Saudi Aramco Advances with Gas Projects, Sees Greater Oil Use in Petrochemical Plants

From One Push to Another

Having launched—and delivered—a massive oil production capacity expansion programme, raising its output potential from about 9 million b/d to 12.5 million b/d in a few years, Saudi Arabia will now switch its attention to its gas production capacity. The switch is long in the making and could be said to have been interrupted early this decade, when Saudi Arabia and its OPEC peers were caught out by quicker–than-expected global—especially Asian—crude demand growth. They had been forced then to embark on a vast production capacity expansion in order to supply the markets and defend their strategic position in the world’s energy sector.

Saudi Arabia's actual long-term swing-production capacity had com under widespread doubt through market tightness in 2003–04. This led the kingdom to embark on a swift and concerted effort to bring its production capacity sharply upwards, redeveloping significant parts of its existing fields and production infrastructure, while also bringing a number of mothballed and undeveloped fields onstream. The oil-focused push, however, saw its development of gas for domestic use fall behind, as the oil expansion programme—if not eating up all of its investment capacity altogether—took up too much of its operational and project-management capacity. Consequentially, a planned expansion of its domestic gas production capacity, which in the early years of this decade was evidenced through discussions about a gas master plan and the kingdom’s decision to invite IOCs to undertake exploration in its Rub' al-Khali (Empty Quarter) desert, was largely put on the backburner.

The issues of oil and gas expansions in Saudi Arabia are not mutually exclusive. The recently completed oil production capacity push—resulting in a spare capacity cushion of about 4.5 million b/d—had brought significant amounts of associated gas onstream. Nevertheless, it has had two less-than-ideal consequences from a gas supply angle. The raised oil production capacity has significantly raised the Saudi call on gas for reinjection into fields, and the increment of associated gas has proven problematic from a reliability point of view, as when global oil demand is low and Saudi Arabia has to scale back production to balance markets—as now—its associated production also falls, despite growth in domestic demand remaining more or less unaffected.

Hence, Saudi Aramco, having successfully rebuilt a crude spare production capacity cushion that allows the kingdom to continue deriving international political and economical benefits from its "swing producer" position, is now turning its attention to non-associated fields wherever possible, in order to catch up with a situation that has been allowed to slip somewhat out of its tight grasp over the past five years.

Tightening the Leash

Saudi Aramco’s chief executive, Khalid al-Falih, yesterday told Reuters that the kingdom expects its domestic gas demand growth to continue at levels of around 7% per year, causing an increasing strain on the company’s ability to identify and deliver gas volumes. The spiralling gas demand in Saudi Arabia is partly due to the kingdom’s burgeoning population growth, but it is mainly fuelled by extremely generous energy subsidies, which have encouraged the most wasteful consumption patterns. Trying to create jobs for its young population, but struggling to build up large-scale industries from scratch, the kingdom has also resorted to using its hydrocarbon know-how and experience to invest directly in, and attract investment to, its petrochemical sector—also allowing it to benefit from adding value to its main export commodity.

Given the high gas demand growth figures, it is becoming clear that Saudi Arabia will have to do something to rein in such growth, particularly given the largely discouraging results from the IOC-led exploration push in its hoped-for new frontier in the Rub' al-Khali desert. Scrapping or lowering fuel and electricity subsidies for the general population seems politically impossible today, especially when Saudi government coffers are relatively full. Even in the cash-strapped late 1990s such a decision was considered only as a last resort, given that subsidies are popularly regarded as one of the key ways in which the population shares in the kingdom’s oil wealth.

Hence it seems that the route open for the government and Saudi Aramco to tackle gas demand growth is through making sure that less of its industrialisation push is based on the utilisation of gas as a main feedstock. That is not to say that such industrialisation is unnecessary—jobs need to be created for the young population so as to avert similar growth in militant and anti-government sympathies that came to a fore in the 1990s and early 2000s.

Speaking at the inauguration of the US$10.3-billion PetroRabigh refining and petrochemical joint venture (JV) between Japan’s Sumitomo Chemical and Saudi Aramco, the kingdom’s oil minister Ali al-Nuaimi said that "we are now working on boosting our current capacity of petrochemicals that depend on gas by installing new facilities that rely on liquid hydrocarbons, and merging these facilities with refining capacity assets," Reuters reports. At the same event Al-Falih was quoted by Reuters as saying that the soon-completed plans to construct the 1.8-bcf/d integrated Wasit gas processing plant would "not have any NGL [natural gas liquids]…it will not address any petrochemical production needed for olefins".

Offshore Progress

The vast Wasit project in itself will go most of the way to lifting Saudi sales gas production capacity by 30% to 8 bcf/d, with its 1.8-bcf/d capacity drawing feedstock from the offshore Manifa development as well as the non-associated Arabiyah and Hasbah gas fields. The vast project will include the construction of the kingdom’s largest single gas processing facility, as well as two offshore gas platforms, one tie-in platform, subsea power and communication links and pipelines, with Canada’s SNC Lavalin providing engineering and design work.

"This plant [Wasit] will be the biggest gas plant we have ever built" al-Falih told Reuters, adding that "it will process all offshore non associated dry gas and this will go a long way to meet rising demand for utilities and some industries."

Several large offshore gas projects are scheduled to come onstream around 2011, with exploration into deeper offshore horizons now being planned for 2012, which will stretch Saudi Aramco’s limited offshore expertise tremendously. The NOC is increasingly looking at its Gulf offshore areas with new eyes, seeing potential new areas opening up in its very deep subsalt basins. "These are new frontiers offshore Saudi Arabia. We hope to find some gas in the subsalt geology there," al-Falih told Reuters, adding that "this is a new technical challenge the company is prepared to take on and we are optimistic".

Outlook and Implications

After successfully having undertaken a huge—and swift—boost of its crude production capacity, Saudi Arabia needs to catch up with its domestic gas demand, as shortages over the past several years during peak demand times have frequently led to rolling blackouts across its cities and definitely resulted in lower economic growth. Reining in its generous subsidy system is seen as politically unmanageable, leading the government and Saudi Aramco to work on utilising more of its vast crude production spare capacity cushion as feedstock for sorely needed industrialisation programmes, which—given the skill-sets, know-how and financial fundamentals most available in the kingdom—will hinge on large-scale petrochemical investments.