By Reem Shamseddine and Barbara Lewis
KHOBAR/LONDON (Reuters) - Long before it understood the value of oil, the desert kingdom of Saudi Arabia knew the worth of water.
But the leading oil exporter's water challenges are growing as energy-intensive desalination erodes oil revenues while peak water looms more ominously than peak oil -- the theory that supplies are at or near their limit, with nowhere to go but down.
Water use in the desert kingdom is already almost double the per capita global average and increasing at an ever faster rate with the rapid expansion of Saudi Arabia's population and industrial development.
Riyadh in 2008 abandoned what was in retrospect clearly a flawed plan to achieve self-sufficiency in wheat and aims to be 100 percent reliant on imports by 2016.
"The decision to import is to preserve water," said Saudi Deputy Minister of Agriculture for Research and Development Abdullah al-Obaid. "It's not a matter of cost. The government buys wheat at prices higher than in the local market."
Critics complain the policies are still not joined up, however, and say the risk is that Saudi farmers will turn to even thirstier cash crops.
"Many farmers who used to grow wheat start growing fodder (animal feed) instead that generates quick cash. But unfortunately fodder's use of water is four times more than for wheat," said Abdulaziz Rabih al-Harbi, professor at the King Saud University and a member of the agriculture committee at the Riyadh Chamber of Commerce and Industry.
"Other farmers grow palms instead of wheat and this also consumes huge amounts of water and may not achieve the desired goal of efficient water consumption."
As one of the kingdom's primary sources of development and employment, agriculture is a sensitive political issue and so scaling back is not an option.
But with such a small amount of the country suitable for cultivation, a comprehensive solution is required, industry officials say.
A water quota for the agriculture sector and a push to reduce wheat consumption, which is rising by 5 percent a year, are possible solutions, said Hasan al-Shehri, chairman of the Cooperative Association of Wheat in the Kingdom and general manager at the Saudi Agricultural Development Co.
"We need coordination between the ministries of agriculture and water," said al-Shehri.
The lack of water also poses a major challenge to the kingdom's hopes to develop its mining sector to diversify its economy given the water-intensive nature of the industry.
"Gold is there but we don't have water," Mohammed Hany al-Dabbagh, vice president of precious metals and exploration at state-controlled minerals firm Saudi Arabian Mining Co said.
"Water is as precious as gold."
Saudi Minister of Water and Power Abdullah al-Hussayen said in May the nation's demand for water is rising by more than 7 percent each year and that more than 500 billion riyals ($133 billion) of investment in the water and power sector will be required over the next decade.
Consultancy Booz and Company estimates Saudi water use is around 950 cubic meters per capita each year, compared with a world average of 500 cubic meters.
Agriculture is the single biggest user, absorbing 85-90 percent of the kingdom's supplies, according to Saudi's deputy minister of agriculture for research and development. Of that, almost 80-85 percent came from underground aquifers.
With average annual rainfall around 100 mm (4 inches), Saudi's ancient underground aquifers are its lifeblood.
But just as peak oil theorists believe the world's conventional oil supplies are at or near their peak, proponents of the peak water view have said the resource has been irreversibly drained.
Booz and Company has said some of the region's aquifers -- also referred to as "fossil water" as they contain rain that fell thousands of years ago -- have become too salty to drink.
Injecting water into oilfields has also had an impact, although sea water is now generally used to maintain reservoir pressure.
HIGH COST, HIGH ENERGY
The alternative to desalination -- the energy-intensive process of converting salt water to fresh water -- robs Saudi Arabia of its other precious resource, oil, by eating up both fuel and fuel revenues.
Saudi Arabia's Saline Water Conversion Corp (SWCC) produces 3.36 million cubic meters of desalinated water per day, a daily cost of 8.6 million riyals based on the SWCC's 2009 figures -- the latest available -- when the cost of producing one cubic meter of desalinated water was 2.57 riyals. Transporting it added an extra 1.12 riyals per cubic meter.
Analysts and industry leaders say the authorities need to pass on more of the costs to the end-user to curb demand and reduce waste -- an argument that holds true for power and fuel but which requires very careful handling in the case of water.
"It is necessary to raise water tariffs," Isao Takekoh, a director at the U.S.-based International Desalination Association, said. "But it should be conducted very carefully and step-by-step because water is, needless to say, indispensable for human life."
By burning up energy, desalination reduces the amount of crude available for lucrative export markets. Takekoh estimated energy represented between 45 and 55 percent of unit production costs.
The International Energy Agency and analysts at HSBC bank estimated Saudi Arabia's rate of direct crude burning more than doubled from 2008 to 2010 because of a rapid rise in power demand and a shortage of natural gas. How much of that went to desalination is not known but experts believe it is significant.
Industry officials and experts say the fact that Saudi Arabia is adjusting its agriculture policies shows it is aware of the challenges but like the rest of the world, it needs to move fast.
"Saudi Arabia realized they should start thinking about using their water in a more efficient way," said Peter Brabeck, chairman of Nestle, one of the world's largest food companies and a leading campaigner to avert a world water crisis.
"They understand water has more value than oil in the long term," he said.
(Editing by Daniel Fineren and Sonya Hepinstall)