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Unconventional Gas and Raised Oil Recovery Are Focus for Saudi Aramco's Future Strategy

Montreal, 14 September 2010

Having built up a spare crude production capacity of over 4 million b/d, Saudi Aramco's priorities will now be gas development—where an increasing focus on unconventional gas is needed—to meet spiralling domestic demand, while its oil position will be sustained through, over the long term, raising recovery levels to 70% at its main onshore oilfields.

IHS Global Insight Perspective
Significance     Saudi Aramco expects to continue growing its oil reserves mainly through improvements to its recovery levels, hoping to raise those to 70% and add 40% to crude reserves "over time", while its domestic gas shortage is to be met over the long term by the company moving into the exploitation of unconventional gas reserves in the kingdom.


Implications

Saudi Aramco is also hoping to escape its gas shortage dilemma by targeting unconventional gas reserves, which it believes could more than double its current gas reserves of "about 280 tcf". Moving the company into an unconventional-focused gas exploration and production sphere will, however, require not only large investments, but also the attainment of a new technological skillset, a huge undertaking in a completely nationalised sector.

Outlook

While the strategic direction laid out by Saudi Aramco is bold and well funded, it also confirms what the industry has known for some time: that the era of new conventional oil and gas discoveries in the kingdom is more or less over and that future production capacity will come at a very different production cost for Saudi Arabia than has hitherto been the case.

Setting Out the Direction

Speaking on the sidelines of the World Energy Congress in Montreal, Canada, as well as in an interview with the Financial Times (FT), Saudi Aramco's chief executive Khalid al-Falih has revealed that the state-owned oil and gas giant would concentrate on technical development to replace and grow its oil reserves and that its gas shortage would be met by an increased focus on developing the kingdom's vast unconventional gas potential.

Having invested heavily over the past decade, first to catch up with runaway global demand (after a long period of low crude prices and, consequentially, investment) and then to rebuild its spare crude production capacity cushion, the kingdom's national energy champion is now in a comfortable position to meet resurgent economical and crude demand growth across the globe. Domestically, however, its gas position has become anything but comfortable, with failure to discover new gas reserves or bring them onstream sufficiently swiftly leading to repeated power shortages during peak electricity demand seasons during much of the past decade. To alleviate the gas shortages, increasing volumes of crude and refined products have had to be burned in power plants throughout the kingdom, at lower efficiency rates than if gas had been used and to a considerable future revenue loss in the shape of those crude and product volumes lost for export. Saudi Arabia's gas shortage situation was further compounded at the start of the global economic downturn in 2008 and the crash in oil prices, given that much of its gas production is associated with its oil production. Reining in its oil output significantly under OPEC quotas, the kingdom also saw its gas volumes falling, while brisk domestic demand growth continued despite the recession, on the back of high domestic energy subsidies and a booming population. This year Saudi Arabia is burning almost 880,000 b/d of crude and crude derivatives for power generation, while growing oilfield maturity over the long term is also raising the kingdom's need for either increased gas or water injections—the latter demanding large-scale power-consuming water desalination operations.

New Frontiers

Saudi Aramco will solve its gas dilemma by looking to develop its unconventional gas potential, al-Falih told the FT, singling out shale gas opportunities in the kingdom as particularly promising over the long term. Increasingly, Saudi Aramco has had to deal with tight and sour gas reserves, as well as offshore developments, to meet near-time gas demand. The company has already laid out plans to drill into deeper reservoir layers, particularly in the offshore Gulf, in the hope of finding additional volumes of relatively conventional gas, or at least more conventional gas than that produced from shale rocks. Exploration together with a number of IOCs in its Rub' al-Khali (Empty Quarter) desert has been largely disappointing, however, although al-Falih told the FT that the Kidan discovery in its joint venture (JV) with Shell was "very promising" and that "we are moving into a second exploration period that will be announced soon, which will go to appraisal and ultimately development, we hope". Nonetheless, the industry has not thus far interpreted the sounds from Shell as buoyant. The terms offered by Saudi Arabia when IOCs—for the first time since nationalisation—were invited back into the kingdom's upstream sector are tight, with a very low set gas price imposed for deep and remote production at high costs, ultimately making the JVs reliant on condensate reserves in order to attain any acceptable profit margin. Rumours that the Saudis are now willing to renegotiate the gas feed-in price upwards have surfaced this year, however, as they look for ways to improve commerciality of less conventional reserves.

The focus on unconventional gas will be aided by an US$130-billion investment programme. Al-Falih told the FT that Aramco's exploration efforts have indicated that the kingdom could hold "hundreds of trillions of cubic feet of unconventional resources such as shale gas, more than doubling its proved reserves of 280 [tcf]". While some of the reserves discovered recently in the offshore Gulf or in the Rub' al-Khali have indeed been tight and/or sour, those reserves have not been of a scale to increase the kingdom's reserves by anywhere near what al-Falih suggests, meaning that the bulk of such a change would probably come from shale gas reserves. Little has been revealed about the kingdom's shale gas potential so far, as Saudi Aramco is probing those formations alone without the involvement of IOCs. This might continue—in the FT interview al-Falih seems to lay the weight of Saudi Aramco's efforts to raise its shale gas expertise on its in-house training programmes and its sponsorship of about 1,500 students at international universities, although JVs with IOCs at particular developments again could be considered. Still, these are very early days to count on Saudi Arabia's shale gas potential, especially if IOCs are not to be part of the exploration work.

While building up its crude spare production capacity has now put it in a stable position where it can focus entirely on meeting domestic gas needs, Saudi Aramco is seeing technical development as the source of its future capacity increases also on the oil side. Speaking at the World Energy Congress, al-Falih said that "in terms of enhancing access to energy, our oil reserves of about 260 billion barrels represent roughly a fifth of the world's proven reserves, and at our current production rate, these reserves are enough for more than 80 years of production. Yet we expect that over time those reserves will grow by an additional 40%, and are working to raise the rate of recovery from our major oil fields to 70%, or twice the worldwide average", Platts reports. He highlighted the "considerable cost" at which maintaining the huge production capacity cushion came to underline Saudi Aramco's long-term commitment to stable global crude market supplies.

Outlook and Implications

Saudi Aramco's strategic focus on technology to raise recoverability is of course nothing new. Its efforts to explore and develop unconventional gas—perhaps mainly shale gas—are the real new item of interest, although both together point to Saudi Aramco adjusting to—and confirming—a new era for Saudi Arabia's hydrocarbon industry. Future capacity will not come from additional discoveries of conventional oil or gas reserves, but from reserves being added through technical improvements by the company. On the oil side this has been a notion in the industry for some time, with few new oilfields having been identified over the past two decades while recoverability rates have increased, making it possible for the kingdom to not only replace production, but even grow its reserve figures.

Nevertheless, the situation has a few heavy long-term implications, as the higher recovery numbers—should they come anywhere close to such a huge uplift as 40% growth in reserves—are likely to require costly investments in enhanced oil recovery (EOR) at its major oilfields, which has the potential to dramatically change the Saudi bottom-line production cost per barrel. The kingdom is, like most of its Gulf neighbours still, producing from low-cost oilfields, giving it very healthy per-barrel margins. With massive future investments in costly advanced technology and EOR solutions the basic calculations might change significantly, bringing Saudi Arabia closer to other mature producers over time with regard to production costs, in itself significantly limiting its opportunities and economic freedom of manoeuvre. A similar issue applies to future unconventional gas developments, which will come at a production cost radically different from what the kingdom and its population has been accustomed to, and in the long term this inevitably has to result in reforms of already costly energy subsidy regimes. Such a change would also have significant consequences for its job creation and industrialisation programme, which thus far has utilised its low-cost energy availability as a foundation and hence to a large degree built on high energy consumption industries being established. If Saudi Arabia slowly starts moving away from being a low-energy-cost market, its efforts to diversify its economy might become the first casualty.

Ends --


IHS Senior Middle East Energy analyst Samuel Ciszuk's note on Saudi Arabia.

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