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No. 4, 2012

Eldar Kasaev ,
Expert on investment in the Middle Eastern and African energy sector


Saudi Arabia to spur up the oil industry development through the foreign investment and governmental programs

Major oil industry development projects by Saudi Arabia Government are focused on exploration and development of new fields, refurbishment and upgrade of the transport infrastructure, construction of refineries. Their objective is not only to increase the hydrocarbon exports but also to maintain the high standing among the world leading oil and gas producing countries. Russia, on one hand, is competing with Saudi Arabia on the global mineral resources market, but on the other hand, our country is supporting this Arab state in its "energy muscle building" efforts.

Boosting oil production is not everything

Oil industry is the cornerstone of the Kingdom of Saudi Arabia well-being, accounting for 80% of the budget revenues, 45% of GDP and 90% of the export proceeds. Saudi Arabia which over a century ago was among the founders of Organization of Petroleum-Exporting Countries (OPEC) is a major crude oil supplier in the world with its immense reserves of the "black gold".

Saudi Aramco, one of the largest oil producing companies in the world, is the crucial component of the national energy sector. It controls 98% of the oil/gas resources of Saudi Arabia dominating the production, transportation, processing and distribution of the hydrocarbons. Incidentally, the known Saudi reserves have reached 262.6 billion barrels, which represents 19% of the global pool.

According to the Russian statistics Saudi Arabia is the second, after Russia, largest oil producer (10 million barrels per day) in the world. However, some European analysts tend to disagree - in their estimation Saudi Arabia's production rate hits 10.8 million barrels per day while Russia is a bit slower with 9.8 million barrels rather than the official 10.27 millions declared by official Moscow. To prove their leadership Riyadh claims going over the allowed quota repeatedly during the reporting period.

It's worth mentioning that at the end of 2011 OPEC for the first time in several years officially raised the production quota and Saudi Arabia wasted no time in taking good advantage of that. For instance, in 2012 the daily production rate in the kingdom reached record 11 million barrels (1.5 million tons). Saudi Aramco's experts are convinced that the production capacity can be increased up to 750 million tons per annum within several years.

It should be noted that contrary to certain expert opinions oil production rate in Saudi Arabia has not been gradually going up recently but jumping up and dropping sporadically.

The reason is that the Saudi government does not mindlessly focus on getting the production boosted up every year - there also are external factors to consider. The government  has been trying to tie the production rate to the current market trends. Saudi Arabia has frequently used their reserve capacities to make up for a disturbing gap between supply and demand caused by any negative event that may occur.

For instance, the global financial crisis of 2008 forced Riyadh to ramp up exports to increase budget proceeds. Thanks largely to the Saudi efforts a status quo has been reinstated on the European oil market after the exports from Libya were temporary suspended in 2011.

Saudi Arabia has repeatedly volunteered to cover oil shortage resulted from the sanctions EU and USA imposed on the Iranian oil industry. However, Ali Al-Naimi, Saudi Minister of Oil, said that the national production capacity was insufficient to cover the losses incurred by the embargo on Iranian crude exports (over 3 million barrels per day). Yet he pointed out that the daily production had increased dramatically.

According to QNB Capital, analyst branch of the Qatar National Bank, the Saudi Arabia's daily production rate, including launching the reserve capacity, is expected to reach 12 million tons by the end of 2012.

In other words Al-Naimi does not rule out the probability of production increase (within reason, of course) by the government if need be. His statements also knock the bottom from under the experts who claim that Riyadh is bluffing and unable to increase the hydrocarbon production rapidly.

The Saudi Arabia government plans to raise the aggregated production capacity to 670 million tons per annum and to keep 75-100 million tons in reserve.

In light of the ongoing tensions in the Middle East and North Africa it would be safe to expect Saudi Arabia to boost its oil production in near and middle term, but it can also slow down. The first scenario is likely to take place if their neighbors have to cut their exports due to acts of sabotage on the oil transportation facilities. The second scenario might become a reality if any export route used by Saudi Arabia gets blocked.

Preserve the current assets and develop the new ones

Saudi Arabia has benefitted immensely from the fact that its crude oil varies in quality from heavy to extra light. Save for AEL and ASL the Saudi crude features higher sulfur content. Light and extra light crude oils account for the two thirds of the overall production volume. Light brands are, for the most part, produced onshore while heavier grades originate from the offshore fields.

There are over 100 oil and gas fields in the Saudi Arabia with 8 major fields containing over one half of all national reserves. Most of the fields are concentrated in the eastern part of the country and the Persian Gulf offshore. The largest oil fields include Ghawar (up to 250 million tons per annum), Safaniya (up to 64 million tons per annum), Khurais (up to 60 million tons per annum), Shaybah (up to 37 million tons per annum).

The Saudi Arabia government intends to invest about $95 billion into new oil production projects: $70 billion for the production expansion and $25 billion for the construction of new refineries in an attempt to find alternatives to Ghawar field, which has had the largest (65%) contribution into the Saudi liquid hydrocarbons production over 60 years of operation.

In addition to the major promising fields already in development Saudi Arabia has approximately 70 fields in reserve. The experts believe that once developed such fields would allow for increase the production rate up to 18.2 million barrels per day by 2030. Plans are also in place for drilling additional wells at the existing sites to make up for the natural depletion of the mature fields.

The Saudi oil is traditionally extracted using free flow method. However, with the help of the leading global corporations (including but not limited to ExxonMobil, Royal Dutch Shell, Schlumberger) the Saudi oilmen are currently learning to use the cutting-edge oil production technologies in addition to the more conventional methods. For instance, Schlumberger and Saudi Aramco have jointly developed and tested StageFRAC system, which allows for doubling well productivity.

In addition, the Saudi oilmen have successfully used the horizontal directional drilling technology at Khurais oil field. A horizontal well's yield is 2-10 times higher than that of a vertical one. HDD also reduces the risk of water and gas cone rupture thus increasing the recovery rate. The HDD has proved cost-efficient because it helps increase well flow rate by 150-400%, reduce the total number of wells by 30%, cut the drilling and field equipment installation costs by 20-25%, cut the produced water and gas treatment costs by 50%, increase the recoverable reserves by 5-10% and delay installation of gas-lift and compressor units.

Adopting the latest hydrocarbon production technologies Riyadh, undoubtedly, lays the groundwork for further development of the oil industry, but there are still some problems Saudi Arabia may have to face in the future.

First, even such an oil producing giant as Saudi Aramco has trouble increasing production rate without sizable sustainable financing. It requires serious investments to enable further geological survey at the existing fields, whose yield Saudi oilmen are seeking to increase.

Second, some fields cannot be developed without the latest drilling technologies which have never been used in Saudi Arabia before thus necessitating involvement of foreign companies with vast experience in this area.

Third, unused drilling equipment is in rather short supply these days hence the rocketing lease prices, which is not going to make the life of the Saudi oilmen any easier.

Saudi Arabia Gas Initiative

Gas industry with 15% of GDP is the second largest contributor to the Saudi Arabia economy. The known gas reserves of Saudi Arabia equal to 7.8 trillion m3 (4.2% of the world number), which makes the Kingdom number four after Russia, Iran and Qatar.

The national gas production has been constantly growing but not a single cubic meter is exported or imported because all natural gas is consumed internally. As a result the production and consumption volumes are nearly the same.

The major consumers include the power plants, petrochemical and chemical industries, metallurgical and water desalination plants. About 13-14% of the natural gas are lost in the course of the crude oil production - flared and injected to maintain formation pressure.

Trip gas accounts for about 60% of the proven reserves. Ghawar (one third of the national reserves) and offshore Safaniya and Zuluf fields contain the bulk of the trip gas reserves. Also remarkable reserves are concentrated in the Northern-West (Midyan field in Rub Al Khali desert) and South-East provinces (Shaybah oil field).

The total length of the gas pipelines in Saudi Arabia exceeds 2,200 kilometers. The Master Gas System comprises the gas transportation and gas processing facilities. There are 7 gas processing plants in operation with the total processing capacity of 92 billion m3 per annum while the transportation capacity amounts to 72 billion m3 per annum.

The main gas pipelines are located in the Eastern province that connect the natural gas fields with largest consumers. They use a section of Iraqi pipeline (built in 1989) traversing Saudi Arabia to transport "blue fuel" to Janbu on the Red Sea coast.

In 2006 the national Ministry of Oil and Mineral Resources in collaboration with Saudi Aramco developed Natural Gas Exploration, Production and Consumption Strategy 2025 under which Riyadh intends to raise about $20-25 billion to finance 10 projects in the gas industry and increase the reserves of free (non-associated) natural gas by 1.4 trillion m3 per annum. According to estimates by Saudi Aramco the domestic demand for the natural gas will reach 150 billion m3 per annum, which is nearly twofold of the current level.

In addition, the government is determined to bolster the development of the gas reserves and to upgrade the national gas transportation system. Currently underway is the development of Karan offshore gas field, whose yield is expected, according to Saudi Aramco, to hit 15 billion m3 per annum this year. Plans are in place for the construction of the second phase of Shedgum-Riyadh-Janbu gas pipeline to run for about 1,000 km from the Persian Gulf to the Red Sea.

The government also expects to booster the domestic gas consumption thus saving more crude oil for export.

To be perfectly fair, it should probably be mentioned that despite the immense reserves and growing needs there are still certain limitations affecting the gas production in Saudi Arabia: high level of price subsides and ever-growing costs of gas production, exploration, processing and distribution restrict deliveries and investments hampering the development of other industries and slow down economic growth.

Adding the complexity of the situation is the fact that most of the gas fields in Saudi Arabia are "linked" with the oil fields or gas is produced from the same wells as the "black gold" making the gas production remain directly dependent upon the crude oil production. Most of the new natural gas fields discovered in 1990-s contain associated gas in the light oil wells especially in Najd region south of Riyadh. That is why the kingdom has been assigning top priority to finding non-associated gas in onshore and offshore formations. According to Saudi Aramco only 15% of the country's territory have been properly explored for gas.

To rectify this omission the country launched Saudi Gas Initiative that calls for increasing gas production and processing through foreign investments.

In 2007-2010, LUKOIL Overseas spent $500 million on drilling four exploratory wells at two Module A's oil fields in Saudi Arabia under the said Initiative. After that the wells were mothballed pending the final decision by the Saudi government on the feasibility and cost-efficiency of the project.

If will be remembered that the contract territory of Module A is located in the heart of Rub Al Khali desert of Arabia 260 kilometers south-east of Riyadh. In 2010 the project successfully underwent the discovered field evaluation. The work was done at Mushaib-1 and Tukman fields. Completed at the first site were drilling and testing of Tukman-4 parametric well (which was mothballed for the purposes of the technology selection and development of the stimulation program to get yield). The second site saw additional testing of exploratory well FYDH-LKSR-0002 (which was mothballed for the purposes of study and selection of the cost-effective methods of tight gas reservoir development). LUKOIL Overseas has 80% in the project with Saudi Aramco holding the remaining 20%.

Vagit Alekperov, President of LUKOIL, announced that Saudi Arabia had recognized the reserves discovered by his Company at Module A as gas condensate. Under the kingdom's law only national companies shall be entitled to crude oil production. It means that if the reserves had been declared crude oil LUKOIL Overseas would have been stripped of all rights to develop them.

In 2011, with the view to obtain a technology of tight gas development and production LUKOIL hired an international engineering company to find a technical solution that would allow for reaching maximum yield to commercialize the reserves.

Based on the study and review results the field development was found cost-efficient providing that the purchasing price (set by the government) of the natural gas is increased notably. Agreement was reached with Saudi Aramco to make price changes to the current production contract. Negotiations are underway with Riyadh on this particular matter. If the parties reach a consensus on the proposed changes the new technologies are to be tested in parallel with further appraisal of the reserves in Tukman and Mushaib fields.

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Oil of Russia, No. 4, 2012
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