Saudi Arabia mulls alternative gas options

10 January 2011

That Saudi Arabia sits on hundreds of trillions of cubic feet of untapped gas deposits has sent ripples across the global oil and gas sector. The challenge is the reserves are inaccessible via normal techniques

Oil & gas in numbers

447 trillion: Estimated volume in cubic feet of Saudi Arabia’s undiscovered gas resources

5 billion cf/d: The amount of additional gas Saudi Aramco has said it will produce within five years

$6 a million BTU: The gas price required for the Kidan sour gas field to be commercially feasible

cf/d=Cubic feet a day. Sources: MEED; US Geological Survey

Saudi Arabia’s urgent pursuit of new gas supplies to feed its fast-growing economy is taking it into uncharted territory. For the first time, the kingdom is giving serious consideration to exploiting its unconventional energy reserves, following the revelation by Saudi Aramco chief executive officer, Khalid al-Falih, in September 2010 that the country possesses “hundreds of trillions of cubic feet of shale gas”.

The problem in the GCC has never been that they don’t have natural gas reserves … [it] is in monetising the gas

Justin Dargin, Harvard University’s Belfer Center

Shale gas is gas deposits trapped within shale rocks. In the US, the rapid development of shale resources has led to a massive rise in gas output. This is playing a key role in suppressing global gas prices at present.

Al-Falih’s comments at the World Energy Council meeting in Montreal on 13 September, that shale gas could significantly boost the kingdom’s gas reserves came as a surprise to the industry. Although the potential for Saudi shale gas has been known for more than a decade, it had never been viewed as a strategic priority for the Saudi authorities.

Gas supply strategy

A study from the US Geological Survey 10 years ago estimated a 50 per cent chance of there being 447 trillion cubic feet of undiscovered gas resources in the Qusaiba Paleozoic reservoirs in the Rub al-Khali and around the giant Ghawar oil field.

Until now, that is. The Aramco chief’s statement in Montreal suggests that the need to secure more gas feedstock for power generation and industrial consumers, and meet a self-imposed target of adding 5 billion cubic feet a day to Saudi gas production within five years, means it will have to dig deeper into its geological inheritance to ensure sufficient supply.

A lot of people are excited about … Saudi Arabia’s shale gas reserves, but the devil is in the detail

Justin Dargin, Harvard University’s Belfer Center

The kingdom may struggle to match the rapid expansion of the US shale gas industry. Since 2000, shale gas production has leapt from 1 per cent of total US output to 20 per cent in 2009. In 2008, US-based shale gas produced some 50 billion cubic metres, according to the International Energy Agency (IEA). Experts say Saudi Arabia also has some of the features that could create a successful shale gas industry. It boasts shale gas formations with mature gas resources, shale gas formations being the source for Khuff gas reservoirs in the kingdom.

In any case, the presence of massive hydrocarbons deposits in the kingdom is another indicator of the likelihood of strong unconventional resources, since most shale deposits are situated in systems where conventional reserves are already significant. Saudi Arabia is clearly in a strong position with conventional natural gas reserves estimated at 267 trillion cubic feet.

The dominant shale deposit is the Qusaiba shale in the Eastern Province. The organic-rich shales in the Lower Qusaiba constitute the main source rock for the kingdoms’ Paleozoic petroleum system.

Though assessments of the prospectivity of the Saudi shale are still in their infancy, analysts see positive indicators. “We’ve seen data to indicate that some of the shales are brittle, which we would see that as a positive alongside known events of natural fractures,” says Robert Clarke, unconventional gas service manager at consultancy Wood Mackenzie.

However, in other respects, there are clear geological obstacles to developing shale gas in Saudi Arabia. The kingdom’s major gas rich shale formations tend to be very thick layers with trapped hydrocarbons in continuous shale layers. This leaves a weaker proximity to brittle rock layers, such as limestones or dolomites, which can be fractured, propped and serve as drainage pathways for the gas entrapped in the shales.

Overcoming gas extraction obstacles in Saudi Arabia

Under shale gas extraction techniques, hydraulic fracturing – the high-pressure injection of water, chemicals and sand – breaks up the rock structure and allow the gas to flow more easily.

In the main Paleozoic shale zone, the gas-rich zone lies at the bottom of the shale formation at thousands of feet deep, which is particularly difficult to tap into. While thinner layers of organically rich shales are available in other areas of the kingdom, these have been largely ignored due to their limited commercial value.

Even if Riyadh is able to mount a geological argument for commercial shale gas production, there are still formidable technical and financial obstacles that will have to be overcome. 

The capital-intensive fracturing process would force development costs to rise to tens of millions of dollars for each well, according to a senior Saudi upstream source. Building infrastructure for shale gas, including gas-gathering and distribution facilities, covering vast distances, will also add significantly to costs. 

Cost is key issue in the context of a subsidised gas market in the kingdom, under which the domestic sales price of natural gas is capped at $0.75 a million BTU.

“The prevailing gas price is below $1 a million BTU, and the best North American shale play in terms of the breakeven cost is $3.50 a million BTU. That shows how hard it will be to make it work commercially,” says Clarke.

Commercial feasibility for shale gas

Kidan, the massive Rub al-Khali-based sour gas field of Aramco and Royal Dutch Shell, is reported to require a gas price of $6 a million BTU to make it commercially feasible.

“The problem in the GCC has never been that they don’t have natural gas reserves; they do. The challenge with the Gulf is in monetising the gas, and I can’t see how shale gas will be any different to the struggle to monetise sour gas,” says Justin Dargin, a research fellow and energy specialist at Harvard University’s Belfer Center.

Developing shale gas will require relatively advanced technology. Though Saudi Aramco has built up a strong reputation in the application of technology, it will need to develop different technical skills needed to capture unconventional gas resources. The cutting edge technology for shale gas is largely in the hands of specialist US companies like XTO, acquired by ExxonMobil two years ago. 

Another technical challenge is presented by the amount of water needed in the hydrofracturing process. The water has to be relatively unpolluted when used in hydrofracturing, since it must not push pollutants into natural reservoirs. While desalinated water could be used for this purpose, this looks to be an expensive option.

Such technical and financial challenges are not unique to Saudi Arabia. Other countries will also encounter problems in replicating the US success model. According to a Chatham House report on the US experience with shale gas, released in 2010, many of the favourable factors connected with the US – the geology, tax breaks and the existence of a vibrant service industry — are generally not replicated outside the US.

Coherent plan for shale gas in Saudi Arabia

Furthermore, some of the technologies that have made commercial-scale shale gas develop possible – such as horizontal drilling and hydraulic fracturing – are coming in for growing criticism over their environmental impacts.

Another drawback is that unconventional gas resources tend to deplete quickly; despite the massive scale of unconventional gas resources compared to the conventional, their depletion rates are estimated to be five times that of conventional gas. The danger then is that a massive investment programme in sour gas yields only a short-term boost to supply, and at a massive price. 

A coherent plan about how it would monetise the kingdom’s shale gas is awaited. “A lot of people are excited about the announcement of Saudi Arabia’s shale gas reserves, but the devil is in the detail,” says Dargin.

Until that time, the geological potential of shale gas remains a possibility, rather than a bankable prospect – but the urgency of the requirement for increased natural gas across the Gulf means no stone must be left unturned.

What is unconventional gas?

There are different types of unconventional gas

Shale gas

Gas deposits trapped within shale rocks. Unusually, these rocks are both the source of the gas and the means of storing it. They also tend to overlie conventional oil and gas reservoirs. If there has been extensive exploration for conventional oil and gas the existing well-cores can generate large amounts of data to locate the potential shale plays.

Coal-bed methane (CBM)

Also known as coal seamgas, it is natural gas contained in coal beds. Normally the coal beds are regarded as commercially sub-optimal. The IEA estimates CBM to be the source of 10 per cent of total gas production in the US in 2008, 4 per cent in Canada and 8 per cent in Australia. China and India, with their huge coal reserves, also have great interest in developing their CBM capability. 

Tight gas

Deposits found in low-permeability rock formations that require fracturing to release them for production. The IEA suggests a definition that is based upon a gas reservoir that cannot be developed commercially by vertical drilling because of the lack of natural flow. Even with horizontal drilling, hydraulic fracturing is also required to produce commercial quantities. Saudi Aramco’s tight gas effort is focused on the lower Paleozoic siliciclastic succession. According to the US Society of Petroleum Engineers, the nature of the Lower Paleozoic succession varies considerably across Saudi Arabia, from outcrops to 20,000 feet depths, and with reservoir qualities that range from conventional to distinctly tight.

Exploration activity in Southern Saudi Arabia over the past four years has more than doubled the number of lower Paleozoic penetrations in the South Ghawar and Rub al-Khali areas. This activity has resulted in several key developments including confirming that the pre-Qusaiba sandstones of the Sarah and Qasim contain significant untapped tight-gas resources. In the Gulf, Oman has some of the most significant tight gas reserves. BP started production in 2010 from the Khazzan and Makarem fields, part of an area covering 2,800 square kilometres, and is looking to raise output in 2011 up to 300 million cf/d.

Gas hydrates

Deposits trapped in ice crystals in permafrost and on the ocean floor. The IEA says the gas resource contained in hydrates is estimated to be larger than all other sources of natural gas combined, but that most is not commercially producible with current technologies.

Shallow biogenic gas

This is gas found in coal seams generated by biogenic processes rather than the thermal maturation that produces CBM. It is mainly found in Western Canada.

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