Commercial gas finds prove elusive in Saudi Arabia

08 October 2009

Discoveries of gas in the Empty Quarter have been disappointing and the foreign oil companies that carried out the exploration will have to decide whether to stay on for the long term or cut their losses

Five years into their contracts, international oil companies (IOCs) exploring for gas in the Rub al-Khali (Empty Quarter) have had little to cheer about. France’s Total pulled out in February last year and the remaining, mainly Western, IOCs are now considering their options, having realised that the inhospitable terrain is unlikely to yield the gas riches held out as a prospect at the outset of the kingdom’s gas exploration initiative in 2003.

But the gloom surrounding the project lifted in the summer when Saudi Aramco and the UK/Dutch Shell Group announced they were preparing to submit a plan to the Saudi oil ministry to develop the Kidan gas structure in the Empty Quarter. Aramco says it is confident that the sulphur in the gas found at the field can be removed and the gas extracted commercially.

Key fact

Gas is flowing at Srak’s Kidan-6 concessions at a rate of 90 million cubic feet a day

Optimism about the area’s gas reserves was also generated by the Luksar Energy project, a joint venture of Russia’s Lukoil (80 per cent) and Saudi Aramco (20 per cent). The company claims to have made two commercial discoveries in the Empty Quarter and received permission from the Petroleum & Mineral Resources Ministry in April to evaluate the size of the reserves. In late March, Luksar discovered gas condensate at its Mushaib-1 well in Block A, which covers an area of 30,000 square kilometres.

Sour gas

But the other two ventures exploring the area – the Sino Saudi Gas project, a joint venture of China’s Sinopec International Petroleum Exploration & Production Corporation (80 per cent) and Saudi Aramco (20 per cent), and the Eni-Repsol consortium of Italy’s Eni and Spain’s Repsol – have not reported any major finds.

The Sino Saudi Gas consortium, exploring in Contract Area B in the south Ghawar region, is drilling a seventh exploration well after the previous six found no reserves of commercial value. The last well of its contractual commitment will be drilled by October, but costs have risen well above the original pro-jection of $300m. 

South Rub al-Khali (Srak), a 50:50 joint venture of Aramco and Shell, reported in August that gas from two zones in its Kidan-6 exploration in the Empty Quarter flowed at a combined rate of 90 million cubic feet a day (cf/d): one at 50 million cf/d, the other at 40 million cf/d. Srak said the gas was sour, with 25 barrels of condensate liquids for every 1 million cubic feet of gas.

On first analysis, the details of the find are hardly auspicious. Sour gas is expensive and difficult to extract, and the task is made more complicated by the remote location.

But Khalid al-Falih, chief executive officer (CEO) of Saudi Aramco and architect of the Empty Quarter exploration venture, delivered an upbeat spin on the exploratory drilling when, in August, he told pan-Arab daily newspaper Al-Hayat he was confident the sulphur could be removed and the gas extracted commercially.

“Production from wells we drilled in Kidan is high and we still have to draw up a plan to develop it economically,” he said. 

The reason for Al-Falih’s optimism is Kidan’s proximity to the 750,000-barrel-a-day (b/d) Shaybah oil field, which may make the development economically feasible through a sharing of the facilities for processing Kidan and Shaybah gas.

“The payback periods are quite different from when the deals were agreed, and the return on investment lower”

Raja Kiwan, analyst, PFC Energy

But uncertainties still surround Srak’s prospects. According to senior Saudi oil industry sources, the data made available so far is insufficient for experts to draw conclusions on the merits of developing Kidan.

The presence of sour gas is not an insurmountable obstacle: gas-sweetening technology is available to strip the gas of sulphur, carbon dioxide and nitrogen. The issue is the cost of sweetening, added to the high cost of the alloy well metallurgies, gathering pipelines and the eventual compression and shipping pipeline system to the main gas distribution network.

But it is the Saudi fiscal regime for domestic gas that presents the major stumbling block. The domestic gas price of $0.75 a million BTUs is insufficient to cover the development costs, estimated at up to $3 a million BTUs.

By way of compensation, the exploring consortiums are entitled to any condensate or natural gas liquids (NGLs) discovered. The removal of liquids accounts for a major part of the cost of gas extraction if the volume is insufficient to justify their own processing facilities. But the nearby Shaybah gas and NGL pipeline systems mean NGLs in Kidan could be processed at the site. At Shaybah, Aramco plans to build an NGL recovery plant, including a splitter and gas-oil separation facilities, which are due to come on stream by mid 2014.

The key question for the Kidan project is whether Riyadh will consider deregulating its domestic pricing system to allow a higher end-price for gas. As yet, there is no real sign of any willingness to take such a step.

“The issue has become very sensitive, but I cannot see any change in the pricing policy, as it is bound up with the way the kingdom wants to develop, exploiting its competitive advantage of cheap energy,” says Bassam Fattouh, senior research fellow at the Oxford Institute of Energy Studies. “I don’t expect them to change this; on the contrary, they will consolidate.”

Yet there may be ways around the pricing issue. One option would involve the government buying gas from the companies to put into the national gas grid, thereby reducing the burning of domestic crude oil, which is grossly underpriced relative to export markets.

Until the government comes to a decision on this issue, the main consortiums will struggle to commercialise their Empty Quarter discoveries. In the meantime, they are persisting with their upstream activities. Srak will drill its fifth and sixth wells in Saudi Arabia in the next couple of months. The seventh and final well is expected to be drilled in 2010.

Mixed benefits

While Aramco has discovered tight gas reservoirs near the Sino Saudi Gas concession and the Area C concession held by the Eni-Repsol consortium, there is little doubt that the Saudi government is concerned about the lack of success in the Empty Quarter. In 2003, the min-istry suggested the IOCs could produce up to 2 billion cf/d of gas by as early as 2011. The US Geological Survey, for example, had estimated the Empty Quarter would contain up to 300 trillion cubic feet of gas resources. 

The Empty Quarter disappointment comes as a surprise to Aramco. “It was expecting some finds,” says Fattouh. “But it has not given up yet and the kingdom’s drive towards non-associated gas will be strong, as it has reached a point where it does not need to expand oil capacity any more.” 

From the IOCs’ perspective, the benefits of continuing with major exploration and production commitments in the Empty Quarter are mixed. Most consortiums have gone well over their original budgets, having worked for four to five years in harsh conditions with no infrastructure, and mostly at a peak in the market for services.

Even if finds such as those at Kidan are commercialised, the returns on investment may take longer to realise than during the boom years of 2003-08. “The payback periods are different from when the deals were agreed and the return on investment will be much lower, since energy prices have come down,” says Raja Kiwan, an analyst at US energy consultant PFC Energy.

Any talk of success in the Empty Quarter can only be considered in relative terms. Al-Falih’s recent comments represent a Saudi commitment to persist with non-associated gas development, whether in the Empty Quarter or elsewhere, so long as the IOCs have sufficient incentives in the form of prospective condensate and NGL flows.

The foreign oil companies’ long-term Empty Quarter strategies remain a work in progress. Some, like Total, may cut their losses and run. Others may see a strategic advantage in staying for the duration.

“In terms of the oil companies’ strategic portfolios, having access to Saudi gas might work if it achieves something downstream,” says Fattouh. “You cannot look at it from a narrow perspective. Of course it is expensive, but it also of strategic importance, so most companies are likely to hold their course.”

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