Riyadh pins gas hopes on Empty Quarter

31 October 2008
The kingdom is continuing its commitment to its gas exploration programme in the remote Rub al-Khali desert despite no companies having yet reported commercially viable finds.

The search for major gas deposits in the isolated Rub al-Khali (Empty Quarter) region is a strategic priority for Saudi Arabia.

It hopes that the ongoing exploration programme, which started in late 2003, will make it a key source of fuel for power generation and feedstock for the fast-growing petrochemicals industry.

The largest stakeholder in the programme with the largest concession (see box), South Rub al-Khali (Srak), a 50:50 joint venture of Saudi Aramco and the UK/Dutch Shell Group, has drilled three wells, and in August it announced that it had found signs of a working hydrocarbons system, but it is still yet to make a commercially viable find.

Even if this first exploration phase fails to produce worthwhile results, under its contract with the government, Srak is entitled to sign a second five-year drilling deal, provided it completes the first seven-well programme.

Srak is now about half way through its first programme. Its operations have moved from contract area two, near the Yemen border, to area one, in the kingdom’s easternmost region, neighbouring Oman and UAE, where work on a fourth well, Kidan-6, began in February.

Drilling at this site is expected to continue until the end of the year or into 2009.

In May, the Petroleum & Mineral Resources Ministry granted Srak an extension to the overall contract schedule because of delays caused to its drilling programme by terrorist attacks in 2004, allowing the first phase of exploration to run until 25 July 2010.

There are still some grounds for hope that gas will be found. It is close to the important Shaybah oil field, which spreads across the border with the UAE.

Indeed, in late-2004, UAE president Sheikh Khalifa bin Zayed al-Nahyan revived an old dispute over the border, in the hope of securing an increased share of Shaybah’s hydrocarbon resources.

But Al-Nahyan received short shrift from Riyadh, which insisted the original 1974 Jeddah agreement on the frontier remained valid.

Logistical hurdles

Srak’s operations have also been hindered by the logistical challenges of moving equipment to remote Empty Quarter sites.

Its first well, Isharat 1, was 345 kilometres from the nearest town, Sharourah, and the drilling rig had to be brought 1,800km from the rig’s base in the UAE.

Operating conditions were harsh, with summer temperatures reaching 50-°C.

The contracts cover huge tracts of desert. Area two is almost 160,000 square kilometres, while area one is 50,000 sq km.

Given the extent of territory to be explored, the prospect of Srak taking up a second five-year contract is a real one, although a failure to make any discoveries under the first programme would lower the probability of success the second time around.

The final decision will be taken by the shareholders, Saudi Aramco and Shell, on the basis of a recommendation from Srak’s management.

France’s Total, which was originally a 30 per cent stakeholder in the joint venture, has already reached its own view.

In February this year, it opted to exercise a contract clause allowing it to withdraw from the venture if no finds were made at the first three wells.

Saudi Aramco responded to the Total pullout by raising its Srak share to 50 per cent, signalling Riyadh’s continuing commitment to the Empty Quarter gas exploration effort.

However, Srak is just one of four Saudi Aramco joint ventures that are engaged in exploring the Empty Quarter.

The others are: Sino Saudi Gas (SSG), for which it has partnered with China’s Sinopec International Petroleum Exploration & Production; EniRepSa, with Italy’s Eni and Spain’s Repsol; and Luksar, with Russia’s Lukoil.

Concession terms

So far, only Luksar is known to have made a substantial find of 650 million barrels of condensate in 2007.

Luksar’s concession covers just 29,900 sq km in the northern part of the Empty Quarter, which means its discovery may be relatively near to Saudi Arabia’s largest existing field, Gawar.

The terms of concession forbid Luksar from producing any oil that it finds while searching for gas. Saudi Aramco is entitled to buy any gas found on take-or-pay terms of $22.70 a 1,000 cubic metres.

The contract does, however, entitle Luksar to sell any condensate it produces at world market prices and at a pre-agreed profit level, which is yet to be decided, albeit through Saudi Aramco.

But it is unclear whether the deposits that have been found fall within the definition of commercial viability that applies under the concession.

EniRepSa and SSG have found traces of gas, but at this stage there has been no suggestion that this is in quantities that would justify hefty investment in development and production.

Lukoil, Eni, Repsol and Sinopec did not secure rights to early withdrawal. Unless they manage to negotiate contract changes, they are obliged to continue to the end of their drilling programmes in the hope that they will make worthwhile gas finds.

The Empty Quarter exploration represents a considerable cost outlay by all parties.

Lukoil president Vagit Alekperov said his company was ready to invest up to $3bn, if the exploration yielded favourable results.

The challenge the four consortiums have faced in tackling the Empty Quarter has been compounded by the current state of the hydrocarbons exploration sector.

“Market conditions in the world at the moment, given the recent high oil prices, mean the industry, particularly the drilling sector, is up against the limit of its capacity,” one senior executive involved with the Empty Quarter programmes tells MEED. “This means there is a huge turnover of staff.”

This has put the companies under pressure to compete for expert labour at a time when the global demand for staff is pushing up pay and perks.

In addition, with personnel regularly tempted by attractive offers from elsewhere, companies have had to work hard to maintain stable teams that can develop deep experience of the Empty Quarter’s distinctive environment.

A MEED Subscription...

Subscribe or upgrade your current MEED.com 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