Analysis: Saudi Arabia unlikely to become gas exporter even with $110 billion Jafurah field investment

Dubai — Saudi Arabia is unlikely to start exporting gas despite plans to invest $110 billion to develop its biggest unconventional gas field, although the asset could help wean the kingdom off burning crude for power generation, according to analysts.

Saudi energy minister Prince Abdulaziz bin Salman has previously said the kingdom will be able to become a gas exporter in the near future, and over the weekend plans were announced to develop the Jafurah field, which is estimated to hold 200 trillion cubic feet of gas.

State-owned company Aramco, whose gas reserves stood at 233.8 Tcf at the end of 2018, said it plans to start production from Jafurah in 2024 and reach 2.2 Bcf/d of sales gas by 2036.

In addition, the field, located in the oil-rich eastern province, is expected to produce some 425 MMcf/d of ethane, which represents 40% of current production in Saudi Arabia, and 550,000 b/d of gas liquids and condensate.

"Saudi Arabia is still burning around 400,000 b/d of oil for power generation on top of large volumes of fuel oil and diesel," said Siamak Adibi, head of the Middle East gas team at consultancy FGE. "If they proceed with an aggressive fuel switching to bring direct crude oil burning to near zero, there will be not much surplus gas for exports. It can be even a deficit for LNG imports."

HIGHER PRODUCTION

Aramco produced 8.9 Bcf/d of natural gas and 1 Bcf/d of ethane in 2018. Its 2018 gas production is nearly a 20% increase from 2013 levels.

The kingdom has been ramping up exploration for gas with a view to freeing up oil and oil products currently used for power generation for export. It is also planning to boost power generation from renewable energy.

Together gas and renewables could make up more than 90% of the power mix in the future, according to the country's energy minister.

But the kingdom currently relies on associated gas production, having in the past failed to develop non-associated gas resources, and this is currently constrained by the kingdom's oil output cuts under the OPEC+ agreement.

At the moment Aramco produces just 50 MMcf/d of non-associated gas, with some 8.8 Bcf/d coming from associated gas, according to Platts Analytics.

"International oil companies have repeatedly tried to monetize non-associated gas reserves in Saudi Arabia, but ultimately decided the effort was uneconomical due to high sulfur content, depth of reserves and lack of access to fracking fluid," senior analyst Samer Mosis said in a Platts Analytics report on Monday. "Jafurah will face similar issues, but there is reason to be hopeful, including Saudi Arabia's commitment to put as much as $110 billion on the project."

FAILED PROJECTS

Saudi Arabia has tried since the 1990s to woo international oil companies to develop its gas resources, including the $25 billion Natural Gas Initiative and later the Rub al-Khali (Empty Quarter) non-associated gas project in 2003-2004, which proved to be fruitless.

The Rub al-Khali project, in the southern desert of Saudi Arabia, was significant because it was the first time IOCs were allowed to take part in an upstream project in the kingdom, but the oil majors withdrew one after the other after achieving no results.

"Taking a cue from the past, the bidding, construction and commissioning processes could face delays given the scale and complexity of the project," said Aditya Saraswat, a senior analyst at Rystad Energy. "There is very little information available on the quality and appraisal results of the shale play. These factors could affect the production targets in the future."

LNG IMPORTS

Nonetheless, Saudi Arabia will need Jafurah to work because its gas production has to reach at least 23 Bcf/d by 2026 to meet the needs of growing power and industrial demand, according to Platts Analytics.

Even if Jafurah is able to produce 2.2 Bcf/d by 2036, the kingdom will still have a gas deficit.

"The most important factor for development of unconventional gas is its breakeven price not size of its reserves," said Adibi. "The market price is an important indication to decide whether to produce expensive gas or consider other alternatives such as LNG imports."

Adibi and Mosis said LNG imports could be a solution to Saudi Aramco's gas dilemma, particularly since the company is investing in an LNG project in the US.

Last year, Aramco and Sempra Energy signed a preliminary deal to negotiate a 20-year liquefied natural gas sale-and-purchase agreement for 5 million mt/year from the Port Arthur LNG export project under development in Texas. The preliminary agreement also included negotiations for Aramco to acquire a 25% equity investment in Phase 1 of Port Arthur LNG.

"Ultimately, the notion of importing LNG is one which can bring resolution to the difficulties of meeting burgeoning gas demand amidst uneconomic unconventional gas reserves while still maintaining unconstrained oil production levels," said Mosis in the Platts Analytics report.