Gas to fuel Saudi expansion [NGW Magazine]
State-owned Saudi Aramco started the year with the announcement of regulatory approval to proceed with the expansion of unconventional gas production capabilities. While the company has since become distracted by the twin challenges of the ill-timed oil price war with Russia and the dramatic decline in demand caused by reduced travel and commerce as a result of the Covid-19 pandemic, Aramco is at pains to assure the market and its investors that its gas plans remain in focus.
The primary target of the February announcement was Jafurah, which is by far the kingdom’s largest unconventional gas deposit, holding an estimated 200 trillion ft³, with liquids making up more than half of the resource. Aramco said that it planned to spend $110bn developing the field, with production expected to begin in early 2024, ramping up to 2.2bn ft³/day of sales gas by 2036. Given recent events, doubts have been cast over the Dhahran-based company’s larger capital projects.
Capital cuts
In early April, it set a single-day oil production record of 12.1mn barrels/day but less than three weeks later, as demand crashed, crude prices fell to an historic low of -$37.63/b for US West Texas Intermediate. Aramco’s response was to cut oil output to 7mn-8mn b/d.
In early August, the company announced that it was reeling in its full year spending plans, first half capital expenditure amounted to $13.6bn. Meanwhile, the full-year 2020 capital programme was cut by around $11-13bn as the company retrenched to stem the bleeding.
A company source speaking to NGW on condition of anonymity, said that Aramco’s full-year 2020 gas expenditure is expected to be more than $3bn lower than it was at the end of 2019, with the number of gas wells drilled dropping by 15-20 year on year.
Numerous large projects are being reconsidered, while the Berri and Marjan crude increment programmes have been pushed back by six months. Costing a total of $18bn, the projects will more than double oil production capacity from the assets to a combined 1.35mn b/d, while delivering up to 2.5bn ft³ (71mn m³)/day of associated gas, which will be piped to the Berri gas plant.
Total raw gas production is expected to grow by around 0.5bn ft³/d to 13.5bn ft³/d, which is roughly 5bn ft³/d below capacity. This includes 8.5-9bn ft³/d of sales gas. Meanwhile, Aramco’s gas unit costs are expected to rise slightly to just under $2/mn Btu. Including the Partitioned Neutral Zone (PNZ) Saudi shares with Kuwait, the kingdom has around 324 trillion ft³ of proven gas reserves.
Despite the cuts, Aramco has stuck to its word in several key areas. As with the company’s promised $75bn/yr dividend to shareholders, NGW understands that plans for gas remain largely unchanged.
During Q2, the company made progress in expanding its gas production capacity with the Fadhili gas plant reaching full production capacity of 2.5bn ft³/d following the successful completion of commissioning activities.
While early work has been ongoing on Jafurah throughout Q1 and Q2, the evaluation of bids for three of the main contracts on the project’s $3.5bn first phase has been extended, while the deadline for submissions for the other two has also been pushed back.
However, according to the company source, while the project’s completion date has been delayed as a result of the capital expenditure cut, this will only see it pushed back by a few months.
Building out its gas capabilities is an important part of both Aramco’s and Saudi Arabia’s plans on track as Riyadh seeks to reduce the 3-3.5mn bpd of Saudi crude that is burnt at home to provide electricity.
In mid-August, CEO Amin Nasser said: “Gas is a growth area for us, especially considering increasing gas demand in the kingdom. The Northern area is declining, but there is pick-up in the Eastern province, the Jafurah basin and South Ghawar in conventional gas.”
Challenges and connectivity
However, much of Saudi Arabia’s gas is associated with oil production, and developing unconventional, non-associated resources will require large volumes of water in an area where it is in scarce supply.
It is possible that water could be supplied from the Al-Qurayyah Sea Water Plant, south of Dhahran, which pipes millions of barrels of water daily to Ghawar, the world’s largest oilfield, and Khurais. The facility’s full 14mn b/d of water is understood to be utilised at the oilfields and Qurayyah would require expansion to also serve Jafurah.
In addition, given the field’s very low well flow and steep decline rates, consultancy Wood Mackenzie expects thousands of wells will be required to maintain production. Indeed, Woodmac expects Jafurah to require an investment of $50bn to achieve the 2.2bn ft³/d target.
However, considering that the reservoir has a high ratio of condensate to gas, Jafurah is expected to also produce peak flows of 550,000 b/d of condensate and LPG, as well as roughly 0.4bn ft³/d of ethane.
In addition, its proximity to the Saudi gas grid – the Master Gas System (MGS) – provides relatively convenient infrastructure through which the gas can be transported. The MGS connects non-associated gas developments in Eastern Province to industrial facilities up the coast at Ju’aymah and Jubail and the Yanbu’ Industrial Complex on the Red Sea coast.
This also applies to conventional gas assets in South Ghawar, which are likely to use existing processing facilities at Haradh, Hawiyah or ‘Uthmaniyah, which are already connected to the MGS.
Apart from the MGS connection to Yanbu’, Saudi Arabia does not have a gas grid on its west coast. The development of the Jafurah and South Ghawar resources would certainly support the expansion of the MGS, thereby increasing the role of gas in the Saudi energy mix.
Gassing up and going green
The gas is also likely to be diverted to Aramco’s petrochemical plants. Having recently closed the acquisition of a 70% stake in petrochemicals firm Saudi Basic Industries Corp. (Sabic) from the Public Investment Fund for $69.1bn, the company has become one of the world’s largest petchem producers. The deal was concluded the week after Aramco cuts its expat workforce by 500-1,000, according to the company source, showing that the firm can maintain its appetite for massive investments, even in the toughest of economic climates.
In 2019, Aramco and Sabic produced nearly 90mn metric tons of petrochemicals combined, and the increased availability of gas feedstock will only improve economies of scale.
Meanwhile, Riyadh’s focus on building out its electrical network was highlighted by the recent signing of a memorandum of understanding with neighbouring Jordan covering a framework for the connection of the two countries’ grids. This was followed by comments from the Iraqi government that it was looking to join up with its neighbours in the development of a broader Gulf grid.
The deal with Jordan was signed between Saudi energy minister Prince Abdulaziz Bin Salman and his counterpart Hala Zawati. In an official statement, Prince Abdulaziz said: “There are promising opportunities from the project to support the reliability of the electrical networks between the two countries, achieve economic savings, [enable] electrical networks to use renewable energy, and achieve optimal investments in electricity generation projects.”
His mention of renewable energy gives some insight into the Kingdom’s vision of the future. Riyadh is investing heavily in renewables as part of Crown Prince Mohammed bin Salman’s Vision 2030 initiative, highlighted by the 2019 launch of the 300MW Sakaka project in the north-western Al-Jawf province, which at the time was one of the world’s cheapest producers of energy from solar.
The key project associated with Vision 2030 though is the development of the $500bn Neom smart city on the Red Sea coast near the border with Jordan, which is to be built and powered exclusively by renewable energy. In July, the Neom project company announced a $5bn deal with Air Products and ACWA Power to build the world’s largest hydrogen facility.
While the hydrogen produced at Neom will be ‘green’ as it will be generated from renewable sources, Saudi’s increased gas production could facilitate the growth of ‘blue’ or ‘grey’ hydrogen for use in fuel cells for industrial transportation.
With a stated aim of diversifying the economy, it should not come as a surprise if the government ringfences the development of its large gas assets in much the same way they have done with Neom, protecting them from any potential reductions in capital spending.
The benefits of ramping up gas production are clear for Saudi Arabia: it can thereby increase its revenues from crude exports, diversify its energy mix, create new industries, jobs, and assume the role of a world leader in clean energy. Given Riyadh’s penchant for statement projects and deals that project it favourably, Jafurah might just be too big to fail, even if it faces delays amid oil price and demand volatility.