The announcement in early 2013 that Saudi Aramco and the UK/Dutch Shell Group are likely to start the tender process for the Kidan gas field in the middle of the year reaffirms the direction of Saudi Arabia’s mid-term upstream strategy.
The kingdom has an insatiable appetite for gas and conservative growth estimates for consumption are 5-6 per cent a year. Saudi Arabia uses all the gas it produces internally.
Demand is set to increase further, driven by rising electricity consumption among residential users and from industrial projects. Many of Saudi Arabia’s power stations burn valuable crude oil, which Riyadh is keen to sell on the international market.
This means Aramco has now been given the task of initiating a domestic gas boom that would produce enough gas to meet the future needs of utilities and industrial users.
Saudi Arabia has the fourth-largest reserves of gas in the world, with proven reserves of 282 trillion cubic feet, according to Aramco’s 2011 annual report.
Most of the kingdom’s gas comes from associated fields, where oil and gas are found together and output fluctuates depending on how much oil is being produced. As supplies get tighter, it is difficult for Aramco to accurately allocate gas for use in industry and power generation.
This has forced the state-owned firm to focus much of its exploration activities on locating non-associated gas fields. When a suitable field for production is discovered, Aramco fast-tracks construction to bring the gas onstream as quickly as possible.
This has not proven an easy task and has called for creative thinking from both Aramco and its partners to be able to solve issues that would have made many of the current schemes unviable in the past.
One key issue hindering Aramco’s gas plans is the high sulphur content of the kingdom’s non-associated gas. About 75 per cent of the non-associated fields have high sulphur content and this has led to delays with some of the largest gas projects such as the $4.6bn Wasit gas development on the Gulf coast.
Aramco is on track to increase domestic reserves by 50 trillion cubic feet by 2016, but it may be delayed by about a year in its pledge to increase production to 15 billion cubic feet a day (cf/d) by 2015. The kingdom currently produces 9.6 billion cf/d of gas.
To diversify its energy mix, Aramco is fast-tracking several unconventional gas schemes, as well as ramping up its seismic surveys off the Red Sea coast. The Kidan project is an example of how far Saudi Aramco is prepared to go to increase gas output. The field has reserves of about 7 trillion cubic feet of sour gas and is located close to the UAE border in the Empty Quarter.
“If this field was discovered 10 years ago, it would have been mothballed and forgotten about due to its remote location and the high sulphur content of the gas,” says an executive working in the oil and gas industry. “Now, it is likely to get fast-tracked.”
The plans for the field will see gas processing and sulphur treating facilities being built at the site. Initial production of about 300 million cf/d will eventually rise to 500 million cf/d.
Carrying out a large-scale construction of this type in such a remote location will be expensive and cost estimates range between $4bn and $7bn. The high sulphur content of the field at 35 per cent also poses a challenge for Aramco. One solution that has been suggested is construction of a rail line to transport the granulated sulphur to processing facilities at Ruwais in Abu Dhabi.
The UAE’s Etihad Rail is currently constructing the first phase of its national rail network, which will link Abu Dhabi’s gas fields in Shah and Habshan to Ruwais for this same purpose. No deal has been agreed yet, but talks are taking place.
To increase output, Aramco is also developing smaller gas fields that will produce less than 100 million cf/d of gas.
The Midyan non-associated gas field is located in the Western Province of Saudi Arabia and is being developed by Aramco to supply gas for power production.
The project has a budget of about $800m and will produce a relatively modest 75 million cf/d of gas and 4,500 barrels a day (b/d) of condensate for a 20-year period.
The gas will be transported by pipeline to be used in a power plant in the coastal town of Duba, 135 kilometres southwest of the field. The US’ Mustang Engineering carried out the front-end engineering and design. The engineering, procurement and construction (EPC) contracts are currently being tendered.
The scope of works includes the EPC of upstream and processing facilities, as well as pipelines to transport the gas and condensate. Most of the processing facilities will be skid-mounted. This means that they can be transported to other smaller gas fields in the area after production from Midyan is completed, which is a first for the kingdom. By skid-mounting the facilities, the project’s scope is similar to an offshore rig. The first gas from the Midyan scheme is expected in 2015.
Extensive seismic surveys of the Red Sea means the coastal town of Duba is expected to undergo massive redevelopment as a hub for all of the kingdom’s hydrocarbons activities in the west of the country.
A gas field 26km offshore northwest of Duba has been already been discovered that could be commercially viable. One test well flowed at 10 million cf/d, 17,700 feet below the sea surface, while another showed a flow of 5.2 million cf/d at 17,275 feet.
Also as a part of plans to increase gas output, Riyadh is looking to tap unconventional sources such as shale gas that have proved to be successful elsewhere. Previously, the kingdom had no plans to exploit the resource until 2020.
This is now changing and Aramco is formulating a plan that will see the production of shale gas in seven years.
Seismic surveys have already started and a vast area of the northern desert area close to borders of Iraq and Jordan has been earmarked as the prime area for shale gas production.
The rewards on offer in shale gas could be enormous. According to the US’ Baker Hughes, Saudi Arabia has the world’s fifth-largest shale gas deposits of about 645 trillion cubic feet. This means that shale gas could offer Riyadh an opportunity to solve its gas shortage in the long-term. The US’ Halliburton and Schlumberger are carrying out feasibility studies for shale gas production.
Aramco is already considering tendering a long-term development contract in 2013 to oil field services companies to carry out underground activities that will include fracturing (fracking) the rock, as well as drilling the wells.
US companies will be well-positioned to benefit from shale gas developments in the kingdom because of their extensive experience in the industry. However, if it goes ahead, the scheme will not be short of challenges.
Shale gas is expensive to produce and when compared with the price at which Aramco sells gas for industrial use, there is a huge disparity.
Together with the remote location of the area earmarked for extraction, a production cost of $8-$9 a million BTU has been quoted. Aramco currently sells ethane to industrial customers at $0.75 a million BTU. To make developing unconventional resources economically viable, Saudi Arabia will need to reconsider its gas pricing.
Creating permeability in rock thousands of metres underground to release gas is complex and expensive. Fracking involves drilling long horizontal sections and creating artificial permeability by fracturing as many as 400 wells.
Shale gas extraction also uses a lot of water and finding a water source in northern Saudi Arabia that is not required for drinking or agricultural purposes will be a challenge.
The kingdom’s gas shortage is an indication of how quickly the country is changing and the investment Riyadh is directing towards expanding its industrial base and power infrastructure.
Insatiable demand for gas is testing Aramco’s capabilities to the limit. But its willingness to take on small and complex projects shows that it is intent on rising to the challenge.
$4.6bn: Value of the Wasit gas development on Saudi Arabia’s Gulf coast
50 trillion cubic feet: Saudi Aramco’s domestic gas reserves targeted increase in 2016