Saudi Arabia: Industry forecast

The country still relies heavily on its oil and gas reserves, and plans to increase oil production capacity in the coming years – a welcoming revelation in today’s rapidly changing energy market.

Oil and gas reserves

In April 2004, officials from Saudi Arabia’s oil industry announced that the Kingdom’s previous estimate of 261bn bbl of recoverable petroleum has more than trebled, to 1200bn bbl.

The country’s oil minister announced during the recent World Petroleum Congress that Saudi Arabia would soon be able to boost proved reserves of 264bn bbl by a further 200bn.

While the country’s ultimate potential may indeed be well above current industry estimates, there has been little change to the recognised third-party reserves assessment of 264.2bn bbl (BP Statistical Review or World Energy June 2008).

We see scope for this to edge higher to 295bn by 2012, unless the Saudi authorities can convince external observers of the much higher resource base they claim.

Saudi Aramco stated in March 2007 that its reserve replacement ratio stood at 106% in 2006, with the discovery of 3.6bn bbl of new oil reserves.

Gas reserves of an estimated 7170bcm are forecast by BMI to increase to 7500bcm by the end of the forecast period, assuming that the current IOC-linked exploration initiatives are successful.

Oil supply & demand

Saudi Arabian crude supply in June 2008 averaged 9.45 million barrels per day, reaching the highest production level since March 2006. The increase came in the aftermath of Saudi claims of higher post-maintenance demand from US refiners.

Saudi Arabia’s representatives said that July production could be raised to 9.7mn b/d, and preliminary reports of regional tanker sailings do suggest some additional increase in July Saudi production.

Oil Minister Ali al-Naimi has also suggested that the Kingdom is considering a second phase of upstream capacity expansions, which could potentially take capacity to 15mn b/d after the phase one target of 12.5mn b/d is reached at end-2009.

However, a key condition was that there should be clear signs of long-term demand for the extra volumes.

The Minister suggested that each of these capacity expansions could be completed within three years of project sanction.

The key projects are: Zuluf (Arab Medium) – 900,000b/d; Safaniyah (Arab Heavy) – 700,000b/d;  Berri (Arab Extra Light) – 300,000b/d; Khurais (Arab Light) – 300,000b/d; and Shaybah (Arab Extra Light) phase 3 – 255,000b/d.

The Khursaniyah programme, which will also produce more than 3bcm per annum of gas, will develop production facilities for the onshore Khursaniyah, Abu Hadriya and Fadhili oil fields near the city of Jubail on Saudi Arabia’s Persian Gulf coast.

In spite of spare capacity, combined Saudi crude oil and gas liquids output is expected to remain broadly under OPEC guidelines, perhaps reaching 11.78mn b/d by 2012 as world demand rises – with capacity rising to a possible 13.5mn b/d.
 

Crude oil and gas liquids exports should therefore average around 8.68mn to 9.31mn b/d in 2008-12.

Gas supply & demand

In November 2006, the Petroleum Ministry and Saudi Aramco announced a US $9bn long-term strategy to add 1416bcm of reserves by 2016.
 

In order to free up oil for export, all current and future gas supplies (except NGL) are reportedly earmarked for use in domestic industrial consumption and by desalination plants.

A consortium of Saudi Aramco, Shell and Total is to invest an estimated US$2bn in the exploration of more then 210 000sq km in two separate concession blocks.

According to statements made by Aramco, the five-year plan will radically increase the rate of exploration and includes the drilling of 307 new development wells, including 67 exploratory wells primarily in non-associated offshore formations.

Also exploration and development will also commence in non-producing areas such the Red Sea and the Nafud basin, north of Riyadh. Currently, non-associated gas accounts for 40% of Saudi Arabia’s total gas reserves.

The South Rub al-Khali Company (SRAK), a consortium of Saudi Aramco, Royal Dutch Shell and Total, is to invest an estimated US$2bn in the exploration of more then 210 000sq km in two separate concession blocks (Blocks 5-9 and 82-85).

The concessions surround the Shaybah and Kidan oil fields, abutting Oman and the UAE, and the Saudi-Yemeni border respectively. The consortium has been aiming to sell 5.2bcm per annum to the Ministry starting in 2009.

Total has withdrawn from the SRAK scheme. Failure to find gas has been cited as the basis for the move.

Three wells drilled on the prospect’s acreage have come up dry. However, Shell claims that it is still committed to the project, in spite of the apparent lack of success.

It leads the venture to explore for gas in Saudi Arabia’s Empty Quarter, with a 40% stake – Total held a 30% share of the venture. Shell believes the initial three wells are not sufficient to assess the project’s potential and is prepared to keep drilling.

Total will transfer its shares in SRAK to the other partners. The original agreement allowed for partners to reassess their involvement after three wells, then transfer their shares to the remaining parties.

In January 2004, Russia’s Lukoil won a tender to explore for and produce non-associated gas in the Saudi Empty Quarter in Block A (29,000sq km), near Ghawar, as part of an 80:20 JV with Saudi Aramco, known as Luksar. Luksar drilled two wells and plans a third. Also in January 2004, China’s Sinopec won a tender for gas E&P in Block B (38,000sq km).

Sino Saudi Gas, a venture of Sinopec and Aramco, has drilled two wells and reported that there would be another two by year-end 2007. The Eni-Repsol-Aramco consortium, LENIREPSA Gas, was granted a licence to operate in Block C (52,000sq km), and drilled its first well in September 2006.

The consortia have some 27 wells planned in total by 2009. The contracts cover a 40-year period, except SRAK, which holds a 25-year contract.

Our forecasts are for gas production of around 96.2bcm by 2012, matching domestic consumption. Risk here is on the downside, as activity levels and investment appear to be running behind schedule.

Exports are unlikely until beyond the end of the decade. Using gas instead of oil domestically will help free up additional crude oil for export.

Saudi Arabia has declared a target of 155bcm of gas production capacity by 2009, which seems ambitious when viewed against Aramco spending plans and the timetable for SGI projects.
 

To date, Saudi Arabia has not expressed great interest in exporting LNG, mainly due to doubts regarding economic viability and concerns that gas exports could compete with more lucrative oil exports.

Refining and oil products trade

In 2006 Saudi Aramco and Japan’s Sumitomo Chemical broke ground on the US$9.8bn Rabigh Refining and Petrochemical JV. Rabigh will be upgraded to 825 000b/d (from 400 000b/d), while shifting the product mix towards gasoline and kerosene, and integrating the site with a new petrochemicals plant. The refinery will come on line in 2008.

Early 2007 saw Saudi Aramco sign an agreement with US chemicals group Dow Chemical for a US$15 billion petrochemical plant at Ras Tanura.

At the same time, Aramco announced 100 000b/d expansion and integration with neighbouring petrochemical plants upgrades for Ras Tanura and Yanbu by 2010-12. Refining capacity by the end of 2007 had risen to almost 2.1mn b/d.

The Saudi Aramco development plan calls for US$20bn of investment to increase domestic refining capacity to more than 3mn b/d and international holdings by at least 1-2mn b/d by 2011, particularly in an effort to meet the requirements of the fast-growing Asian market.

Aramco and the third-biggest US oil firm ConocoPhillips signed a deal in 2006 for a second new refinery in the Kingdom, in the wake of French major Total’s similar arrangement earlier in the year.

The Conoco venture is aimed at building a plant with 400 000b/d capacity at Yanbu on the Red Sea coast. It will create petroleum products for export to the US, European and Asian markets. Total earlier joined an exclusive club of energy giants in forming a refinery JV with Aramco.

The Paris-based company will boost the Kingdom’s capacity through the construction of a US$6bn complex capable of refining 400 000b/d. It is assumed that the Conoco plant will be of the same size and cost much the same to build.

The Conoco and Total deals are two important steps in a process aimed at increasing the Kingdom’s refining output by as much as 60% over the next five years. Saudi Arabia is keen to expand refining capacity to 3.4mn b/d by 2011, aided by the new Total plant at the industrial city of Jubail.

IOCs are happy to invest in Middle Eastern refining ventures as a means of boosting global capacity without the environmental problems encountered in the United States or Europe – and with a source of plentiful cheap crude feedstock to improve plant economics.

Early 2007 saw Saudi Aramco sign an agreement with US chemicals group Dow Chemical for a US$15bn petrochemical plant at Ras Tanura. Aramco also expects to raise debt of upwards of US$10bn for the project, in which it plans to float 30% to the public. In July 2006, the state oil firm chose Dow Chemical to discuss a partnership to set up, own and operate a plant for chemicals and plastics near the 550,000b/d Ras Tanura refinery.

Revenues/Import costs

We are assuming an average OPEC basket oil price of US$106.00/bbl in 2008, US$96/bbl in 2009, and an average US$90/bbl in 2010-12. This implies crude oil export revenues of US$335.89bn in 2008, easing to an estimated US$305.76bn by 2012.

The outlook

The world waits with baited breath for future energy policies and statements made by KSA, as the direct implications of these are massive. However, it seems that regardless of the level of external pressure from western nations and the OPEC cartel, Saudi Arabia will maintain a steady rise in production and is on-track to increase its refining and marketing downstream base.