With high flow-rates and strong formation pressures, Saudi Arabia has historically enjoyed lucrative returns from its oilfields. Following decades of sustained production at high levels, Aramco’s hydrocarbon productivity has been noted to gradually fade over time.
More effort, deeper drilling and greater technical innovation is now required, which in turn is increasing extraction costs.
In this article, Contax Partners studies how Aramco is looking to diversify its overall energy mix away from oil, and how the national oil company is taking steps to safeguard its hydrocarbon future by increasing drilling rig count to target natural and unconventional gas sources.
The strategy
With total E&P spend estimated at $15 billion in 2013, Aramco has accelerated its drilling programme this year to mobilise an estimated 142 drilling rigs, including 91 oil & 51 gas rigs (with 105 land & 37 offshore rigs).
The company recently put into action plans to develop its non-associated gas fields, to continue offshore exploration and also to add new production wells to maintain an extra export cushion of profitable light sweet crude oil.
Beyond the short term, Aramco is also looking to join the international shale gas bandwagon and capitalize on potentially 645 tcf of unconventional shale gas reserves, with Halliburton and Schlumberger both engaged to initiate shale gas research centers, and help plan the drilling programme.
What Aramco’s rig count tells us
The drilling rig count is an intuitive gauge of planned drilling activity, and it often acts as a yard stick by which production capacity is measured. It remains one of the most tangible benchmarks used to study on-field developments. By tracking rig movements as they happen, experts can study stages of engagement, i.e. exploration, development and work-over drilling to pinpoint hotbeds of planned activity.
In Saudi Arabia’s case, the drilling rig count remains reflective of the country’s commitment to improve its hydrocarbon production capabilities via extraction of greater natural gas, tight, sour and shale gas.
The country also wishes to maintain its dominance in conventional oil. With rig counts expected to ramp up to 200 by 2014, this increase is a positive gauge of planned on-field activity.
In Saudi Arabia, a key contributor is development drilling at the 500,000 bpd Manifa oilfield, while greater exploratory drilling in the Red Sea and other natural gas developments are expected to contribute to further rig hikes.
It is apparent that the Kingdom has bounced back from the uncertainties of 2010, when the country was cautiously not taking on any new contracts, and instead playing the waiting game. From 98 rigs, the country’s rig count grew to 114 (85 land, 29 offshore) in 2011 and then 136 (98 land, 38 offshore) in 2012, which is an overall 19% growth.
By the end of the 2013, rigs are projected to increase to 170 rigs (Source: Primary interviews with industry experts), and this growth is expected to continue growing by an additional 18% to 200 by 2014 (Source: Barclays Capital). Some field estimates also suggest 240 to be a possibility if gas exploration continues to show promise. This would reflect an overall growth of 144% since the recession threw the global oil markets into turmoil.
As a caution to the above, it is imperative to note that drilling rigs are a measure of activity and not a representation of production, reserves or drilling success. Rigs generally vary in size, depths and purpose, and therefore an analysis of current drilling rig counts tells us a few things about ARAMCO.
Whilst actively looking to maintain its 12.5 million bpd output capacity, the company is being forced to look into other forms of hydrocarbons. With declining productivity and an increasing proportion of water extracted from oil wells, the NOC has been forced to move into increasingly difficult terrain, where most new finds are remote and difficult to access (e.g. Red Sea, Northwest of Tabuk, South Rub al Khali).
In these places, logistics and infrastructure also pose considerable problems. Nonetheless, with 58 new rigs planned to be added in a few months’ time, it shows that ARAMCO has tangibly committed to aggressively pursue its long-term objectives by pushing for new hydrocarbon finds.
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Saudi push for natural gas
The most significant contributor to the drilling rig rise has been an emerging emphasis on gas.
Holding approximately 288 tcf of conventional gas reserves, Saudi Arabia presently remains a formidable international producer with an output of 9.9 bcfd in 2012. Given that the country is seeking to move its domestic industries away from dependency on oil, more pressure is expected to be put on Saudi’s gas production industry.
At present, most of the available gas has been preferentially allocated to domestic industrial & power generation projects at a financially unfeasible $0.75 mmbtu, which makes development of existing explored gas projects unlikely.
One problem encountered by the country is that the Kingdom’s gas reserves are associated with oil production, and to comply with OPEC restrictions, it is not deemed possible to develop this potential at the expense of more lucrative oil output.
To counter this problem, ARAMCO has initiated expansion of its non-associated gas production from three offshore fields: Karan, Arabiyah, and Hasbah. The company and its partner international oil companies continue to talk to remove obstacles encountered in the Rub al-Khali (Empty Quarter), Northwest off Tabuk Province and south of the giant Ghawar field in the Eastern Province (shown in Figure 1).
More emphasis is therefore expected to be placed on dry, non-associated gas finds to transition industries and electricity production away from conventional crude oil.
Shale gas and constraints
With the world realising shale gas potential, Saudi Arabia has also identified the potential upside of planning its own shale gas revolution. Vast amounts lie potentially available for extraction from shallow depths in the Kingdom.
Hydraulic fracturing and directional drilling now make it imaginable to efficiently access the deepest and most difficult terrains in the desert. Fortunately, two of the leading providers for this technology, Halliburton and Schlumberger, are already present in-Kingdom.
These firms possess the capabilities to overcome the technical challenges presented after the era of easy oil in Saudi Arabia. With a considerable amount of work still to be done in terms of R&D, these technologically advanced in-kingdom contractors appear to be up to the challenge, having already established their local research centers.
Amongst all the technical challenges, the biggest constraint against shale gas feasibility in Saudi Arabia is the obvious reason found in an arid desert country: water. With millions of gallons of this precious commodity required during the fracturing (fracking) process, there is a big gap that cannot currently be met by the country’s already strained aquifers (it is estimated that for domestic consumption alone approximately 27 new desalination facilities will be required in the future to supply c. 300 billion gallons annually).
The logic of burning oil to desalinate water to produce more gas therefore seems highly questionable.
To overcome problems of water shortages, there have been suggestions to adopt alternatives such as water reinjection via recycling, nitrogen foam (to reduce water use) and gelled propane as a form of waterless fracking. All these methods in their present state require considerable R&D, money and technological innovation to be financially viable.
That said, even though existing low gas prices are threatening the viability of unconventional gas at the present time, it is believed that with increasing energy needs, more gas reliance and diversification, a change in domestic gas pricing is an eventuality.
This would in turn make the opportunity for offshore, tight, sour and shale gas a real possibility in the Kingdom, allowing Rub al Khali and other sour gas fields to be considered lucrative.
Nonetheless, commercial terms for hard-to-develop fields remains subject to negotiation on the price of natural gas, whereas shale gas remains at least 5 to 10 years away due to this and the technical challenges outlined above.
The future
In recent years, Saudi Arabia’s role as an OPEC leader has been to counteract against countries that do not comply with quota restrictions and therefore, keep international oil prices in check.
The Kingdom maintains a dual policy of keeping a supply cushion to flood the market if necessary, but also holds a willingness to cut back on production if there is excess international supply. This role can only be met if the country holds enough supply to balance the markets and this, in turn, can only come from maintaining the country’s production capacity, i.e. wells drilled and producing.
