Shale Gas Development Heralds a New Era in

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1 Shale Gas Development Heralds a New Era in 26 Saudi Energy Sector

2 Saudi Arabia has turned its attention to the development of a new source of energy shale gas, in order to strengthen its position as a key player in the global energy supplies. This ambitious initiative for the exploration of shale gas estimated a deposit of nearly 600 trillion cubic feet, more than double of the current proven conventional reserves will undoubtedly save more of the Kingdom s crude oil for lucrative exports, writes Shamsul Huda COVER FEATURE The Kingdom engaged itself into the unconventional gas development two years ago and continued to pursue this new energy source. Its fully-owned government company, Saudi Aramco, made its first foray into the unconventional gas arena in 2012, proving that substantial shale and tight gas deposits abundantly exist in the country. The company has continued to explore and appraise programs in three prospective areas for unconventional gas in the Kingdom: in the Northwest, South Ghawar and condensate-rich shale gas in the Rub al-khali or Empty Quarter. These projects are part of its wider Unconventional Gas Initiative, which became fully operational in 2012 when multidisciplinary teams, made up of Saudi Aramco professionals and industry experts with extensive experience, began appraisal drillings. Following the success in exploring new energy sources, Mr. Khalid Al Falih, CEO of Saudi Aramco, announced the discovery and prospective use of Saudi shale gas in the recently concluded World Energy Congress in South Korea. He said: We are ready to start producing our own shale gas and unconventional resources in various types in the next few years and deliver them to consumers. Only two years after launching our own unconventional gas program, in the northern region of Saudi Arabia, we are ready to commit gas for the development of a 1,000 megawatt power plant which will feed a massive phosphate mining and manufacturing sector. In the wake of recent US shale gas development which transformed the country from the largest gas importer in the world, to a potentially huge exporter, there is a possibility of exploring huge unconventional gas in the Kingdom. Saudi Arabia hopes that exploration of unconventional gas will help it reduce its huge domestic consumption of oil and natural gas currently used for power generation and desalination of water. Saudi Arabia has abundant resources of shale gas. According to the US Energy Information Administration s (EIA) survey of the top 10 countries with technically recoverable shale gas resources, Saudi Arabia, with 600 trillion cubic metres is ranked fifth between the US and Canada. China tops the list and has already signed production-sharing deals and awarded exploration blocks as it targets output of 6.5 billion cubic metres a year by There are challenges for the exploration and development of shale gas in the Kingdom. Due to a scarcity of water, a vital component in hydraulic fracturing, and the prevailing natural gas prices, which are far lower than production costs, it is un- Mr. Khalid Al Falih, CEO of Saudi Aramco 27

3 Shale Gas Reserves in World s Top Ten Countries COVER FEATURE Ranking Country Trillion cubic Feet 1 China 1,115 2 Argentina Algeria US Saudi Arabia Canada Mexico Australia South Africa Russia 245 Total 7,299 Sources: Saudi Arabia & EIA The year 2012 was a milestone year for Saudi Aramco gas development. Its production in terms of raw gas to gas plants rose 8.3 percent from 2011 to trillion standard cubic feet, the most in a single year in the company s history 28 likely that Saudi Arabia will be able to produce much shale gas before the end of the decade. Oman is most likely to develop its unconventional gas reserves, with commercial production potentially starting in Gas Demand to Double Saudi Aramco has predicted that the country s natural gas demand will double by To meet the growing demand, it is exploring hidden reserves of shale gas across the country. Shale gas will, at first, be used to feed a proposed power plant in Jizan, which Saudi Aramco hopes to complete by Saudi Arabia believes that using shale gas for domestic power production will help it to maintain the largest spare oil production capacity in the world, vital to protect the oil markets from changes in production output. Saudi Aramco has identified natural gas as a valuable source of energy since 1970s. By creating the Master Gas System, it began capturing and making good use of the gas associated with oil production. The national company is responsible for the current known gas reserves of trillion standard cubic feet. Finding additional gas reserves is one of its top priorities, and so far its exploration program has been very successful. The year 2012 was a milestone year for Saudi Aramco gas development. Its production in terms of raw gas to gas plants rose 8.3 percent from 2011 to trillion standard cubic feet, the most in a single year in the company s history. Karan Gas Field is its first non-associated gas field. Development work on the Wasit Gas Program, one of the largest gas plants Saudi Aramco has ever built, remains on schedule. Major Achievements Major achievements in the Saudi gas sector in 2012 included production of 10.7 billion standard cubic feet per day of gas, annual production of 3.9 trillion standard cubic feet of gas, 100 gas exploration and development wells completed, 482 million barrels of NGL production, and 2 gas fields discovered -- Sha ur and Umm Ramil -- bringing the total oil and gas field discoveries to 116 and billion standard cubic feet per day of gas processing capacity. Karan & Wasit Gas Programs Karan, the first non-associated offshore gas field development, helped to boost the Kingdom s gas production by reaching its full peak production capacity of 1.8 billion scfd. Another key achievement of this program is its operational safety record. When completed, Saudi Aramco s Wasit Gas Plant will be one of the largest gas plants along with Karan. It will raise the Kingdom s gas processing capacity by about 40 percent. As a standalone gas plant, its integrated facilities will process 2.5 billion scfd of non-associated gas from the offshore fields of Arabiyah and Hasbah. Under normal conditions, Wasit is expected to supply 1.75 billion scfd of sales gas, though the two offshore fields have a production potential of up to 3.05 billion scfd of raw gas during emergencies or demand peaks. Demand Forecast Total demand for natural gas apart from gas liquids and ethane is expected to exceed 7,768 million standard cubic feet per day by the end of 2014, according to the Kingdom s 9th Five-year Development Plan. The bulk

4 Consumption of Gas Forecasts: 2014 (million standard cubic feet per day) Industries using gas Manufacturing Industries Annual growth % Electricity & Water COVER FEATURE Oil & Gas Total Sales Gas Consumption of Ethane Forecasts: 2014 (million standard cubic feet per day) Industries Using Gas Annual growth % Manufacturing Industries Consumption of Gas Liquids Forecasts: 2014 (thousand barrels per day) Industries Using Gas Annual growth % Manufacturing Industries of the sales gas is being used as fuel in the electricity, water, oil and gas and manufacturing industries, while consumption of ethane and natural gas liquids will be limited to only the manufacturing sector as feedstock. Electricity production consumes most of the natural gas. In 2014, gas consumption in this sector is estimated at 3,921 million standard cubic feet per day. In 2013, it was expected to reach 3,858 million standard cubic feet per day, followed by 3,797 million standard cubic feet per day in 2012 and 3,520 million standard cubic feet per day in The manufacturing sector is set to use more than 2,422 million standard cubic feet per day in This sector used, according to the 9th Development Plan, 2,396 million standard cubic feet per day in 2013 and 2,422 million standard cubic feet per day in Manufacturing industries also consumed 2,261 million standard cubic feet per day in 2010, followed by 2,139 million standard cubic feet per day in The oil and gas sector also consumes a significant volume of natural gas. Sales gas in this sector is expected to amount to 1,425 million standard cubic feet per day in In 2013, sales gas consumption in oil and gas industries was estimated at 1,414 million standard cubic feet per day, followed by 1,412 million standard cubic feet per day in 2012 and 1,255 million standard cubic feet per day in Demand for natural gas products for use as fuel or as a feedstock in industry, such as sales gas, ethane, and natural gas liquids, is set to grow at an average annual rate of more than 4.3 percent over the period of the 9th Development Plan stretching from 2009 to Ethane is only used in the manufacturing industries. In 2014, consumption of ethane is poised to exceed 1,039 million standard cubic feet per day. In 2013, the Saudi manufacturing sector was expected to use 1,037 million standard cubic feet per day followed by 1,025 million standard cubic feet per day in 2012 and 1,007 million standard cubic feet per day in Consumption of gas liquids in the Kingdom has increased conspicuously. In 2009, Saudi manufacturing industries used 535,000 barrels per day which is set to jump to 807,000 barrels per day in In 2013, Saudi liquid gas consumption was estimated at 784,000 barrels per day, followed by 792,000 barrels per day in 2012 and 698,000 barrels per day in The Kingdom is committed to pursuing plans to ex- 29

5 Domestic Energy Consumption Forecast: 2014 (thousand barrels per day) Year Refined products Crude oil Natural gas (fuel) volume Share % Volume Share % volume Share % Total consumption Average annual growth % Source: Ministry of Petroleum and Mineral Resources Consumption of Refined Products: (thousand barrels per day) 30 Domestic consumption of primary energy is expected to rise from about 3 million barrels per day in 2009 to about 4 million barrels per day in 2014, an average annual growth rate of 6.5 percent, compared with a forecast average annual growth of GDP of about 5.2 percent over the same period Description Annual Growth % LPG Jet Fuel & Kerosene Gasoline Diesel & Gas Fuel Heavy Fuel Oil Asphalt & Other Total pand its crude oil and natural gas reserves, by offering new areas for exploration and drilling. Enhancement of proven natural gas reserves and development of its production capacities are expected to continue, especially for non-associated gas, through a partnership with the national and foreign private sectors, in order to meet growing demand for gas as a fuel and for industrial purposes. In contrast, natural-gas production is expected to increase at an average annual rate of 4.4 percent, to 7.8 billion cubic feet over the period of 9th Development Plan, while production of natural gas liquids is expected to grow at an annual average rate of 3.3 percent to 1,245 thousand barrels per day. Since natural gas is less expensive and less polluting to the environment, there has been rapidly growing demand for it, whether as a feedstock for basic industries, or as a fuel for electricity production, water desalination and other industries. In response, exploration activities mainly concentrated over the past years on the search for non-associated natural gas deposits. Indeed, the National Gas Strategy aims to use non-associated gas to complement associated gas in meeting demand, as well as to provide flexibility in managing production of crude oil, since production of associated gas is linked to that of crude oil. Non-Associated Gas Exploration of non-associated gas reservoirs primarily concentrated on a number of regions, including: the Empty Quarter, the territorial waters in the Arabian Gulf, and the areas adjacent to the Ghawar oil field, in addition to the northwestern parts of the Kingdom. However, the Saudi gas initiative involves several com-

6 heavy fuel oil is expected to increase its share in the total energy consumption, especially in the electric power and water desalination sectors COVER FEATURE panies looking for non-associated gas in the eastern and southeastern parts of the country. Clear criteria for allocating natural gas products were established in In addition to the economic feasibility of the projects using gas, these criteria include the level of integration of the projects concerned in the value chain, their forward and backward economic linkages, and their contribution to the provision of job opportunities to Saudis. Adoption of these criteria enabled the Kingdom to succeed in maintaining the highest rates of effective utilization of natural gas. There has been no significant change in the level or structure of domestic prices of natural gas and refined products. The financial allocations for government agencies in the oil and natural gas sector (Ministry of Petroleum and Mineral Resources Petroleum Affairs) under the Ninth Development Plan amount to SR759.4 million. In Saudi Arabia, domestic consumption of energy is expected to continue to grow, supported by continued economic growth, and stability of domestic prices over the coming period. The volume of domestic energy consumption will be influenced by a variety of factors, most notably: growth in natural gas production and its availability in various regions of the Kingdom, growth in domestic refining capacities, the nature of the expansion of electricity generating capacity, and developments pertaining to the level and structure of domestic prices for energy products. Domestic consumption of primary energy is expected to rise from about 3 million barrels per day in 2009 to about 4 million barrels per day in 2014, an average annual growth rate of 6.5 percent, compared with a forecast average annual growth of GDP of about 5.2 percent over the same period. Refined Products The share of refined products in total domestic consumption of energy is expected to stabilize at about 56 percent, with its consumption growing at an average annual rate of 6.4 percent, compared with a rise of the share of crude oil for direct use from about 12.2 percent to 15.3 percent over the five-year period. Crude oil consumption is rising at an average annual growth rate of 11.5 percent; while the share of natural gas in the total energy consumption is expected to decline from about 31.7 percent to about 29.1 percent, with its consumption rising at an average annual rate of about 4.7 percent. In terms of structural development of consumption of petroleum products under the Ninth Development Plan, heavy fuel oil is expected to increase its share in the total energy consumption, especially in the electric power and water desalination sectors. Fuel oil use is set to rise from about 30 percent to about 36.3 percent, compared with a decline in the share of diesel and gas fuel from about 36.7 percent to about 33.0 percent in the Kingdom s total energy consumption. 31

7 It s A New Source of Energy Eng. Talal Idriss, Chief Executive Officer of the Jeddah-based Bahra Cables Company, which has been engaged in the production and distribution of high, medium and low voltage cables, described the shale gas development in the Kingdom as a new source of energy. In an exclusive interview with Saudi Commerce and Economic Review, he said that this ambitious initiative for exploration of unconventional gas is very important in the wake of growing demand for natural gas in the domestic market. Excerpts from the interview: 32 What is your comment on the government s plans to develop shale gas in Saudi Arabia? Every effort to develop alternative sources of fuel is worth appreciation. Estimates indicate that the Kingdom has nearly 600 trillion cubic feet of shale gas; therefore, shale gas may become a factor for change to the rules of the government and the world s oil markets. The limited supply of gas is one of the challenges facing Saudi Arabia, and the problem is worsening with the rising domestic demand as a result of increasing population and economic expansions. Thus, exploration of shale gas or any other natural gas sources is very important. The only obstacle is the doubt about the feasibility of such a project, since extracting of shale gas is done by hydraulic fracturing, a technology based on the intensive use of energy and water, where water pushes compressed sand and chemicals in vertical and horizontal wells in rocky formations. Excessive use of water might pose a challenge in the development of shale gas as there is a scarcity of this precious commodity in the Kingdom. What is your opinion about the future outlook of the Saudi oil & gas sector? The oil and gas sector in the Kingdom is the world s largest. Our government has been able to develop policies that ensure the best use of oil and gas, by developing a number of industries for converting oil into products needed by the local as well as overseas markets. We think that the outlook for the Saudi oil and gas sector is optimistic and ambitious. What are the new technologies adopted and services rendered by your company? Bahra Cables is always very keen to adopt latest technologies in its field of business through using German experience. The company achieves numerous accreditation certificates such as (KEMA, IPH, SASO, LPCB, CSA, BASEC), and others for its products of electrical wires and cables. The company has also received the ISO 9001:2008 certification for its range of medium and high voltage cables up to 132 kv. It is also the first Saudi cable manufacturer that has obtained ISO 14001: 2004 and OHSAS 18001: Keeping abreast of new developments with its modern business framework, the company opened a new fully automated warehouse which uses the latest technologies in storing and production. The new warehouse was built on an area of 10,000 square meters, and can accommodate more than 19,000 pallets, plus 2500 pallets in an air-conditioned store with temperature-controlled system, according to the type of product. The warehouse also has an area of 1,000 square meters for storing of spare parts for the company s machinery and equipment. This is in addition to an open area that can accommodate more than 5000 cable drums. What are your comments on the development of local technology and the government s priority for local suppliers? We are one of the largest companies working on the nationalization of technology and training the youth in our factories, as well as granting them the opportunity to join us. We anticipate that this is a patriotic responsibility that all companies must bear. Our main objective is to enable other Saudi companies to meet the needs of the local market from local production in order to expand the industry as well as increase its contribution to the gross national product. We do appreciate the government s policy of giving priority to local suppliers, thus encouraging national companies to expand and increase their investments to satisfy the market demand for their products. How is Saudization of jobs affecting the service-oriented industries? Service based industries are the widest in most markets, including the Saudi market. There is no doubt that the localization target for jobs is a noble objective sought by the government, and we all must support it. Future generations

8 Factory of Bahra Cables Company have the right to education and employment and to take advantage of opportunities in their home country, and that will only happen if we allow them to work and continue ongoing training to enable them to take the helm in future job markets. How do you explain the economic benefits from the upcoming new oil refineries in the wake of the Kingdom s huge import of refined petroleum products? For many years, Saudi Arabia has imported large quantities of refined petroleum products to meet the growing demand for these products. Now, with the expansion and development of new oil refineries, the picture will change completely where these refineries will be able to meet the needs of the Kingdom, and even export surplus of refined products rather than the raw oil. What is the impact of low fuel prices used for transportation and industries in the Kingdom? There is no doubt that industries use a large quantity of fuel, exploiting the low price of this fuel, which cuts their cost and in turn allow them to reduce prices of their products and enable them to compete strongly in the market. This is also applicable to transportation which basically depends on oil. What are the major activities of your company? Bahra Cables Company s main area of business is the production and distribution of high, medium and low voltage cables. Its cables are characterized as fire resistant, low smoke & fume and zero halogen. The company also has a PVC plant which is used for cable insulation, as well as the production of PVC conduit. Bahra Cables was founded in 2008 as an affiliate of Construction Products Holding Company (CPC), as a joint venture with Electric House, to serve the Saudi Arabian, GCC and other markets. The company plans to expand its range of products through manufacturing of various copper products such as copper wires and connectors to serve the electrical manufacturing sector. The company has built advanced production lines to supply high quality products with the highest quality standards and recently, the company started its own factory for the production of PVC, a substance used for insulation and cable sheathing. The company uses German technologies in all its designing process operations, and looks forward to being a major contributor to the region s architectural renaissance. 33

9 New Gas Initiative to Offer More Trade Opportunities The shale gas development initiative will open up new opportunities for suppliers, manufacturers and investors to support this sector 34 Shale gas development through the new Unconventional Gas Initiative undertaken by Saudi Aramco will be a new source of income for the Kingdom and will offer huge opportunities for trade and business for the local firms involved in the oil and gas sector. These were the views expressed by a number of company executives and experts during a survey conducted by Saudi Commerce and Economic Review. New Opportunities The shale gas development initiative will open up new opportunities for suppliers, manufacturers and investors to support this sector, said Mr. Abdulkarim M. Al Amri of Titanium & Steel Manufacturing Company (TSMARABIA), a Dammambased producer of process equipment such as heat exchanger, pressure vessel, reactor, column and spools. We are specialized in titanium material application related to our work business especially high quality welding techniques, he pointed out. Mr. Al Amri stressed the importance of the development of local technology for the oil and gas sector saying that it should be a strategic national goal. He believes that this sector will remain a pioneer sector for several decades making more investments in this field very promising. Supporting local industry with new technology will be beneficial to local economy and will boost economic growth and create jobs for unemployed Saudis, he said. When asked, Mr. Al Amri noted that his company as a manufacturer is facing some problems in sourcing raw material supplies especially for high alloys. There are also logistics problems such as transportation and shortage of skilled man power, he said adding that various government-supported training programs for locals will help implement Saudization initiative in the Kingdom. Low fuel prices are helping reduce the transportation and logistics cost in the Kingdom, he added. Big Source of Income Commenting on the Saudi shale gas initiative, Mr. Rolly G. Mecija of the Dammam-based Petroleum and Natural Gas Institute of Technology (PNGIT) said that although unconventional, it will be a big source of natural gas as well Heat Exchanger of TSMARABIA as national income. It is a good plan because it is not only an investment, shale gas exploration is also one of the increasingly important sources of natural gas in some parts of the world like US. It will not only help many countries consume cheaper energy, it will also add revenues to their national exchequers like it has for the Kingdom, he observed. The shale gas initiative will strengthen Saudi Arabia s position in the global energy market, said Mr. G. Mecija adding that it will help local companies expand their businesses and supplies to the Saudi oil and gas sector. PNGIT has much to offer to this sector, he noted referring his company s capability and experiences. The major activities of PNGIT consist of providing capability building skills in the field of technical vocational Mr. Abdulkarim M. Al Amri