Last reviewed 22 June 2021
Saudi Arabia, the world’s largest oil producer, is a huge market for UK exporters already, but there is plenty of room for growth as its economy diversifies away from hydrocarbons.
The oil kingdom
The largest economy in the Middle East Gulf region — it accounts for 25% of the Arab world’s gross domestic product (GDP) — Saudi Arabia is already a substantial export market for UK firms.
As well as being the world’s greatest oil producer, an area which has brought with it staggering levels of investment over many decades (the petroleum sector accounts for almost half of GDP and nearly all export earnings), the kingdom is also a key strategic defence ally for the UK. Today, it is the UK’s single largest trading partner in the Middle East.
In a part of the world often known for its volatility, this means a relationship that has deep political roots, far and above trade. Yet, at the same time, it is these trade and investment links that provide the platform for a much wider, and often complex, bilateral relationship.
Beyond these two core industry sectors — energy and defence — Saudi Arabia and the UK share a huge pool of other mutual interests, from banking and finance through to technology and tourism. Saudi investment has long been courted and prized in the UK, finding its way into a multitude of areas including property and, more recently, almost soccer teams.
A 2020 Saudi-led attempt to buy Premier League football club, Newcastle United, in a deal worth £300m, was ultimately thwarted amid a series of complications. The bid team included Saudi Arabia’s Private Investment Fund (PIF), the kingdom’s sovereign wealth fund, which has amassed around US$430 billion in assets under its control.
In the other direction, UK companies are well established throughout Saudi Arabia’s vast energy sector and in supplying state-of-the-art weaponry to its military. The two sides have stood shoulder to shoulder during two major conflicts with Iraq, following the 1990–91 Gulf War and the 2003 US-led invasion.
Saudi Arabia occupies the bulk of the large Arabian peninsula, sandwiched between the north-eastern flank of Africa on one side and Iran on the other. It’s a vast, sprawling landscape with a rugged, desert interior, with most cities dotted along the coastline, with the notable exception of Riyadh, the national capital.
Also located inland from the west coast is Mecca, the holy city, with Saudi Arabia hugely important in a religious context as the custodian of the birthplace of Islam. Iraq sits directly to Saudi Arabia’s north, as does Jordan, while to the south are Yemen and Oman.
Along Saudi’s eastern coastline are its other near neighbours, Kuwait, Bahrain, Qatar and the United Arab Emirates (UAE). These four tiny, but oil and gas rich states, make up the powerful Gulf Co-operation Council (GCC) economic group, alongside Saudi Arabia and Oman.
As well as smoothing trade, transport and other links, among its longer-term goals is a vision for a single currency unit though this may yet be some way off.
A key focus for all of the so-called Gulf states has been economic diversification. Despite the success of the oil and gas sector, there is a move to higher value areas, including services like technology and finance, through to renewable energy. The blazing hot sun and open landscapes of the Saudi interior make it ideal for both solar and wind-based power generation.
Much of the kingdom’s future planning — and that of its other oil-rich neighbours — is directed by a recognition of a world transitioning away from hydrocarbons to cleaner fuels. It is arguably more pressing for Saudi Arabia, however, given the size of its population, around 32 million.
With approximately 39% of that number under the age of 25, there is an urgent need to widen the economy and create more jobs. For the Saudi leadership it is a delicate balancing act to push through key reforms and liberalisation measures, while combating extremism and facing up to regional tensions, including arch rival Iran.
Oil and gas
Fortunately, Crown Prince Mohammed bin Salman, the de-facto ruler since 2017, has the cushion of his nation’s immense oil and gas wealth with which to navigate these challenges.
Saudi oil production capacity is around 12 million barrels of crude per day (bpd), although actual output is typically less as a result of quotas and demand. It holds a fundamental position in Saudi’s economy, generating huge flows of income, but also making the country vulnerable to commodity price swings.
Indeed, the kingdom was hit hard by last year’s historic oil price crash, as well as the Covid-19 pandemic, both of which continue to exert an influence. GDP fell 3% in the first quarter of 2021, after a fall in the oil sector pulled back the economy, though this was offset by higher growth in other areas like petroleum refining activities and manufacturing.
It reflects the importance of the Crown Prince’s Vision 2030 blueprint, the Government’s transformation plan to wean the economy off oil and into new added value areas.
Saudi Aramco, the state-owned oil company, is itself going through a period of transition, following an initial public offering (IPO) on the stock market and a series of restructuring moves to streamline its multiple subsidiaries. It remains popular with investors, recently raising US$6 billion through the world’s largest US-dollar corporate Sukuk, an Islamic financing instrument.
This underscores the level of global confidence in the group’s long-term business strategy and is a further show of support for the wider Saudi economy, with the two intrinsically linked. In fact, on the ground, Aramco’s production remains steadfast and the industry continues to provide a vast amount of work for both contractors and suppliers.
For the first quarter of 2021, the oil giant posted a 30% year-on-year increase in net income to US$21.7 billion, a sign that is has now weathered the storms of 2020.
“Given the positive signs for energy demand in 2021, there are more reasons to be optimistic that better days are coming,” said Aramco president and chief executive Amin H. Nasser.
“And while some headwinds still remain, we are well-positioned to meet the world’s growing energy needs as economies start to recover.”
British companies have successfully traded with Saudi Arabia for many decades and have supported the oil industry from the beginning, in the pre-war World War Two years. Its largest field, Ghawar in the Eastern Province, discovered in 1948, remains by far the largest conventional oil field in the world and accounts for roughly a third of Saudi’s cumulative oil production.
Major UK corporations active today include the likes of GlaxoSmithKline, BAE Systems, Rolls Royce and Unilever. The leading UK export areas include machinery and mechanical appliances, aircraft and spacecraft, electrical machinery and equipment, arms and ammunition, and vehicles.
While bilateral relations have been disrupted by various political events over the years, such as the murder of the Saudi Arabian journalist Jamal Khashoggi, business links are extensive and entrenched.
One UK group, De La Rue, is currently working on a five-year contract with the General Authority of Zakat and Tax (GAZT) to implement and operate a digital tax stamp solution for all tobacco products and soft drinks sold in the kingdom. Under the agreement, De La Rue will implement its DLR Certify digital system to track and trace excisable products, starting with cigarettes, followed by other tobacco products and soft drinks.
As well as tackling illicit trade, it will ensure the country has a robust excise tax scheme in place and that Saudi Arabia complies with the World Health Organization’s Framework Convention for Tobacco Control.
And the potential for more trade and investment is vast, given the scale of Saudi Arabia’s ambitions over the coming decades. That includes carrying out several new mega projects, including a high-tech city called Neom and a megacity for culture, sports and entertainment in Qiddiya.
There are also sprawling new development projects on the Red Sea coast including hotels, high-end residential properties and a luxury tourist and wellbeing resort called Amaala. While Saudi Arabia has traditionally been a conservative country that has shied away from tourism, it is slowly beginning to open up.
High tech industries are also increasingly prominent. During a June visit, the UK’s Business Secretary Kwasi Kwarteng discussed co-operation opportunities between the Saudi Space Commission and the British Space Agency. The kingdom already boasts one of the most advanced digital government networks in the world, underlining its commitment to the technologies of the future.
While culturally there are major differences, there is also a well-trodden path for British firms keen to enter the Saudi market and plenty of government support and experience tap into.
The UK Department for International Trade identifies strong opportunities in energy, healthcare and education — Saudi Arabia is intending to build 2500 new schools to serve one million new school places by 2030. English is also widely spoken in business circles, providing a degree of comfort and familiarity to overseas visitors.
It may not be an easy, beginner’s market for new exporters but there’s no doubting the scope for more UK-Saudi bilateral trade and investment.