Saudi Arabia is not just one of the world’s biggest producers of oil and gas; it has also historically been one of the cheapest. But if it wants to meet growing domestic power demand over the coming 15 years, it will have to start paying more to produce hydrocarbons and charging in-kingdom customers more for its output.
According to a MEED Insight report released in March, power demand is set to grow by more than 7 per cent a year between 2010 and 2020, requiring more than 3,500MW of new capacity to be built every year over the next decade. As domestic power demand grows, so too will the draw on the country’s hydrocarbon resources – its main revenue generator and export. Aramco’s best option is to produce more diesel and gas to meet domestic needs. But this will not be cheap.
Historically, it has cost about $2 a barrel to produce oil in the kingdom, and most of the gas produced has been ‘associated’ – in effect a byproduct of oil production. Aramco continues to sell ethane gas, used in petrochemicals, at $0.75 a billion thermal units.
But if Aramco wants to produce the kind of volumes of oil and gas to meet power needs, it will have to look to increasingly unconventional sources such as the heavy, offshore oil of the Manifa field, and the non-associated gas found in the offshore Hasbah and Arabiyah fields. Producing oil and gas from these fields will cost up to four times as much than elsewhere in the kingdom.
Given that the government already heavily subsidises both electricity and gasoline in the country, the development of these fields will cause a major problem for the world’s biggest producer: increase prices domestically, or spend billions of dollars developing loss-making oil and gas fields.