SAUDI ARABIA - The Gas Sector & Pricing.

In 1974, King Faisal ordered Aramco (Arabian American Oil Co.) to design, build and operate a master gas system (MGS) for the kingdom. The company (at the time controlled by Chevron, Texaco, Exxon and Mobil) embarked on the largest engineering project to executed by any firm in the world, hiring tens of thousands of workers and many contractors to build the gas-gathering and fractionation infrastructure linking all the kingdom's onshore and offshore gas-oil separation plants (GOSPs). Now, 31 years later, natural gas is once again a hot topic of debate after Riyadh and Washington recently signed a bilateral agreement to smooth the way for the kingdom to be granted full membership of the World Trade Organisation (WTO) before end-2005. Now Aramco is fully owned by the Saudi government and is known as Saudi Aramco.

As a full member of the WTO, the Saudi government is no longer able to keep the price of natural gas subsidised. With competition coming to the Saudi petroleum sector, the issue of pricing the gas to local industry is causing Riyadh a great deal of trouble. The price of gas, whether a feedstock for petrochemicals and other industries or a fuel, will have to rise considerably above its current level.

In 2003, it was Brussels which raised the issue, when a similar trade agreement was signed by the EU and Saudi Arabia. EU leaders protested at the price of $0.75/m BTU for gas supplied by Saudi Aramco to the local petrochemicals industry and the power generators and at the 30% discount on gas liquids (mainly LPG) supplied to industry. The EU argued that the price was well below international levels, making Saudi Basic Industries Corp. (SABIC) products unfairly competitive in the EU. The pricing issue is unlikely to be resolved soon, but pressure is mounting on Saudi Aramco to deliver increased volumes of feedstock gas.

Saudi Aramco itself protested several years ago that the price of $0.75/m BTU was too low. But SABIC's foreign partners had been lured to Saudi Arabia by two key incentives offered in the 1970s: guaranteed long-term supply of crude oil without any "access premium", and a plant gas or fuel gas price of $0.50/m BTU. These companies were no longer keen on the oil incentive in the 1980s, when their petrochemical plants went on stream. But they did not mind an increase of the gas price to $0.75/m BTU in the early 1990s as this was the lowest in the six Arab Gulf Co-operation Council (GCC) states.

However, suggestions that Saudi Aramco might raise its price for plant or fuel gas to $1.50/m BTU to satisfy the WTO have made many of SABIC's partners worried that the NOC may also eliminate the discount on the price of NGL. These are tricky matters, but the government will have to resolve the problem in one way or another.

Saudi demand for dry sales gas has grown at an average rate of 6% in the past four to five years, with the demand for wet, ethane-rich, gas increasing by more than 9%. Growth in demand is largely being driven by a series of petrochemical mega-projects proposed in the Eastern Province by SABIC and the private sector. Back and front-end engineering and design (FEED) as well as construction work is already under way for six new greenfield olefins and polyolefins projects in Jubail, and expansions have been announced for four existing ventures. Major investments are planned in Yanbu', on the Red Sea coast to the west. Altogether, more than 12m t/y of new capacity is planned to be brought on stream, starting in 2009 (see the petrochemicals sector in DT No. 15 - refining in DT No. 14).

By 2009, Saudi Electricity Co. (SEC), The Power & Utilities Company for Jubail & Yanbu (Marafiq) and Saudi Aramco would have installed about 3,700 MW of gas-fired power generating capacity. Demand for reinjection of gas into oil reservoirs to maintain pressure is another factor. The situation in the kingdom is not comparable with that in other GCC states such as Oman, which is fighting to prolong the life of old oil reservoirs, but there are indications of a change. Reinjection into the Shou'aiba reservoir in Saudi Arabia is very high and is set to increase. New demand will come from other onshore fields in production since the late 1940s.

Abut 60% of the kingdom's natural gas reserves of 236-237 TCF are in associated form. This means future gas production increases will be partly limited by OPEC-set oil output quotas - although this quota system has been suspended for the time being (see OMT).

According to presentations made in late June in Washington by Khalid al-Falih, senior vice-president of Saudi Aramco's gas operations, new capital investment of about $9,000m is planned in the upstream gas sector by 2010. Work is under way on two major projects - the straddle and the Khursaniyah gas plant (KGP) - which will cost more than $3,000m. The larger of the two, the straddle plant, will process non-associated gas and natural gas liquids (NGLs) from the Haradh and Hawiyah plants. Some 3,800 MCF/d of gas will be available on project completion in 2008. By then, about 1,000 MCF/d of gas will also be pumped into the MGS under the KGP project.

Saudi Aramco earlier this year awarded a contract to expand the gas fractionation capacity of the Ju'aymah plant by 45%, and bids are due to be submitted by late October for a near 50% increase in capacity of the Hawiyah and Yanbu' gas plants, making available a further 985 MCF/d of gas. Supplies will rise from the new onshore oilfield development project at Khurais will produce 400 MCF/d of gas in association with 1.2m b/d of Arabian Light crude.

These projects will increase the capacity of the MGS from about 7,800 MCF/d to between 13,000-14,000 MCF/d before 2025.

Despite the huge list of mega-projects depending on gas, Saudi Aramco is not shouldering the burden alone. Following the collapse of the natural gas initiative (NGI) in late 2002, the company for the first time in decades signed exploration and development agreements with international oil companies (IOCs), enlisting their support to produce non-associated gas in the Rub' al-Khali (Empty Quarter - RaK). The three core ventures proposed under the NGI, were expected to have brought significant new capacity on stream by 2006/07. But other gas E&P ventures have since emerged in the RaK.

Now work is progressing on gas E&P ahead of schedule. Nine seismic crews are currently active in the RaK and new prospects have been identified. A total of 27 wildcats are to be drilled by 2009. IOCs are at the final stages of 2D and 3D seismic data interpretation and preparing to spud the first exploratory wells by early 2006.

However, indications that Saudi Aramco will only pay $0.60/m BTU for the gas which will be produced in the RaK have alarmed some of the companies which have been interested in the current gas opening in Saudi Arabia (see Gas Market Trends 13). There are healthy prospects and a clear picture will emerge after the first well is drilled; and the IOCs are two months ahead in their drilling programme.

Saudi Aramco has made several important oil and gas discoveries in recent years. In late June, the Petroleum & Natural Resources Ministry announced the discovery of a new gas field about 95 km west of Dhahran, capable of producing 40 MCF/d. Prospecting for non-associated gas is a constant activity. Of particular focus is the Ghawar, South Ghawar, and the northern and central area oilfields. Prospects also exist offshore: the Safaniya, Marjan and Zuluf oilfields - for which engineering, procurement and construction (EPC) contracts were awarded August to modify the GOSP and install new facilities - and the Dorra gas field in the Gulf.

Saudi Arabia, Iran and Kuwait are expected to sign an agreement to develop non-associated gas reserves at Dorra, a field straddling their territorial waters, with its reserves said to be large enough to feed a stream of more than 1,000 MCF/d.