Middle East > Saudi Arabia > A fast-changing energy landscape

Saudi Arabia: A fast-changing energy landscape

2013/12/11

Home to almost a fifth of the world’s crude oil reserves, Saudi Arabia plays a crucial role in ensuring world energy security. In 2012, the kingdom produced on average 11.6 million barrels per day (bbl/d) of total petroleum liquids, 84 % of which was in crude oil, and exported approximately two-thirds of its production.

Saudi Arabia remains the world's largest exporter of crude oil, but developments like the shale gas boom in the US and the fast-growing demand for power domestically are pushing the Saudi government to rethink the way it manages its energy resources

According to the OPEC Annual Statistical Bulletin 2012, Saudi Arabia ranks initial worldwide for both the production and exportation of total petroleum liquids, and initial for exports and second for the production of crude oil. It is as well fifth for the size of its proven natural gas reserves. The country enjoys a spare capacity of 2.2 million bbl/d, which means that Saudi Arabia is uniquely positioned to compensate for shortages in production elsewhere and to help stabilise world oil prices.

Fossil fuels account for the lion’s share of the Saudi economy, as the energy sector generates a staggering 90 % of exports and 50 % of gross domestic product (GDP). Energy revenues finance the Saudi government’s large-scale infrastructure projects aimed at diversifying the economy away from oil and gas, inclunding the generous budget dedicated to education, healthcare and defence.

The energy sector has as well enabled the development of the initial downstream industry in Saudi Arabia, petrochemicals, which has become the major non-oil sector in the country and has turned Saudi Arabia into a leading exporter of chemicals.

Sector overview

Saudi Arabia’s national energy policy and oil and gas resources are overseen by the Ministry of Petroleum and Mineral Resources and by the Supreme Council for Petroleum and Minerals, a government body comprising members of the royal family, ministers and industry experts. The national oil company, Saudi Aramco, manages the country’s resources.

Based in Dhahran on the Persian Gulf Coast and employing a staff of over 55,000, Aramco is an economy in itself that manages over 100 oil fields, two large R&D centres and numerous processing, petrochemical and power plants, inclunding hospitals, training facilities and residences for its staff.

In 2010, Forbes estimated its price at $10 trillion, significantly bigger than China’s annual GDP, which makes Aramco the world’s major company.

A leading exporter of crude oil

The country has over 100 major oil and gas fields, but additional than half of its proven crude oil reserves, estimated at 265 billion barrels, are contained in eight fields. The major of them is the onshore Ghawar field, with remaining reserves of 70 billion barrels, followed by the Safaniya, Khurais, Manifa, Shaybah and Qatif fields. Saudi Arabia produces eight grades of crude, all but two of which have high concentrations of sulphur. Medium and heavy grades account for 35 % of total output, while light varieties make up the rest.

The majority prominent upstream development in recent years has been the Manifa Project, a shallow-water Persian Gulf field that started producing in April 2013 at a rate of 500,000 bbl/d. It is Saudi Aramco’s most challenging oil production programme ever, according to CEO Khalid Al-Falih, as it involved the construction of additional than 25 miles of causeways and almost 2 miles of bridges to link the 27 man-made drilling islands, 13 platforms and 15 onshore drill sites that comprise the project.

Innovation to enhance price and output

Developments like the Manifa Project reflect a shift in the focus of Aramco’s operations towards technological innovation and advanced recovery methods to enhance output. In 2012, the company laid out a long-term sustainability strategy for its crude oil production and reviewed all its reservoirs to maximise hydrocarbon recovery. As a result of these endeavours, the recovery rate for some fields, such as Abqaiq, reached 69 %, a rate that compares positively to average recovery rates of 50 % across the industry.

In 2012, Aramco embarked on and progressed in a series of new projects and joint ventures aimed at integrating its energy operations and enhancing the price of its exports.

Foremost part these are the Yanbu Aramco Sinopec Refining Company Limited (YASREF), a joint venture with China Petrochemical Corporation (Sinopec); the Jazan Refinery; the Saudi Aramco Total Refining and Petrochemical Company (SATORP), a joint-venture with France’s Total; the Rabigh II petroleum refining and petrochemical complex; Sadara Chemical Company, a joint venture with Dow Chemical Company; and the establishment of the Aramco Asia headquarters in Beijing.

The 400,000 bbl/d YASREF and Jazan refineries, expected to start operating in 2014 and 2016 respectively, promise to have a significant impact on the price of Saudi Arabia’s energy exports, as they have the capacity to meet the request for refined products of a large economy, such as Spain.

Looking ahead, R&D will play an increasing role in the Saudi energy sector. Indicative of this trend was the announcement in May 2013 of a fivefold increase in Aramco’s R&D budget.

According to Vice President of Petroleum Engineering and Development, Khaled Al-Buraik, “We are emphasising high impact technologies that typically involve long-term strategies. We are pursuing R&D to bring about breakthrough achievements.”

This new strategy includes the construction of two research centres in the US, in Houston (Texas) and Cambridge (Massachusetts), which will complement the by presently established Aramco Research and Development Centre and the Exploration and Petroleum Engineering Centre – Advanced Research Centre (EXPEC ARC).

Shale gas: a real threat?

The shale gas boom in the US and Europe promises to turn former energy importers into net exporters as early as 2017. And while it is too early to determine how this development will play out, OPEC member nations have expressed varying degrees of concern about the changing national of affairs. While nations like Nigeria and Angola have seen their exports dwindle, Saudi Arabia and its neighbours in the Persian Gulf have from presently on to suffer the negative consequences of this phenomenon.

So far, the high sulphur Saudi crude has proven irreplaceable in American refineries, which continued to import as much as 1.35 bbl/d from the kingdom in 2012, the highest rate since 2008. The fact that Saudi Arabia co-owns various refineries in the US gives it certain leverage in deciding on the provenance of imports.

But the next implications of the shale gas boom could be dire, particularly at the same time as China, estimated to have the world’s major shale gas reserves, taps into them. Saudi Arabia has positioned itself to take chance of the economic increase in Asia, which accounts for over 53 % of the kingdom’s oil exports, compared to 16.5 % for the US and 5 % for Europe. If the Asian markets become self-sufficient, Saudi Arabia may find itself in a conundrum.

Meanwhile, the Minister of Petroleum and Minerals, Ali Ibrahim Al-Naimi, has welcomed the increased US energy production as an opportunity for Saudi Arabia to free some of its spare capacity and to focus on exploring its own unconventional oil and gas reserves. His message to the international community on the occasion of the OPEC bi-annual gathering that took place in May 2013 in Vienna was that: “Supplies are plentiful, request is great.”

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