Market focus: Saudi Aramco renews its interest in the kingdom’s offshore production

19 February 2010

The state-owned oil company has dedicated 10 per cent of its latest capital investment programme to developing the kingdom’s offshore production

Although Saudi Aramco is now regarded as one of the world’s leading oil companies, both in terms of reserves and technological know-how, its emergence as an offshore oil and gas developer lagged behind the rest of the industry, as development of its huge onshore fields took precedence.

The world’s first offshore oil field was developed in 1903 in the US, near Santa Barbara in California, using a wooden pier resting on stilt-like piles. It took nearly 50 years for Arabia to launch its own offshore exploration.

In numbers

  • $16bn - Estimated cost for developing the Manifa oilfield
  • 10 per cent - Proportion of Saudi Aramco’s oil output from offshore
  • 14.5bn - Forecast daily domestic gas consumption in Saudi Arabia by 2030 in cubic feet

Aramco built its first offshore drilling platform in 1950 near the Safaniyah prospect and within 12 months had found highly promising oil deposits.

The Safaniyah field turned out to be the largest offshore oil reservoir ever discovered, boasting 37 billion barrels of oil reserves and 5,360 billion cubic feet of gas.

When the field was first exploited in 1957, it produced 50,000 barrels a day (b/d) of crude. Just five years later this had increased to 350,000 b/d. Aramco has pumped as much as 1.3 million b/d from Safaniyah, but at the end of 2009 the production level was around 600,000 b/d due to weak global demand for oil.

Ample capacity

While an estimated 90 per cent of the kingdom’s oil capacity of 12 million b/d comes from onshore acreage such as the giant Ghawar field, Saudi waters still contain vast reserves of oil and gas. In addition to Safaniyah, the Abu Safah, Zuluf, Marjan and Berri fields are also considered significant offshore fields.

Offshore production has become an important facet of the country’s oil supply. However, until recently Aramco has prioritised maintaining existing production of about 1 million b/d at its offshore facilities rather than embarking upon new field development. This is partly down to its ample crude capacity in the past few years but also a nod to the higher development costs of offshore oil and gas production.

Aramco launched its ‘maintain potential’ programme to sustain offshore output in 2003, and a number of international contractors have won engineering and construction work as the old fields are redeveloped.

In August 2005, the UAE’s National Petroleum Construction Company and the US’ J Ray McDermott were awarded upgrade deals on the Safaniyah field. Egypt’s Engineering for the Petroleum & Process Industries won a $150m engineering, procurement and construction (EPC) contract in late 2006 to handle increasing water cuts at the field. And in 2007, Italy’s Saipem won a $250m contract from Aramco to provide offshore engineering and construction services on Safaniyah.

Maintenance contract

Under the seven-year contract, Saipem, together with its two local partners, Industrialization & Energy Services Company and Al-Rushaid, is responsible for the engineering, procurement, transportation and installation of offshore platforms and pipelines. A minimum workload of 16 platforms and 80 kilometres of sealines are guaranteed until 2011.

In January 2009, Saipem awarded a subcontract on Safaniyah to the Netherlands’ Royal Boskalis Westminster, covering dredging work for a crude pipeline to the mainland.

J Ray McDermott’s initial maintenance contract for Safaniyah, signed in 2005, has paid further dividends. In 2008, the US contractor was awarded a seven-year deal to provide EPC and installation services to Aramco under the state-owned oil giant’s ongoing long-term agreement with the contractor. The deal covers offshore work on the Zuluf, Safaniyah, Marjan and Karan fields.

In March 2009, J Ray McDermott won additional procurement and installation work on the south Safaniyah and Berri oil fields. The new work covers procurement, fabrication and installation of three shallow water crude oil pipelines and associated works in the south Safaniyah oil field. The pipelines will divert crude oil production from three existing platforms to other facilities before reaching the onshore Safaniyah gas-oil separation plant.

Non-conventional oil costs substantially more to develop

Khalid al-Falih, CEO, Saudi Aramco

While the work servicing the kingdom’s offshore fields has kept a handful of contractors busy, in the past few years Aramco has also embarked on a series of major new developments, signifying a change in strategy.

The development of the 900,000 b/d Manifa oil field, scheduled to be completed in 2015, is one of the largest heavy crude oil increments ever commissioned by the industry.

The field was discovered in 1957 when Aramco drilled a wildcat well, Manifa No 1, in the Gulf, off Manifa Bay, a shallow water harbour 190km northwest of Dhahran.

But because a market had yet to be established for the particular type of crude produced by Manifa, Aramco suspended drilling operations at the field in 1960. It eventually committed to a $13m investment in the mid-1960s, but production was limited.

In mid-2006, when Aramco decided to resurrect the Manifa field, the project was expected to cost between $5bn and $7bn. But by December 2009, Aramco had more than doubled its estimate of the cost of developing the heavy oil field to $16bn.

Robust investment

In a speech in India on 4 December, Khalid al-Falih, chief executive officer of Aramco, said the cost for Manifa would be seven times higher than a development at the onshore Haradh crude field, which cost $2,500 for each barrel of daily oil production capacity added.

“Besides greater complexity, the rising capital cost trend has played a distinctive role in these higher costs,” said Al-Falih. “Of course, non-conventional oil [also] costs substantially more to develop.”

He added that Aramco had decided to delay the completion of the Manifa project until 2015 as construction costs had not declined in line with the lower oil prices in early 2009.

Al-Falih said the oil price was in excess of $70 a barrel when the firm made its investment decision, but it fell to less than $35 a barrel in early 2009 after construction contracts were awarded. “[Oil] demand projections fell but [construction] costs did not proportionally decrease, clouding the robustness of the investment,” said Al-Falih. “We reviewed the [Manifa] programme and with some execution plan modifications, including deferring completion by two years, decided to continue.”

Alongside its Manifa development, Aramco has also committed to strong spending on its offshore gas developments to keep pace with annual domestic demand growth of 7 per cent.

Aramco is targeting a 30 per cent increase in sales gas output by 2014 to 8 billion cubic feet a day (cf/d). In the longer term, the kingdom must try to meet a forecast threefold rise in consumption to 14.5 billion cf/d by 2030.

With exploration in the onshore Rub al-Khali (Empty Quarter) continuing to disappoint, Aramco has switched its focus to the offshore Karan field, discovered in 2006.

Karan, 100km north of the giant Ghawar oil field, is the kingdom’s first non-associated offshore gas field to be developed by Aramco. It has reserves of more than 9 trillion cubic feet of gas and the company expects to produce 1.8 billion cf/d from the field by 2013.

In October, the firm said international contractors had started “major construction activity” on the four main Karan packages.

J Ray McDermott began fabrication in September for 30,000 metric tonnes of steel for 38 offshore structures. South Korea’s GS -Engineering & Construction has started construction work on the sulphur recovery unit while Hyundai Engineering & Construction, also of South Korea, is building three gas processing trains, each with a capacity of 600 million cf/d. The UK’s Petrofac is working on the utilities and cogeneration facilities package.

The Wasit plant will be the biggest we have ever built and will process all offshore dry non-associated gas

Khalid al-Falih, CEO, Saudi Aramco

Several other major new offshore gas developments are in the engineering phase to lift domestic production.

Aramco only discovered the Arabiyah and Hasbah fields in January 2009, but has already included them in its five-year spending plan for 2010-14.

Largest plant

The Wasit gas development programme will produce and process up to 2.5 billion cf/d of sour gas from the offshore Arabiyah and Hasbah fields, and Canada’s SNC Lavalin is currently carrying out front-end engineering and design, and project management services for the programme. “This [Wasit] plant will be the biggest gas plant we have ever built,” Al-Falih said at the inauguration of Aramco’s PetroRabigh refining and petrochemicals joint venture in November last year. “It will process all offshore non-associated dry gas and this will go a long way to meeting rising demand from utilities and some industries.”

More offshore exploration is also under way. Aramco currently operates at least 16 offshore fields and has boosted the number of active offshore rigs to about 15 in 2009 from just one in 2000. In its capital investment programme for 2010-14, Aramco has dedicated $6bn for the development of six offshore facilities out of a total budget of $60bn.

While the level of new seismic work is modest on a global scale, it does indicate the importance of offshore exploration for Aramco. In October, Aramco awarded three contracts worth a total of $300m to the local/Chinese BGP Arabia to gather seismic data on fresh gas reserves in the Red Sea, and oil reserves at the Manifa field.

Al-Falih says the company is interested in exploring potential new areas in its deep subsalt basins offshore.

“These are new frontiers offshore Saudi Arabia [and] we hope to find some gas in the subsalt geology there,” Al-Falih said at the November inauguration.

Despite the company’s success in raising overall oil production to 12 million b/d in the past few years, analysts argue Aramco has a difficult job to tackle domestic gas demand largely from offshore projects.

“For a company with very little historic offshore experience, cracking the subsalt nut will prove a challenge worthy of the world’s largest national oil company,” says Samuel Ciszuk, Middle East energy analyst for IHS Global Insight.

A MEED Subscription...

Subscribe or upgrade your current package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.

Get Notifications