexity to the oil market dynamics.
Discussions centered around the cooperation between Russia, the UAE, and OPEC+ in major oil and gas projects, highlighting the intricate geopolitical factors influencing oil prices.
U.S. Crude Production Hits Another Record, Posing Challenges for OPEC
U.S. crude oil production reached a new record in September, surging by 224,000 barrels per day to 13.24 million barrels per day.
The U.S. Energy Information Administration reported a consecutive monthly increase, adding 342,000 barrels per day over the previous three months, marking an annualized growth rate of 11%.
The surge in domestic production has led to a buildup of crude inventories and a softening of prices, challenging OPEC⁺ efforts to stabilize the market.
Despite a decrease in the number of active drilling rigs over the past year, U.S. production continues to rise.
This growth is attributed to enhanced drilling efficiency, with producers focusing on promising sites and drilling longer horizontal well sections to maximize contact with oil-bearing rock.
While OPEC⁺ production cuts have stabilized prices at relatively high levels, U.S. producers are benefiting from this stability.
The current strategy seems to embrace non-OPEC non-shale (NONS) producers, similar to how North Sea producers did in the 1980s.
Saudi Arabia, along with its OPEC⁺ partners, is resuming its role as a swing producer, balancing the market by adjusting its output.
Despite OPEC’s inability to formally collaborate with U.S. shale producers due to antitrust laws, efforts are made to include other NONS producers like Brazil in the coordination system.
This outreach aligns with the historical pattern of embracing rival producers to maintain control over a significant share of global production.
In contrast, U.S. gas production hit a seasonal record high in September, reaching 3,126 billion cubic feet.
However, unlike crude, there are signs that gas production growth is slowing due to very low prices and the absence of a swing producer.
Gas production increased by only 1.8% in September 2023 compared to the same month the previous year.
While the gas market is in the process of rebalancing, excess inventories may persist, keeping prices low.
The impact of a strengthening El Niño in the central and eastern Pacific Ocean could further influence temperatures and reduce nationwide heating demand, impacting gas prices in the coming months.
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