To outsiders, it remains a strange phenomenon. The world’s largest oil producer is facing a squeeze on its gas supplies, even though it holds the fourth-largest gas reserves globally.
With oil output close to historical lows, Saudi Arabia has also found itself in the difficult position of no longer producing enough gas to meet demand, and having to lean on imported fuel oil as feedstock for some of its largest power plants.
The problem can be traced back to the kingdom’s assumption that its natural gas exploration initiative, launched in 2004, would supply enough ethane to power industrial and petrochemicals projects around the country. However, the gas initiative’s failure to provide significant gas discoveries in the Rub al-Khali (Empty Quarter) has undermined development and left private sector projects under considerable strain.
Aramco was wrong to place so much emphasis on a highly speculative exploration programme. Questions also remain over the tough terms and conditions it imposed on international oil companies. Energy majors argue that low domestic prices and rising extraction costs make gas exploration in the kingdom a difficult prospect.
Domestic users are typically charged $0.75 a million BTUs for gas, compared with $6-8 a million BTUs on international markets.
Now, with demand for its oil at a low ebb, Aramco has rightly switched its attention to diversifying its sources of gas. The Shaybah and Arabiyah schemes are well overdue.
The company has an ambitious target of finding an additional 50 trillion cubic feet of non-associated gas reserves in the kingdom by 2016. But Aramco will only achieve that through a big increase in its long-term investment in gas. Anything less will continue to hamper the development of its industrial sector.