Saudi Arabia: How much Oil and Gas?

GLOBAL ENERGY REVIEW Saudi Arabia: How much Oil and Gas? A Report by Dr Paul McDonald Consulting Editor, Oil and Energy Trends A survey of the oil and gas reserves and production of Saudi Arabia; With forecasts of production to 2015 31 January, 2007

Contents Introduction 4 Oil 6 Raising Production 6 Present Production 7 Production History 8 Existing Oilfields 10 State of the Oilfields 11 Size of Reserves 12 Ability to find Reserves 15 Crude Quality 15 Financing Expansion 16 Outlook for Saudi Production 16 Natural Gas Liquids 18 Condensate 18 Outlook for NGL Production 19 Saudi Exports 20 Outlook for Exports 21 Natural Gas 22 Reserves and Production 22 Expansion of Industry 23 Outlook for Production 24 Conclusions 25 2

List of Tables Table 1 Saudi Arabia: Liquids Production, 2006 6 Table 2 Saudi Arabia: Production Capacity, 2005-20 7 Table 3 Saudi Arabia: Proven Reserves and Production, 2006 8 Table 4 Saudi Arabia: Crude Oil Production History, 1938-2004 9 Table 5 Saudi Arabia: Principal Oilfields, 2007 10 Table 6 OPEC: Reserve Increases, 1984-90 13 Table 7 Saudi Arabia: Condensate Splitters 18 Table 8 Saudi Arabia: Oil Balance, 2006 20 Table 9 Saudi Arabia: Gas Profile, 2006 24 3

Introduction Saudi Arabia is the world s largest oil producer, with a crude oil and gas liquids output in 2006 of 10.4 mn bpd. It also claims the world s largest reserves, with a total of 260 bn bbl. When the Saudi-Kuwaiti Neutral Zone is included, the production figure rises to 10.7 mn bpd and the reserve level comes to 262 bn bbl. The figure for Saudi Arabia alone represents 19.7% of the world s proven reserves of oil. The Saudis also have more spare production capacity than anyone else, with some 2.2 mbd of unused crude oil production capacity based on the country s official estimate of its sustainable capacity of 11.3 mn bpd. There are plans to increase this to 12.5 mn bpd by 2009 and to make further increases up to 15.0 mn bpd. The Saudis have claimed that production could be sustained at the latter level for upwards of 50 years. Their ability to increase their capacity to 15.0 mn bpd and to continue producing at that level for several decades depends on a number of factors: most importantly, whether they have sufficient reserves and the condition of their oilfields and reservoirs. In both cases, there appears to be some cause for concern. There is insufficient detail available concerning Saudi reserves to enable their size or nature to be verified by independent outside sources, and there is some evidence to believe that their magnitude has been exaggerated for political purposes. There are further reports of production problems in some of the country s most important fields. If any of these doubts can be substantiated, there would be major implications for world supply/demand balances for the next 5-20 years, given that most conventional forecasts rely on an increasing contribution from the Persian Gulf in general and Saudi Arabia in particular. 4

For many years, natural gas took second place in Saudi Arabia to the development of the oil industry. It was not until the 1960s that significant quantities of gas began to be recovered for their liquids content and the kingdom did not have a comprehensive recovery and distribution system until 1975, when the Master Gas System was begun. The recovery of natural gas liquids (NGLs) provides a valuable boost to Saudi Arabia s total output of hydrocarbon liquids. NGL production in 2006 is estimated at just over 1.5 mn bpd, compared with a crude oil production of 9.1 mn bpd. Saudi gas reserves remain underdeveloped compared with those of oil. They are estimated at just below 240 trillion cf (tcf): equivalent to 3.9% of the world s total proven gas reserves. Some 160 tcf are found in association with oil reservoirs. The addition of the Saudi half of the Neutral Zone adds 500 bn cf (bcf) to the above total. Saudi gas production in 2006 was about 7 bn cfd. Output from the Neutral Zone is negligible. Gas development is expected to increase considerably over the next few years as the use of dry gas grows, mainly for electricity production and desalination of sea water to cater for the kingdom s rapidly expanding population. Gas liquids will also continue to be recovered in increasing volumes for use primarily as petrochemical feedstocks. More use is expected to be made of Saudi Arabia s non-associated gas reserves. There are plans to double Saudi production by 2030. The need for ever-increasing supplies of electricity and fresh water may require even higher levels of gas production than those currently planned. This could strain the kingdom s gas production capabilities. In the worst case, it would mean that Saudi Arabia had less oil to export than planned, as more was diverted to domestic use. 5

Oil Saudi Arabia has ambitious plans to raise its production of oil. It is not clear how these can be achieved. Raising Production Saudi Arabia produced an estimated 10.7 mn bpd of oil and gas liquids in 2006 (see Table 1). Of this, some 8.9 mn bpd was crude oil from within the kingdom itself. The remainder consisted of NGLs and output from the Saudi half-share in the Neutral Zone In addition to this, Saudi Arabia has some 2.2 mn bpd of unused crude oil production capacity, consisting mainly of heavy crude, much of which is located in the country s Safaniyah field-complex. There are plans to increase output capacity from its present level of 11.3 mn bpd to 15.0 mn bpd sometime after the end of the decade (see Table 2). It has been suggested by the state oil company, Saudi Aramco, that production could eventually reach or even exceed 23.0 mn bpd Table 1 Saudi Arabia: Liquids Production, 2006 (mn bpd) Production Crude Oil Saudi Arabia 8.9 Neutral Zone 0.3 Total 9.1 NGL Saudi Arabia 1.5 Neutral Zone * Total 1.5 Crude Oil + NGL Saudi Arabia 10.4 Neutral Zone 0.3 Total 10.7 * Negligible Totals rounded 6

Source: GER estimate Present Production Crude oil production from Saudi Arabia and the Neutral Zone began 2006 at just under 9.5 mn bpd. By the end of the year, following two OPEC agreements to cut production, it had fallen to about 8.7 mn bpd. It is the government s policy to maintain at least 1.5 mn bpd as spare capacity in order to meet growing demand or cover unexpected shortfalls, as the policy was described in March 2006 by the Oil Minister, Ali al-naimi. Production capacity is now around 11.0 mn bpd, with a further 0.3 mn bpd available from the Neutral Zone, giving it a cushion of 2.2 mn bpd at present. There are plans to raise capacity by 0.5 mn bpd during 2007 and gradually build up to 12.5 mn bpd by 2009, implying production in that year of up to 11.0 mn bpd (see Table 2). Table 2 Saudi Arabia: Production Capacity, 2005-20 Year End Capacity (mn bpd) 2005 11.0 2006 11.3 2007 11.8 2008 12.2 2009 12.5 2011-13 13.1 2013-20 15.0 After 2020 23.0 Source: Oil Ministry; oil press Longer term plans see a rise in capacity to 15.0 mn bpd. Some Saudis have suggested that this should mark the limit of any expansion capacity and that the kingdom should then concentrate on maintaining output close to this level for the longest period possible. This period has been variously put by Saudi officials at 10, 20 or even 50 years. An output level of 15.0 mn bpd would mean annual production of almost 5.5 bn bbl. Saudi Arabia s 2007 proven reserves of 262 bn bbl would last for approximately 48 years at this level, assuming no additions were made to reserves in the intervening period. 7

Table 3 Saudi Arabia: Proven Reserves and Production, 2006 Saudi Arabia Reserves* 264.3 bn bbl Production 8.9 mn bpd Years remaining 81 Reserves share of world total 20.4% Neutral Zone Reserves 2.5 bn bbl Production 0.3 mn bpd Years remaining 25 Reserves share of world total 0.2% Saudi Arabia + Neutral Zone Reserves* 266.8 bn bbl Production 9.1 mn bpd Years remaining 80 Reserves share of world total 20.6% * It is not clear from Saudi sources how much NGL is included within Saudi Arabia s oil reserves. Saudi Aramco describes its reserves as crude oil reserves. Crude oil only Totals rounded Source: Saudi Aramco; GER estimates Oil exploration and production is the responsibility of the state oil and gas company, Saudi Aramco (except for the Neutral Zone where foreign participation is permitted). In May, 2005, Saudi Aramco s Chief Executive Officer, Abdallah Jumah, said that the kingdom was capable of raising its capacity to over 23 mn bpd. He also said that the company would add another 200 bn bbl to reserves in order to accommodate such an increase. No timetable was attached to Mr Jumah s remarks. Production History A production level around 15 mn bpd let alone 23 mn bpd is well above any level achieved before. The highest sustained total previously achieved was 9.6 mn bpd and that has not been exceeded since 1980. Throughout the 1990s, output barely exceeded 8

8 mn bpd and fell to 7.7 mn bpd towards the end of the decade. It only rose above 9 mn bpd again in 2004 (see Table 4). The Saudis ability to raise their production capacity depends primarily on: o The condition of their existing oilfields; o The actual size of their reserves; and o Their ability to find new reserves. A further issue is the nature of the additional capacity. Some of this is bound to consist of sour and heavy crudes, for which there may not be a ready market unless they are heavily discounted in price. It is not clear how much of a discount against their light crudes the Saudis would be willing to accept. This in turn might determine whether or not they would proceed with some developments covering the heaviest and sourest crudes. Table 4 Saudi Arabia: Crude Oil Production History, 1938-2004 Year Production Remarks (kbd) 1938 1 Production begins 1946 164 Production passes 0.1 mn bpd 1958 1,015 Production passes 1.0 mn bpd 1965 2,025 Production passes 2.0 mn bpd 1970 3,549 Production passes 3.0 mn bpd 1971 4,498 Production passes 4.0 mn bpd 1972 5,733 Production passes 5.0 mn bpd 1973 7,335 Production passes 7.0 mn bpd 1974 8,210 Production passes 8.0 mn bpd 1977 9,017 Production passes 9.0 mn bpd 1980 9,631 Peak year 1985 3,041 Lowest since 1969 1991 8,118 Production recovers to pass 8.0 mn bpd 1999 7,655 Production falls below 8.0 mn bpd 2004 9,050 Production back above 9.0 mn bpd Source: (1938-85) Saudi Aramco (After 1985) OPEC 9

Existing Oilfields Saudi Arabia contains the world s largest onshore oilfield Ghawar and the world s largest offshore field Safaniyah. It also has another very large field at Abqaiq and a few others of world importance (see Table 5). Ghawar has provided the mainstay of Saudi production for a number of decades. In recent years, it appears to have been producing around 5 mn bpd. It is approximately 175 miles long and just over 30 miles at its widest. Safaniyah is somewhat smaller than Ghawar, at about 40 miles by 10 miles, and has been in operation for about six years less than Ghawar. It appears to extend northwards into the Khafji field of the Neutral Zone and may even be part of a greater structure that encompasses Kuwait s giant Burgan field. Safaniyah s production appears to be in the region of 600,000 bpd, but the field has between 1 mn bpd and 2 mn bpd of spare production capacity. Abqaiq is older than either Ghawar or Safaniyah and is close to the kingdom s original field at Damman. It is about two-thirds the size of Safaniyah and produces about 500,000 bpd. Table 5 Saudi Arabia: Principal Oilfields, 2007 Field First Production Gravity* Sulphur Content* (API ) (% by Wt) Damman 1938 35 1.5 Abqaiq 1946 37 1.3-2.8 Ghawar 1951 34 1.0-2.0 Safaniyah 1957 27 2.0-3.0 Bern 1967 32-34 1.0-2.0 Zuluf 1973 29 2.5 Shaybah 1998 42 0.5 Khursaniyah 2007 N/A N/A * Gravity and sulphur content varies. Figures are approximate N/A = Not available Source: Arab Oil & Gas Directory; Oil press 10

The three main fields listed above produce nearly 70% of Saudi Arabia s oil (excluding the Neutral Zone) and account for almost 75% of its production capacity. All three are old (see Table 5) and may be considered as mature fields. Their age has led some outside authorities to question their ability produce at the much higher levels that appear required by Saudi plans to raise production to somewhere in the region of 15 mn bpd. All three fields now produce less than they did at one time. Abqaiq s highest-ever production was recorded in 1973 at just over 1 mn bpd. Safaniyah s peak output was in 1980 with 1.5 mn bpd, whilst Ghawar appears to have been up at somewhere around 5.7 mn bpd the following year. The situation may nevertheless not be as bad as it first appears. Abqaiq, it is true, is almost certainly in long term decline, with output now about half its peak level. Ghawar, on the other hand, has remained remarkably stable since the 1980s and may still be just above 5 mn bpd. The decline in Safaniyah s output has more to do with the lack of demand for its heavy, sour crudes than any geological reason. Its present production capacity is almost certainly in excess of its reported 1.5 mn bpd previous all-time high. State of the Oilfields The state of the principal Saudi oilfields nevertheless continues to worry some outsiders, including Matthew R Simmons of the US, who makes a number of worrying observations, based primarily on a series of papers on Saudi oil produced by the US Society of Petroleum Engineers (SPE), as follows: The older fields rely increasingly on water injection to maintain flow rates. Some water-cut rates have reached worryingly high levels and technical problems have been encountered in the management of the water-cut. Parts of the Ghawar field have been overproduced in the past. Safaniyah s spare capacity is much lest than estimated above probably only about 500,000 bpd. Many important Saudi fields are in long term, irreversible decline. The Saudis have attempted to deny Simmons conclusions, but in the absence of detailed technical information from the Saudis concerning the fields, it is difficult to resolve the issue one way or the other. Simmons and other pessimists nevertheless raise a number of important points. There may, however, be further reasons for doubting the kingdom s ability to raise production to the levels described in Table 2. 11

Size of Reserves If Saudi Arabia is to meet its ambitious production targets, it will need considerable reserves of oil in the ground. There is some reason to doubt whether Saudi Arabia has all the reserves it claims. Saudi Arabia s proven reserves of oil stood at 259.8 bn bbl at the start of 2007, with a further 2.5 bn bbl as the kingdom s half-share of the Neutral Zone with Kuwait. The Saudi figure alone accounts for 19.7% of the world s entire proven reserves as assessed by the Oil & Gas Journal. It is also by far the largest total for any one country. The next-highest* is Iran, with 136.3 bn bbl. For the purposes of comparison, it may be noted that the US has just 21.8 bn bbl, making the Saudi total almost 12-times that of the US, whilst the UK s figure is 3.9 bn bbl. The Saudi numbers have not always been so stratospheric. At the beginning of 1989, they were stated as 170.0 bn bbl: just five-times the then US total of 34.6 bn bbl. The following year, however, the Saudis raised their figure by more than 50% to 258 bn bbl. The reason appears to have been largely political rather than geological. In 1985, Kuwait unilaterally raised its reserves from 64 bn bbl to 90 bn bbl in what appears to have been an attempt to secure an increase in its production quota in OPEC. Several other countries followed suit (see Table 6) in what was clearly an effort to ensure that Kuwait did not secure any advantage in terms of output quotas at their expense. The first to do so were Iran, Iraq, UAE and Venezuela, which raised their reserve levels from 1st January, 1988. Saudi Arabia followed suit two years later with a rise of 88 bn bbl to 258 bn bbl. * In terms of conventional crude reserves (i.e. excluding shales and tar sands) 12

Table 6 OPEC: Reserve Increases, 1984-90 Year Country Proven Reserves (bn bbl) Iran Iraq Kuwait* Saudi Arabia* UAE Venezuela 1984 51 43 64 166 31 25 1985 49 45 90 169 32 26 1986 48 44 90 169 31 26 1987 49 47 92 167 32 25 1988 93 100 92 167 96 56 1989 93 100 92 170 96 58 1990 93 100 92 258 96 59 * Excluding Neutral Zone Abu Dhabi and Dubai only Source: Oil & Gas Journal The pattern exhibited by most of the countries shown in Table 6 between 1984 and 1987 is the normal pattern for large, well-established oil producers. Net annual additions to reserves are usually modest and, occasionally, there is a net decrease in proven reserve levels. None of the countries in the table announced any major new discoveries in the 1980s that would plausibly account for the rises illustrated above. In an attempt to justify the enormous increases claimed from 1985 onwards, some countries resorted to explanations based on unrealistically higher recovery factors that they were now applying to their former reserve estimates. Others added reserves that were not in any accepted sense proven.* Iraq appears merely to have plumped for a figure that was higher than its neighbours and rivals, Kuwait and Iran. Saudi Arabia continued to make small upward revisions until 2006, when reserve levels were stated as 264.3 bn bbl (see Table 3). A small downward revision was then made for 2007, bringing them to 259.8 bn bbl. * Proven reserves are those that can be identified from geological and engineering surveys as being reasonably able to be recovered from known reservoirs under existing technological and economic conditions. 13

In all this period, there has been little attempt on the part of the Saudis to provide a detailed and independently verifiable explanation of the huge reserve additions that have occurred since 1989. Reference has been made to new finds and higher recovery factors from existing reservoirs, but all these announcements have been short on detail. Detailed descriptions of Saudi oilfields stopped being reported in the 1970s. In the middle of that decade, the Oil & Gas Journal gave estimates of reserves for the three large fields described above as follows: Field Proven Reserves (bn bbl) Ghawar 64.8 Safaniyah 12.2 Abqaiq 7.5 Total 84.5 The addition of other, smaller fields suggested that Saudi reserves were in the region of 120 bn bbl to 150 bn bbl, according to various contemporary estimates. Despite record production in the early 1980s, Saudi Aramco continued to add to reserve levels, eventually reaching the levels shown in Table 6. It is tempting to assume that present Saudi reserves are somewhere around their mid- 1970s levels, when the numbers looked reasonable in the light of the data then available. Even then though, reserve estimates for individual fields fluctuated considerably. Any outside estimate remains little more than a guess. For their part, the Saudis argue that the increase in reserve levels since 1989 represents continually improving knowledge of the kingdom s reservoirs as well as recent advances in upstream technology. The increases thus appear to be based on theoretical models rather than large scale drilling of new and existing prospects. Nevertheless, predictions that Saudi Arabian oil production will soon peak and that this will be followed by a sharp decline in output on the lines of M King Hubbert s peak oil hypothesis seem overly pessimistic. The problem for forecasters is to say when Saudi oil production will peak; at what level will it peak; and at what rate it might then decline. The last question is probably the easiest one to answer in terms of the Hubbert theory (see box). Given the technology available to today s petroleum engineers, it is most unlikely 14

that Saudi production will go into a sharp decline. Any decline is more likely to be gradual as more and more oil is squeezed out of existing production horizons. Hubbert and Peak Oil The US geologist, M King Hubbert (1903-89) propounded a theory that oil production followed a bell-curve in which output rose rapidly until half the recoverable reserves were depleted, following which it declined. His theory was used in 1956 to predict the peaking and decline in US production that occurred in the 1970s. Various people have speculated that Saudi Arabia is close to its peak. Even if this is so, there is unlikely to be a sharp decline thereafter, as represented by the right half of the bell-curve. Technology permits the life of fields to be extended much more than in the 1950s, when Hubbert was writing. Ability to find Reserves There may also be new discoveries of large fields, which could add considerably to Saudi capacity. Here, though, the outlook is less encouraging. Saudi Aramco s major recent and future field developments have been of fields discovered some years earlier. Attempts to uncover major new deposits for example along the kingdom s southern border have met with only partial success. Meanwhile, several of the older fields such as Abqaiq and Berri appear to be in long term decline. Crude Quality Saudi Arabia could already produce around 11 mn bpd a rise of some 2 mn bpd over existing levels simply by bringing mothballed production facilities back into production, most of which are in the Safaniyah field complex. The problem for the Saudis is that crude oil from Safaniyah is heavy and high in sulphur (see Table 5). The high sulphur is not wanted by most major refiners owing to the ever-tightening specifications for fuels in most markets. The heaviness of the crude is not generally wanted either, since it produces a high yield of heavy fuel oil, the consumption of which is in decline in most parts of the world. This leaves the Saudis with the sometimes unpalatable option of having to sell such crudes at a large discount to lighter grades. 15

Financing Expansion One thing Saudi Arabia should not lack is the finance to increase its production capacity, despite its having chosen to exclude foreign investment outside the Neutral Zone. In January, 2007, the Oil Minister, Ali al-naimi, said that the kingdom was investing more than $80 bn in order to ensure the availability of reliable and affordable oil and gas. Outlook for Saudi Production From the remarks above, it is possible to make a number of generalizations: Saudi Arabia has large reserves of oil, though there is some controversy over the precise size of its proven reserves, and evidence that reserve levels were overstated by a number of OPEC members during the 1980s, for largely political reasons. The lack of major new discoveries outside the traditional producing areas in the north-east of the country means that most of Saudi Arabia s oil production will come mainly from already discovered fields in the foreseeable future. Concerns have been expressed by outsiders about Saudi depletion practices, in particular, the scale of the water-cut. These concerns have been dismissed by Saudi Aramco. The issue of reserves is unresolvable without much more data from the Saudis about their fields and reservoirs. There are nevertheless probably sufficient reserves to allow a significant increase in production capacity. The 23 mn bpd figure cited above, however, must be considered purely theoretical: the only definite plans cover capacity levels up to 15 mn bpd. Given that Saudi Arabia and the Neutral Zone together have the capacity to produce 11.3 mn bpd, as at the beginning of 2007, and that this is likely to rise to 11.8 mn bpd by the end of the year with the commissioning of new production from Khursaniyah, it is not unreasonable to conclude that the Saudis should be able to reach or come close to their 15.0 mn bpd target by about 2015. Much of the increase from 11.8 mn bpd is likely to come from additions to output from Shaybah and Nuayyim (0.4 mn bpd in 2008) and Khurais (1.2 mn bpd in 2009). It is not yet clear, however, where any increments beyond 15.0 mn bpd might come from. By 2015, Saudi Aramco may well be experiencing difficulties in keeping Ghawar and 16

other major fields at planned levels, leaving it to look for capacity increases in relatively unexplored areas. According to the state oil company, these would be principally: o The southern borderlands of Saudi Arabia, known as Rub al-khali (The Empty Quarter); o The border with Iraq; and o Offshore in the Red Sea. The Saudi state company has stated that there may be about 200 bn bbl waiting to be discovered in these three areas; but this remains pure speculation at present. This makes a capacity figure of about 15.0 mn bpd the maximum that can be assumed for 2015. Saudi policy, however, is not to produce at maximum capacity but to maintain some in reserve in order to be able to meet unexpected surges in demand for oil. Assuming spare capacity of 1.0 mn bpd in 2015 about half what it is now Saudi and Neutral Zone crude oil production may grow as follows: (mn bpd) 2006 9.1 2015 14.0 17

Natural Gas Liquids NGLs were not recovered in Saudi Arabia until 1962, when small amounts began to be separated from associated gas. Output in 1962 amounted to only 2,900 bpd. Production received a major boost in the 1970s with the construction of the Master Gas System, which was designed to provide an integrated national system of collecting and transporting NGLs. By 1977, NGL output had risen above 200,000 bpd. It is now about 1.5 mn bpd (see Table 1), consisting of propane, butane and condensate (pentanes-plus). Condensate Output is expected to go on increasing along with that of crude oil. Production of condensate in particular is set to rise sharply. Rather than exporting it raw, the Saudis plan to split it into its component parts principally light and heavy naphtha using a series of distillation units known as splitters. One of these is already in operation and another three are planned (see Table 7). Table 7 Saudi Arabia: Condensate Splitters Company Location Capacity Completion (kbd) Saudi Aramco Ras Tanura 200 On stream 2003 Saudi Aramco Rabigh 200 2007-8 Saudi Aramco Jubail* 200 2008-9 Saudi Aramco Jubail* (expansion) 200 2010 Total 800 * Or Jeddah Dates approximate Source: Oil press 18

Outlook for NGL Production The programme to build condensate splitters implies a production level of at least 0.8 bn bpd by 2010. By 2015, this could have risen to 1.3 mn bpd, assuming oil production rises to 14.0 mn bpd, as discussed above. LPG production may not rise so much in volume terms as condensate. Taking this into consideration, Saudi and Neutral Zone NGL production may rise as follows: (mn bpd) 2006 1.5 2015 2.5 19

Saudi Exports Saudi Arabia and the Neutral Zone produce some 10.7 mn bpd of oil and NGL, of which about 2.0 mn bpd is consumed internally. This gives a net export total of 8.7 mn bpd (see Table 8). Table 8 Saudi Arabia: Oil Balance*, 2006 Saudi Arabia (mn bpd) Production 10.4 Consumption 2.0 Exports 8.4 Neutral Zone Production 0.3 Consumption Exports 0.3 Saudi Arabia + Neutral Zone Production 10.7 Consumption 2.0 Exports 8.7 * Includes NGL Included under Saudi Arabia Totals rounded Source: GER estimates 20

Outlook for Exports Saudi consumption of oil and NGL is rising rapidly. From 1.3 mn bpd in 1996, it is now just over 2.0 mn bpd, which amounts to an annual increase of nearly 4.5%. If this rate continues, Saudi demand in 2015 will amount to 3.0 mn bpd. Given the country s present population and economic growth, that may well prove to be an underestimate. Nevertheless, using the figure of 3.0 mn bpd, we obtain the following forecast for oil and NGL exports from Saudi Arabia and the Neutral Zone, based on forecast production of 16.5 mn bpd in 2015: (mn bpd) 2006 8.7 2015 13.5 21

Natural Gas Natural gas production has received relatively little attention in Saudi Arabia despite the country s high reserve levels. The government is now giving higher priority to gas development and plans an increase in production. Reserves and Production Saudi Arabia has gas reserves of 240 trillion cf (tcf) as of 1st January, 2007. In comparison, its production is a modest 7 bn cfd, which gives it remaining reserves of 93 years at existing levels of output. The 2007 reserves figure represents a slight fall over 2006 s level. All of Saudi gas is used internally (see Table 9). Gas was originally used principally as a means of maintaining reservoir pressure in oilfields. The reinjection of associated gas began in the 1950s, but as oil production rose, the volume of associated gas became too great to be absorbed by the reinjection process; so it began to be used as a fuel in oil plants such as refineries. Following the establishment of the Master Gas System (MGS) in 1975, gas began to be used extensively for petrochemicals and power generation. The petrochemical industry used both methane and a range of NGLs extracted from the gas. By the 1980s, it was clear that increasing volumes of natural gas would be needed as fuel and feedstocks for a variety of industries, including: o Petrochemicals - NGL-based industries - Ammonia o Refining - Refinery fuel - As source of hydrogen for desulphurization o Heavy industry - Aluminium - Iron & Steel - Cement o Electricity - Power generation - Desalination 22

These last two categories were of particular importance given Saudi Arabia s rapidly increasing population. During the 1990s the MGS was expanded in size. The following decade, two large gasrecovery plants were built on the Ghawar oilfield, at Hawiyah and Haradh. Between them, they are capable of handling some 3 bn cfd. Their construction effectively doubled the throughput of the MGS. The need to find increasing quantities of natural gas led Saudi Aramco to explore beyond the oilfields, which provided it with associated gas, to new, non-associated gas fields, including the Khuff gasfield, which underlies a large area of the northern Persian Gulf. Gas exploration in general also turned up significant quantities of condensate, allowing the Saudis to contemplate an increase in their NGL production (see previous section). Expansion of Industry The expansion of the Saudi gas industry does not appear to have proceeded as quickly as planned. In 1998, therefore, Saudi Aramco invited external companies to become involved in their upstream gas industry. Several were invited to bid for projects and three described as core ventures were awarded to consortia consisting variously of BP, Conoco, ExxonMobil, Marathon, Occidental, Phillips, Shell and Total. It was speculated that these three areas contained up to 50 tcf of gas. The core ventures encountered a series of problems. The Saudis have a policy of supplying natural gas to users within the kingdom at low prices in order to encourage industrial development. At the time, gas was priced at 50 cents per mn BTU. Following representations from the foreign companies, this was raised, but only to 75 cents per mn BTU, which still failed to reflect adequately the costs and risks associated with the three gas ventures. The Saudis then offered to guarantee a rate of return of 9% on the ventures, but this, too, proved unattractive and outside interest began to wane in Saudi gas projects. Doubts also began to be expressed about the size of the reserves in these areas. One foreign oil company executive was quoted in 2004 as saying that gas exploration in Saudi Arabia was a high-risk venture and that the prospects of finding large reserves were low. A few other foreign companies were brought in to develop a further four gas projects, but outside interest in Saudi gas is at present not very high. No new awards are likely to be 23

made during the next few years and it is doubtful that there will be any substantial gas development involving foreign companies in Saudi Arabia between now and 2010. Table 9 Saudi Arabia: Gas Profile, 2006 Reserves Associated 162 tcf Non-associated 80 tcf Total 242 tcf Production 7 bn cfd Reserves remaining 93 years Consumption 7 bn cfd Trade Figures include Neutral Zone Source: (Total Reserves) Oil & Gas Journal (Other) GER estimates Outlook for Production Saudi Aramco has reported several important additions to its gas reserves in recent years, including a giant field called Karan, in 2006. Karan is part of the Khuff formation and it is proposed to develop it to produce 1 bn cfd by 2011. Exploration has been stepped up in relatively unexplored areas such as Al-Nafud, in the north of the country; Rub al- Khali, along the kingdom s southern borders; the Red Sea and the Persian Gulf. Some of these involve foreign companies, despite the earlier setbacks with the core ventures. Saudi Aramco hopes that fields in the Rub al-khali will be producing 2 bn cfd after they have been commissioned in 2011. There are also plans to increase output from existing fields. One of these, Ghazal, is due to go up by 130 mn cfd to 400 mn cfd by 2008. Saudi plans are for total gas production of 14.5 bn cfd in 2030. Saudi Arabia will need all the gas it can find if its population goes on expanding at its current rate. The main growth in demand will undoubtedly be for electricity generation and desalination. If this cannot be satisfied the Saudis may be forced either to import gas from neighbouring countries or, more likely, to use more oil in the power and water sectors, which would in turn reduce the amount available for export. 24

Saudi Aramco can at least report some recent successes in finding gas and bringing it into production. If its efforts continue to be successful, it may well be able to raise production steadily over the next few years. The principal uncertainty covers the prospects for large scale discoveries. Without these, the Saudis may struggle to find enough gas to meet their planned needs after about 2015. Gas production up to that date is forecast as follows: (bn cfd) 2006 7 2015 10 Conclusions The increase in Saudi oil and NGL exports forecast above depends on four main factors: o The ability of the Saudis to develop new production; o Their further ability to prevent a sharp decline from existing fields; o Their ability to keep the rise in domestic oil consumption within reasonable bounds; and o The amount to which natural gas can be used to substitute for oil in industrial applications, particularly electricity production and desalination. If the Saudis fail to bring these problems under control, the volume of oil and NGL exports could be significantly lower than expected. 25