After decades of rapid economic growth based on oil, Saudi Arabia’s policymakers now face a dilemma. Most efforts to diversify the economy have focused on leveraging cheap gas, but that strategy has begun to founder in recent years under the pressures of higher development costs, supply shortages and domestic wastefulness.
The kingdom is trying to map a new course, but decision makers are divided on how to proceed. The debate over modifying gas prices in Saudi Arabia has been ongoing for some time, but this year the conversation uncharacteristically spilled into the open, led by Saudi Aramco and backed by the oil ministry.
The Electricity and Cogeneration Regulatory Authority, Saudi Arabia’s independent electricity oversight body, has publicly joined Aramco in pointing out that runaway domestic fuel consumption will severely limit the country’s export capabilities.
On the other side are the commerce ministry and several powerful royals, who view low gas prices as an essential competitive tool to attract local and foreign investment and to provide Saudis with their birthright of cheap energy.
A few new elements are steering the debate in Aramco’s favour. The state giant says gas prices must be revised upward to reflect new costs - where previously gas was a byproduct of oil production, it now requires targeted exploration and development. Aramco says nonassociated gas exceeded associated gas output for the first time in 2009 - supplying more than half of the 8.6 billion cubic feet per day of production.
Aramco has fast-tracked three large offshore nonassociated gas developments that will each require gas prices of $2.50-$5 per million British thermal unit (mmBtu) to break even, compared with the capped domestic sales price of 75¢/mmBtu.
The Karan project will add 1.8 bcfd by 2013, with 2.5 bcfd more coming from the Arabiyah and Hasbah developments by 2015.
The oil ministry has rejected the idea of selling gas to the domestic market for less than cost. Higher development costs point to a key underlying issue: Certain government officials in the past overestimated the amount of cheap gas in the kingdom.
More than anything, it was the failure to find gas in the Rub Al Khali that drove this point home.
Six years of exploration wrapped up this month, with only one venture, led by Russia’s Lukoil, reporting a new commercial discovery. Royal Dutch Shell, which drilled on the known Kidan field, is in talks with the oil ministry to find a way to develop the giant sour gas structure, but “there is an understanding that the price of gas would have to change,” says an industry source.
These realities have forced the government to guard closely its gas allocations for industrial and other users. It has not granted new ethane volumes since 2006, severely limiting the further growth of a number of private petrochemical firms.
Overseeing the distribution of gas is Prince Faisal bin Turki, an adviser at the oil ministry who is said to be close to Aramco chief executive Khalid Al Falih. New industrial projects need his nod to source feedstock, giving the oil ministry huge say over the types of projects approved on the industrial side.