[Premium] Cyril Widdershoven: Saudis to Join the Gas Giants? Analysis
Saudi Aramco, the world’s largest oil company, is fighting an uphill battle on oil prices but is setting its sights on regional and global gas. While the media are focusing on Opec’s oil price struggle and Aramco’s initial public offering, the Dhahran based oil giant is slowly but steadily expanding its gas sector investments.
In its latest annual review, Aramco reported that its crude oil and condensate reserves held steady, even while producing at record levels in 2016. With a production increase of 300,000 b/d in 2016, it continued its leading position worldwide. Recoverable crude oil and condensate reserves changed only slightly, set at 260.8bn barrels in 2016, down 300mn barrels on the year.
Aramco will need to keep the reserves at around 261bn barrels as it will otherwise affect the IPO premium expected in 2018, but these impressive figures seem less interesting than the ongoing developments with gas.
Aramco’s future will depend more on gas reserves and capacity. As stated in the annual review, Aramco’s gas reserves are set at a level of 298.7 trillion ft³, up 900bn ft³ on 2015. The latter is of importance to Aramco, but also to the overall position of the Kingdom. Domestic gas production is directly linked to three main economic sectors.
First, Aramco has to inject more into its oil fields to keep production up. Second, Saudi Arabia is trying to wean itself off the use of crude oil and petroleum products as a local energy source for power generation. Using gas will allow more crude exports and also lower CO2 emissions. Third, when looking at the Vision 2030 projects of the coming years, natural – including associated – gas is part of the strategy to supply ample gas-based feedstocks to its domestic industries.
Recent discoveries fuel hope
In 2016, Aramco already stepped up its gas adventures, based on the discovery of the Hadidah gas field in the Eastern Province. At the same time, the oil company reported that its raw gas processing capacity rose to 12bn ft/d, allowing output of sales gas or methane, used mainly for electricity and petrochemicals, to hit a record 8.3bn ft³/d. It also stated that ethane production, a favoured feedstock for petrochemicals, was also higher at 920mn ft³/d from 794mn ft³/d in 2015.
To support all this, Aramco gave the green light in 2016 for its Fadhili gas project, aiming to boost production and supply with clean-burning natural gas, lessening dependence on oil for power generation. Scheduled to be completed by the end of 2019, the Fadhili gas project will become a key component of the Kingdom’s master gas system, processing gas from onshore and offshore fields.
Aramco’s CEO Nasser stated that together, with Wasit and Midyan, Saudi Aramco’s two other new major gas projects, Fadhili will add more than 5bn ft³/d of non-associated gas processing capacity. Specifically, Fadhili will process a total of 2.5bn ft³/d of non-associated gas, including 2bn ft³/d of Hasbah offshore gas and 500mn ft³/d of Khursaniyah onshore gas.
But to counter local demand growth, including the negative effects of growing residual fuel demand (RFO), which stands at 650,000 b/d, it has stated lately that it wants to double gas production to 232bn ft³/d within the next 10 years. For 2020 a target has been set of around 17 trillion cubic feet. This volume addition will include "unconventional gas" in the mix. At present, more than 40% of non-associated gas comes from offshore Hasbah and Arabiyah fields.
Even though the Kingdom is well known for its crude oil capabilities, gas has until now been a rocky road. Former gas exploration projects in the Rub Al Khali (Empty Quarter), partly led by Anglo-Dutch major Shell, were very disappointing. At the same time, the oil giant has not been sitting idle. Aramco already has become an unconventional gas producer of importance. Wells have already been completed in northern Saudi Arabia, capable of a production of 552mn ft³/d of gas by the end of 2017.
These supplies will be delivered to industrial and electrical power facilities in the Wa'ad Al Shamal industrial city, a phosphate project run by Saudi mining firm Ma'aden. Aramco also stated that its Midyan gas project in northwest Saudi Arabia, which is also known as a region rich in iron ore deposits, is almost complete. Midyan was discovered in the 1980s and has significant reserves.
Mutual interest
Still, even if Aramco is stepping up its local gas production capacity, international gas developments have also emerged on the target list of the Kingdom. Current investments in Russia will be linked to possible participation in gas and LNG projects in the coming years. Saudi officials have still not really openly addressed their participation in major greenfield projects in Russia’s gas sector, but Moscow has flung open the doors.
Russian energy minister Alexander Novak invited Aramco to participate in Russia’s Arctic LNG projects, repeating that the current energy and investment co-operation with the Kingdom would be boosted by a possible Aramco participation in these projects. Russia's largest private gas producer Novatek is very interested in Aramco’s participation in its Arctic LNG-2 project, which aims for liquefied natural gas (LNG) production by 2022-2023. The final investment decision will depend on ongoing analysis, including possible methods of cost-reduction.
Saudi minister of energy Khalid Al Falih replied that everything was still undecided, while also repeating that Aramco will be investing globally in gas and LNG production after the firm's planned IPO next year. Novatek's head and its largest shareholder, Leonid Mikhelson, has said Novatek could offer up to 49% in Arctic LNG-2 to foreign investors.
Part of the Saudi gas strategy has become clear. More natural gas reserves have to be opened, but new technology and investments are needed. Saudi Aramco’s local demand predictions show growing demand for gas to assist economic growth and meet demand. At the same time, current gas opportunities inside the Kingdom are not yet enough. Even if Russian or western gas companies came in and supported the Aramco gas drive to the fullest, there is still a discrepancy between demand and supply locally.
Eastern Med allure
Aramco’s additional volumes will have to come from international supply sources or co-operation projects. The Russian ventures are clearly on the list of the Saudi officials, but they will directly be linked to either side's geopolitical strategies. To mitigate its possible dependency on Russia, other options are available. The main question to be asked is if Riyadh is willing to diversify its international operations. Without putting pressure on the growing Russian-Saudi co-operation, Riyadh has the option to join in the ongoing eastern Mediterranean gas adventure.
Without setting up a direct link with the Israeli offshore adventures, Riyadh’s possible first option to consider is the ongoing offshore gas success story currently developing offshore the Nile Delta (Egypt) or Cyprus. Strategically these two options would be very interesting, as they will combine the power projection Saudi Arabia is seeking while intertwining the future gas story of Egypt and a European country with the Saudi Vision 2030 targets.
Looking at the ongoing diversification efforts of the Saudi economy, which will be supported by a multi-trillion investments spree the coming 13 years, energy supplies will be key. At the same time, international investors and operators will only be interested in setting up shop in the Kingdom if regional and local stability is guaranteed. The regional (economic) power projections of Riyadh at present are clear, as co-operation with UAE, Bahrain and increasingly Kuwait and Oman, are a high priority. The current Qatar confrontation has its negative repercussions for Saudi Arabia too, as at present Qatari gas supplies, if targeted, are beyond reach.
Saudi’s Middle East and north African power projections are already directly linked to another major Arab power player, Egypt, which has re-emerged as the main gas producer in north Africa. A growing economic and military co-operation between Riyadh and Cairo is already in place, but could be enhanced substantially by increased links in the natural gas sector of both countries. Egypt’s offshore gas developments, which will be targeting a renewed LNG adventure in the coming years, could, without real technical challenge, be linked to Saudi demand.
A combination of LNG and pipeline gas exports to the Kingdom would be very interesting, looking at the economics and political-military advantages. For Egypt, Saudi investments, especially the participation of Saudi Aramco or a Russian-Aramco joint venture (Novatek/Gazprom) in offshore gas projects, would be a major additional source of revenues.
Some even expect Riyadh to push Moscow to reconsider the Rosneft/Qatar Investment Authority deal, which also is linked to Egypt’s Zohr’s offshore giant gas field. With a still struggling economy, Egypt’s needs for foreign direct investment in the coming years is clear. A deepening economic co-operation would not only increase growth potential: it would also be a major asset to support Egypt-Saudi regional co-operation and strategies.
A Saudi move to bring even Cyprus in, could be technically linked via the latter’s offshore Block 11 project. Geographically it makes sense, as Block 11 and Egypt’s Zohr field are adjacent. Politically it would kill three birds with one stone. Egypt and Cyprus could be linked to the burgeoning demand in Saudi Aramco, while Egypt and Cyprus could take Saudi’s financial capabilities (and its partly anti-Turkish position due to Qatar) as leverage. The current more aggressive international strategy employed by Saudi Arabia, and its national oil company could this time be a real bone for third parties. Riyadh could also be a winning party, as it would secure additional gas supplies and political leverage.
Cyril Widdershoven