Editorial: Saudi Aramco Shifts Gear on LNG [LNG Condensed]

News that oil giant Saudi Aramco is planning to take a 25% stake in Phase 1 of US company Sempra Energy’s Port Arthur LNG project, alongside an off-take agreement for 5mn mt/yr, is notable for many reasons not least that Saudi Arabia has no LNG import capacity and domestic gas reserves estimated at 8.0 trillion m3 at end-2017, the sixth largest in the world.

However, the planned move should come as no surprise. Saudi Aramco has made clear that gas and LNG is a strategic focus, and it is a strategy which makes sense  for both domestic security of supply reasons and the company’s long-term development. For the LNG industry, it brings a new deep-pocketed investor and there must be some hope that other national oil companies will follow suit.

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Despite the prevalence of below ground-gas in the region, Saudi Arabia would not be the first Middle Eastern country to import LNG. In 2017, Israel, Jordan, Kuwait and the UAE, itself an LNG exporter, all imported LNG, representing a regional import market of 10.44mn mt/yr, according to International Gas Union data.

In November, Saudi Arabia unveiled its own ambitious domestic gas expansion plans, outlining the development of about 90bn m3/yr new capacity over the next decade at a cost of $160bn. Saudi gas demand is on a sharp upward trend as the country switches from crude and fuel oil for power generation to natural gas. This allows it to maximise its oil exports, but it also needs gas, notably ethane, as feedstock for its expanding refinery and petrochemical operations. It needs gas for injection into old oil fields to slow decline and to support cement and fertilizer production.

In addition, while Saudi Arabia has a lot of gas, that doesn’t mean it has a lot of cheap gas. The first non-associated gas field the kingdom brought online in 2011 was the Karan field, which has high hydrogen sulphide content,  current gas fields under development, the largest is also  a sour gas development. Moreover, the expansion plans announced in November envisage shale gas development, which is likely to be costly in its initial stages and will face a key challenge in terms of water availability.

Set against this is a currently over-supplied LNG market, which, in May, saw spot prices slip back below $6/mn Btu. Middle Eastern gas demand is counter-cyclical, rising in the northern hemisphere summer to meet air conditioning needs, as opposed to the generally higher-priced winter period, when demand is dominated by north Asian countries and Europe. LNG imports into Saudi Arabia on a spot basis might make for good opportunistic seasonal buying.

They would also provide some supply security over potential mismatches in timing between, on the one hand, the commissioning of new gas-fired generation, refineries and petrochemical plant, creating demand for gas, and, on the other hand, the commissioning of Saudi Aramco’s major upstream gas developments, which will provide the supply.

Nonetheless, while Saudi Aramco’s LNG plans may have a domestic element, there are other reasons to pursue this strategy. All of the western oil majors have steadily increased their proportion of gas production vis-à-vis oil over the last decade and it is not hard to see why.

Some of those majors predict a peak in oil demand sometime after 2030, but no such peak is yet envisaged for gas, which, in contrast, is the fastest growing fossil fuel. As Nasir K. Al-Naimi, VP, Petroleum Engineering and Development for Saudi Aramco pointed out to NGW in April, natural gas demand is expected to double by 2040, with LNG expected to make up almost half of global gas trade over the same period.

LNG thus represents modernisation for Saudi Aramco, which is still pursuing a partial IPO for 2021. While its vast long-life crude resources are its principal attraction, its diversification across the oil value chain, for example into petrochemicals, and beyond into gas is a means of future-proofing the company and increasing its attractiveness to investors. The fact is, if there is a ‘must-have’ amongst the oil majors in today’s world, it is not so much a giant oil field as an LNG portfolio.

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Volume 1, Issue 5 - April 2019

In this Issue: 

LNG on the road: The bottom line

Asian hydro woes offer opportunities for LNG

Tanzanian LNG at last?

Vietnam: Capital mobilisation challenges

Tortue LNG - Genesis of a West African gas hub

Getting LNG on the rails and more! 

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