A one-sided affair: Saudi Arabia is interested in 'unconventional gas', but what's stopping in the way?

Published August 3rd, 2014 - 03:55 GMT
The Kingdom, holding the world's fifth largest proven reserves of gas, expects domestic demand for natural gas - used mainly for power generation
The Kingdom, holding the world's fifth largest proven reserves of gas, expects domestic demand for natural gas - used mainly for power generation

Launched by the then Crown Prince, and now Custodian of the Two Holy Mosques King Abdullah Bin Abdul Aziz, way back in September 1998, when during an hour long private meeting with senior executives of seven US oil majors he invited them to help develop the Kingdom's energy resources. The unexpected overture, which took everyone by surprise then, was made at the opulent McLean, Virginia, residence of the then Saudi ambassador in Washington Prince Bandar Bin Sultan. Those attending the meeting included senior executives from four American oil giants - Mobil, Exxon, Texaco and Chevron - which established the Arabian American Oil Co., now known as Saudi Aramco, in the 1930s. Senior executives from Atlantic Richfield, Conoco and Phillips Petroleum also attended. The executives attending the meeting were apparently "shocked" at the offer, reports later said.

The Saudi Strategic Gas Initiative was heralded as the first foreign investment in Saudi Arabia's upstream energy sectors. Western oil firms shown strong interest in the Initiative, hoping that a foot in the door with less than desirable gas projects might ultimately be rewarded with more lucrative upstream crude deals.

Initially, the three mooted gas projects focused on a $15 billion scheme to develop gas reserves in South Ghawar field and two minor $5 billion ventures that involved gas production for petrochemical, power and water desalination projects. However, internal opposition and drawn out negotiations, as well as questions about the Aramco reserve estimates, stifled the early euphoria.

The Initiative ended up with only a handful of projects, led mainly by Russian, Chinese and European firms. US oil majors which had originally negotiated for participation, interestingly abstained.  The revised gas projects entailed exploration and processing of the non-associated gas found in designated blocks in Empty Quarters.

In October 2003 Royal Dutch/Shell and France's Total finalized agreement with Saudi Aramco for the Shaybah gas project, covering a 200,000 square kilometer area of the Empty Quarters. Initially Shell, which led the consortium, had a 40 percent stake in the project with Total and Saudi Aramco each holding 30 percent stake. In May 2004, Russia's Lukoil was also awarded an 80 percent stake in 29, 900 sq.km. Block A and China's Sinopec was also awarded 80 percent stake in 38,800 sq.km Block B with Saudi Aramco holding the remaining 20 percent in both the blocks. Italy's ENI and Spain's Repsol-YPF, won 50 percent and 30 percent stakes respectively in the 52,000 km, Block C with Saudi Aramco accounting for the remaining 20 percent.

The entire Initiative however is in doldrums! Early last month, Royal Dutch Shell announced ending investments in the project, complicating efforts to exploit the gas potential in the Kingdom. Already last year, industry sources told media that Royal Dutch Shell was set to end investments in the venture due to disagreements over terms. At least three other foreign firms - Italy's ENI, Spain's Repsol and France's Total - have also abandoned the search for commercially viable gas deposits in that part of Saudi Arabia.

Shell stuck it out longer in its South Rub Al-Khali Co. (SRAK) project after finding small quantities of sour gas in Kidan, near the Shaybah oilfield. Sour gas has high levels of potentially deadly hydrogen sulphide and therefore is tougher to produce than conventional gas reserves. The relatively high cost of developing challenging deposits while gas sales prices fixed at a fraction of probable production costs were discouraging Shell and others, industry sources familiar with the matter were quoted by Reuters earlier.

When Eni and Repsol quit the project two years ago, media reports said that the companies opted to leave out because even if gas was discovered easily there, the find would not have been economically feasible due to the hydrogen sulphide richness of the 'sour' gas located in the area. Last year it was also reported that China's Sinopec too had suspended drilling operations in the Empty Quarter.

Low domestic gas pricing has been an issue here. Saudi Aramco corridors in Dhahran have been abuzz with voices calling for changes in the price regimen. The country will not be able to develop the known gas resources in the Rub Al Khali (Empty Quarter) desert until the government raises the domestic gas price, Saudi Aramco CEO and president Khalid Al Falih was quoted in press as saying.

“One challenge we have is the pricing of gas is very low in Saudi Arabia and does not make unconventional gas or tight gas in the Rub Al Khali economic,” he argued. Al Falih said he hopes the gas price issue “will be addressed by the government in due course.” However, he refrained out from providing any timeline.

The focus is now shifting to unconventional resources. Saudi Oil Minister Ali Al-Naimi had estimated the country's unconventional gas reserves - those held in reservoirs that have not been traditionally exploited - at over 600 trillion cubic feet, more than double the proven conventional reserves of 288 trillion cubic feet. 

Saudi deserts may hold as much as 645 trillion cubic feet of technically recoverable shale gas, the world's fifth-largest deposits, behind China, the US, Argentina and Mexico, according to estimates by Baker Hughes Inc.

Russia's Lukoil was reportedly interested in tapping unconventional gas deposits in the Empty Quarter. "This is tight gas. The negotiations are under way. No details on deal and future production plans yet," a spokesman for Lukoil Overseas was quoted as saying.

And in order to make unconventional gas economically viable, Saudi Aramco is endeavoring to reduce the cost of producing natural gas from so-called tight rock formations, putting it on equal footing to gas from the best plays in the US.

Saudi Aramco, is now targeting a cost of$2 to $3 per thousand cubic feet of tight gas, Adnan Kanaan, of Aramco's Gas Reservoir Managing department said in a report published last month by the Society of Petroleum Engineers.

The Kingdom, holding the world's fifth largest proven reserves of gas, expects domestic demand for natural gas - used mainly for power generation - to almost double by 2030 from 2011 levels of 3.5 trillion cubic feet per year. After a decade of efforts, finding new gas resources still remains one of the key challenges before the energy managers of the Kingdom.


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