Top of the heap: The leader in oil exports is now looking to explore the potential of unconventional resources

In addition to being the largest oil producer in the world, Saudi Arabia also possesses the second-largest oil reserves on the planet. The Kingdom reached its oil production capacity target several years ago and has no current plans to increase this, given its possession of substantial spare capacity. However, rising domestic oil consumption will put increasing pressure on oil exports in the coming years and decades. As a result, efforts are now turning to raising natural gas production, including through deep-water and unconventional exploration, as well as to boosting refining output.

NATIONAL OIL COMPANY: All oil and gas production, refining, transport and distribution in the Kingdom is carried out by the state-owned Saudi Arabian Oil Company (Saudi Aramco) either on an exclusive basis or via joint ventures with foreign firms. The firm, headquartered in Dhahran in the country’s Eastern Province, was started in the 1930s as an American company licensed to produce oil in the Kingdom. However, the Saudi state acquired a 25% stake in Saudi Aramco in 1973 and gradually increased this over the course of the decade, reaching 100% ownership in 1980. Saudi Aramco is thought to be the world’s largest oil company by value, as well as the leading global oil company in terms of both reserves and output; it is also the world’s sixth-largest refiner. Its activities are supervised by the Ministry of Petroleum and Mineral Resources (MPMR) and the Supreme Council for Petroleum and Mineral Affairs, chaired by King Abdullah bin Abdulaziz bin Saud.

OIL RESERVES: Saudi Arabia had proven oil reserves of 265.9bn barrels as of the end of 2013, according to BP’s “Statistical Review of World Energy 2014”. This amounted to 15.8% of global reserves and ranked the Kingdom second in the world in terms of deposits, behind Venezuela with 17.7% of global reserves and ahead of Canada in third place at 10.3%. Taken together, eight domestic oil fields contain more than half of the Kingdom’s known deposits; these include Ghawar, the largest conventional oil field in the world, which has estimated reserves of around 70bn barrels of oil.

The size of the country’s reserves has remained fairly steady over the years, as new discoveries have slightly more than made up for production. Reserves stood at 261.2bn barrels in 1992 and at 262.8bn barrels in 2002. The MPMR puts the decline rate of existing oil fields at around 2-3%. In October 2013 Khalid Al Falih, the CEO of Saudi Aramco, said the company plans to raise conventional oil recovery rates from 50% to 70% – around twice the global average – over 20 years. Around 65-70% of the Kingdom’s reserves are considered of light gravity, yielding a higher proportion of petrol and diesel when refined than medium- or heavy-gravity oils; most of the rest are considered medium-gravity. The bulk of the Kingdom’s reserves are also characterised by comparatively high levels of sulphur.

OIL PRODUCTION: Total oil production (including condensates and natural gas liquids) in 2013 stood at 11.53m barrels per day (bpd), down 1.1% on 2012 output, which itself represented the highest level of production Saudi Arabia had ever reached, according to BP data. This ranked the Kingdom as the largest oil producer in the world, with 13.1% of global output, ahead of the Russia, which accounted for 12.9% of world production, and the US with 10.8%.

Crude oil production stood at 9.76m bpd in 2012 and fell slightly in 2013 to 9.63m, according to data from the Joint Organisations Data Initiative (JODI). In April 2014, the latest month for which up-to-date figures were available, production stood at around 9.66m bpd. The Ghawar onshore field alone produces about 5m bpd of crude, or more than half of total crude output and around 7% of global oil supply. Two other fields also produce more than 1m bpd of crude: the offshore Safaniya field (1.5m bpd) and the onshore Khurais field (1.2m bpd). Saudi Aramco is working to boost output at the Khurais field to 1.5m bpd by 2016-17, and awarded a front-end engineering and design contract for part of the work to Foster Wheeler in September 2013.

In April 2013 production began at the Manifa oil field, which is the world’s fifth-largest deposit and also the last of the Kingdom’s giant oil fields discovered to date to enter into operation. Saudi Aramco has invested around $17bn in the development of the field, the output of which is to reach 900,000 bpd by the end of 2014. Other examples of investment in maintaining capacity include plans to shut down the Shaybah oil field in March 2014 in order to boost its output to 1m bpd by April 2015, up from 750,000 bpd previously.

EXPORTS: The Kingdom is the largest oil exporter in the world, with net petroleum exports of 8.86m bpd, according to the US Energy Information Administration (EIA). Average crude exports for 2013 stood at 7.54m, according to JODI, while the figure for April 2014 stood at 7.45m bpd. The largest market for Saudi crude in 2012 was East Asia, at 54% of exports, according to the EIA, followed by the Mediterranean region with 16%, and the US and Europe with 15% each. In December 2013 local merchant bank Jadwa Investment forecast that Saudi Arabia would receive an average export price of $100 a barrel in 2014. This is well above the average export price of $81 a barrel that Jadwa estimated is needed by the Kingdom to balance its budget.

SPARE CAPACITY: In addition to being the largest producer and exporter of oil, Saudi Arabia is also the only country in the world that can significantly ramp up production at short notice. Authorities put production capacity at 12.5m bpd – though some industry figures argue that the Kingdom could likely only sustain such production levels for a short period of time – and the country has a stated policy of maintaining spare capacity of 1.5m-2m bpd in order to address any global supply shortfalls and stabilise prices, for fear that price spikes could damage long-term demand for the commodity.

In April 2013 Ali Al Naimi, the head of the MPMR, said the Kingdom did not expect to increase production capacity beyond current levels for the foreseeable future, despite comments earlier in the month from Prince Turki Al Faisal, the former Saudi intelligence chief, that Saudi Aramco would raise potential output to 15m bpd by 2020 – an achievable target if the Kingdom used more advanced drilling methods. The recent hike in US oil output thanks to the development of its shale oil reserves and increased production in other countries are also believed to have played a role in the Kingdom revising its plans to expand capacity.

GAS RESERVES & PRODUCTION: The Kingdom’s proven gas reserves at the end of 2013 stood at 8.2trn cu metres, or 4.4% of global proven reserves, according to BP data. This ranked Saudi reserves the sixth largest in the world and the third largest in the Middle East, behind Iran (with 33.6trn cu metres) and Qatar (25.1trn cu metres). Unlike oil, proven gas reserves have grown substantially over recent decades, from 5.2trn cu metres in 1992 and 6.6trn cu metres in 2002. Most of the Kingdom’s reserves consist of gas associated with oil deposits; the Ghawar, Safaniya and Zuluf oil fields together account for approximately 57% of the country’s proven gas reserves, according to the EIA.

Gas production stood at 103bn cu metres in 2013, up 4.0% on 2012 figures, according to BP. Output has also been rising steadily over the long term, and 2012 production was nearly twice that achieved in 2002, when the figure stood at 56.7bn cu metres. This makes the Kingdom the eighth-largest producer of natural gas in the world, accounting for around 3% of global output, as well as the third-largest global producer of combined oil and gas (in barrels of oil equivalent), behind Russia and the US.

The Kingdom also has the highest natural gas reserves-to-production ratio in the world at 80.1, pointing to a long future of continuing output in years ahead. At the moment it neither exports nor imports gas, with all production consumed locally for electricity generation, as well as for petrochemicals production and boosting oil output via reinjection.

ENERGY CONSUMPTION: BP’s data puts the Kingdom’s primary energy consumption for 2013 at 227.7m tonnes of oil equivalent (toe), up 3.5% on the previous year; this consisted of 131.3m toe of oil and 89.4m toe of natural gas. The Kingdom’s consumption of energy has been rising rapidly over the long term, from a figure of 127.6m toe in 2002. Overall per capita energy consumption levels in Saudi Arabia are amongst the highest in the world, at more than 6 toe per person per year. Saudis consumed 2.93m bpd of oil in 2012, up 3.9% on the previous year. While this still leaves plenty of room for exports, oil consumption in the Kingdom has been rising rapidly over the long term. The figure stood at 1.67m bpd in 2002, pointing to a near doubling in consumption over the course of a decade.

As with overall energy use, levels of oil consumption per capita in Saudi Arabia are among the highest in the world at over 3 tonnes per person per year. To compare, only a handful of other Gulf states and Canada are rivalling the Kingdom. This is due in large part to the fact that fuel is sold for well below international market prices, and government subsidies are thought to account for approximately 70-75% of the Kingdom’s total energy bill, and to represent around 10% of GDP. Few observers believe there is a significant likelihood that the government will move to reduce these subsidies in the foreseeable future, given the political sensitivity of such reforms and public expectations.

EXPLORATION & DEVELOPMENT: Oil exploration and production are largely off-limits to foreign companies, with Saudi Aramco undertaking most of the prospecting and extraction itself. The major exception to this rule is US oil major Chevron, which conducts exploration and production on behalf of the Kingdom in three fields in the partitioned or neutral zone, which is shared with Kuwait. Saudi Aramco is currently in the midst of a major exploration and development drive, and in September 2012 the company said it would spend $35bn over the coming five years on such activities. In January 2014 the company announced that it intended to expand crude reserves by 20%. In October 2013 Reuters, citing oil services firms, also reported that the company planned to increase the number of rigs operating in the Kingdom from 160 – around one-third of which are for gas and two-thirds for oil – to a record 170 by the end of the year and to 210 by the end of 2014. The additional rigs are thought to be part of efforts to maintain spare production capacity as well as to explore for unconventional gas resources.

With Saudi Aramco having reached its targeted oil production capacity of around 12.5m bpd in 2009, and given hopes of reducing domestic oil consumption, particularly the burning of fuel oil to generate electricity, to allow for stepped-up oil exports, the firm is increasingly focusing on gas exploration and development. Saudi Aramco said only around 15% of the Kingdom has been “adequately explored for gas”, suggesting there remains ample room for major discoveries.

EMPTY QUARTER: In contrast to the general exclusion of foreign companies from oil exploration, the Kingdom has invited international oil companies (IOCs) to participate in some of its gas prospecting efforts, and in 2003 and 2004 Saudi Aramco entered into a total of four gas exploration joint ventures focused on the enormous region known as the Empty Quarter (Rub Al Khali), in partnership with IOCs Shell, Sinopec, Lukoil, and (together) Eni and Repsol. “In the long run, and based on the available information, we see there may be potential for further hydrocarbon discoveries in the offshore, and possibly in tight/shale oil and gas resources,” Patrick van Daele, CEO of Shell Saudi Arabia, told OBG.

However, to date only some of the ventures have made significant discoveries, and Eni and Repsol halted their exploration efforts in 2012, apparently put off by a combination of challenging conditions and the low price Saudi Aramco pays for gas compared to other countries on the international market – in Saudi Arabia this stands at $0.75 per million British thermal units for gas production, which would not cover the costs of exploration should gas actually be found, meaning firms would need to find gas-associated condensate in order to be able to make a profit. In March 2013 Reuters reported that Shell was also on the verge of withdrawing from its joint venture with Saudi Aramco, the South Rub Al Khali Company (SRAK).

No such announcement has been made since and the company in July 2013 said it was committed to both upstream and downstream investments in the Kingdom, though in March 2014 Shell said it was not currently drilling in the Rub Al Khali; Sinopec has also reportedly suspended drilling at its venture. SRAK has gas in the Kidan area, which could hold as much as 8trn cu feet of reserves. However, factors like the presence of hydrogen sulphide in deposits would complicate production and the prospects for the development of the find are unclear. Total previously had a 30% stake in the Kidan project but sold it back to SRAK in 2008. Lukoil’s venture by contrast has discovered around 620m barrels of oil equivalent (boe) in tight gas at the Tukhman field, and is in negotiations to develop these.

There has been some recent speculation that the authorities could raise the price of locally produced gas to encourage more efficient use, as well as more exploration, and in November 2013 Prince Abdulaziz bin Salman bin Abdulaziz Al Saud, assistant minister for petroleum affairs, said gas prices were under review. An increase could boost the prospects for more foreign involvement in exploration efforts. However, the issue is politically sensitive and it remains unclear if any hikes will take place in the near future.

OFFSHORE GAS: Saudi Aramco has focused its own conventional gas prospecting efforts (without involvement of IOCs) on offshore exploration in the Gulf and, increasingly, the Red Sea. In 2006 it discovered the Kingdom’s first non-associated gas field, Karan, which is located offshore in the Gulf. Karan began producing gas in 2012 and has a capacity of 1.8bn standard cu feet per day (scfd). Two more fields in the Gulf are currently under development, the Hasbah and Arabiyah fields, which are expected to produce 1.3bn scfd and 1.2bn scfd, respectively. A new gas processing plant at Wasit is due to open later in 2014 and will process 2.5bn scfd of gas from the two fields and supply 1.75bn scfd of gas to customers once they come on-line.

Attention is now also increasingly turning to the Red Sea, where Saudi Aramco began carrying out geophysical surveying in 2009. The firm is focusing on the search for non-associated gas fields in particular, which are estimated to hold reserves of up to 100bn boe, and lower-end industry estimates put Saudi Aramco’s planned investment in the first phase of the development of Red Sea hydrocarbons resources of around $25bn. The first Red Sea field to be developed by the firm is the Ahmar-1 field, which was discovered in 2012 off the coast of Tabuk Province. Saudi Aramco has plans to drill seven wells in the field and hopes it can be brought on-stream by 2016. Initial work in the sea has focused on shallow coastal waters, but exploration activities are set to move into deeper waters, which are thought to hold larger reserves. Deep-water exploration and production will be a new challenge for Saudi Aramco – its Gulf activities are in more shallow waters – and should production go ahead, the firm is likely to partner with IOCs to take advantage of their deep-water expertise.

UNCONVENTIONAL DEPOSITS: With the search for conventional gas reserves in the Rub Al Khali having on the whole met with less success than was initially expected, the Kingdom’s focus there and in other parts of Saudi Arabia is expanding to include unconventional hydrocarbons deposits, with an eye towards shale gas in particular. The government estimates that the Kingdom holds more than 600trn cu feet of unconventional gas reserves, which would rank Saudi Arabia’s reserves as the fifth-largest deposits the world over.

In 2011 Saudi Aramco launched an unconventional gas exploration programme, and the initiative is focusing on three parts of the country, namely the northwest of the Kingdom, south Ghawar and Rub Al Khali, where it has conducted appraisal drilling. The programme appears to have had some early success, leading Al Falih to state in October 2013 that the country intended to start producing shale gas and other unconventional resources within “the next few years”. In March 2014 local media reported that the Kingdom was targeting 200m cu feet per day (cfd) of unconventional gas production for power generation by 2018. Around 40m cfd of this will be used to feed a 1000-MW, shalegas-fed power plant to provide electricity for a phosphate mining and production project near Turaif, close to the country’s northern border with Jordan, while the remainder will be used by a separate power plant being built by the Saudi Electricity Company.

Also in March 2014, Lukoil, which is still exploring for conventional gas in Rub Al Khali with Saudi Aramco, said it was in negotiations to extend the terms of its agreement to explore for deposits of tight gas. One major potential challenge to the Kingdom’s unconventional hydrocarbons programme in the region, which consists of remote desert, is the enormous amounts of water needed for hydraulic fracturing. Saudi Aramco has said it is looking at using seawater for the projects.

DEVELOPMENTS ABROAD: In November 2013 the International Energy Agency released a report stating that the US would surpass Saudi Arabia as the world’s largest oil producer in 2015, thanks to rising output from shale deposits – though it said the US would not be able to maintain the top spot beyond the 2020s. The recent rise in US shale oil output has received mixed reactions in the Kingdom. In November 2013 Al Naimi said Saudi Arabia welcomed new energy supplies in light of rising global demand and asserted that the increase in supply helped to stabilise international prices, which the Kingdom does not want to see rise too high in case this undermines long-term global demand for oil. The following month Jadwa Investment published a report arguing that global tight oil production is unlikely to grow as much as generally expected and will only reach around 3% of total global liquids supply, meaning that it is unlikely to have a major impact on the Saudi oil industry – though it said increased production of light crude from US shale deposits could put downward pressure on the price of Saudi light fuel.

In contrast, in January 2014 Prince Alwaleed bin Talal, owner of the Kingdom Holding Company, stated his belief that US shale oil discoveries constituted an economic threat to oil producers and were “a worry and concern” for the Kingdom given Saudi reliance on oil.

PIPELINE INFRASTRUCTURE: Saudi Aramco’s pipeline network is more than 14,000 km long. The most important individual oil pipeline is the Petroline, also known as the East-West Pipeline, which consists of two lines running parallel from the Abqaiq oil processing facility in Eastern Province to the Red Sea coast, with a combined capacity of 4.8m bpd. In September 2013 Saudi Arabia and Bahrain agreed to build a new 350,000-bpd pipeline running between the two countries to replace the existing 230,000-bpd one. The new structure is due to be completed in the third quarter of 2016.

OUTLOOK: Saudi Arabia is set to remain one of the world’s largest producers of energy, and of oil in particular, for the foreseeable future. However, the extent to which it will be able to maintain current levels of oil exports over the long term will depend on factors such as the Kingdom’s ability to reduce domestic energy consumption growth – which will in turn hinge in large part on whether or not the authorities decide to reduce energy subsidies and raise gas prices, both of which are politically sensitive issues – as well as the success of gas exploration efforts. The outlook for both these issues remains uncertain. In the short term, efforts to maintain oil export levels through stepped-up gas exploration for deep-water and unconventional reserves appear set to increase the opportunities for IOCs in the Kingdom’s energy sector, given its technology needs.

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The Report: Saudi Arabia 2014

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