New gas development poised to increase capacity in Saudi Arabia

Natural gas looks likely to play an increasingly important role in Saudi Arabia’s economy in the years ahead as the Kingdom begins to tap into new reservoirs that are poised to satisfy the growing demand from the power generation, desalination and industrial sectors. Prince Abdulaziz bin Salman Al Saud, the minister of energy, hinted that the development of new sources may create a surplus, enabling Saudi Arabia to become a gas exporter in the near future.

Jafurah

In February 2020 the Ministry of Energy approved Saudi Aramco’s plan to develop the Jafurah onshore gas field in the Eastern Province. The field, which measures 170 km by 100 km, is estimated to hold 200trn cu feet of raw gas. Saudi Aramco aims to start production at Jafurah by 2024, with output capacity increasing to 2.2bn standard cu feet per day (scfd) of sales gas by 2036. The gas itself can be used in electricity generation and desalination plants as well as by energy intensive industries. Jafurah will also produce valuable feedstock for the Kingdom’s petrochemical plants, with a capacity of 425m scfd of ethane, equivalent to 40% of output in 2019. Saudi Aramco also expects to produce 550,000 barrels per day (bpd) of gas liquids and condensates. Development costs for the project are estimated at $3.5bn.

Gas System

Jafurah is a non-associated gas field, and as such, the gas is not produced as part of the oil extraction process. Traditionally, the associated gas produced while pumping for oil was burned or flared at the wellhead, but in modern times Saudi Aramco has reduced flaring to less than 1% of output, and in 2019 it signed a World Bank agreement to end all flaring by 2030. In the 1970s Saudi Arabia started work on the master gas system (MGS), a pipeline and processing network that was initially used to divert associated gas from the oil fields to be used in power stations, desalination plants and factories. In January 2018 the first phase of an expansion to the MGS was completed, adding 1bn scfd to capacity and bringing the total up to 9.6bn scfd. The aim in Phase 2 is to increase capacity to 12.5bn scfd, with the two expansion phases adding 1600 km of new pipelines to the network. Saudi Aramco has not announced when it expects to finish Phase 2. The MGS connects the Kingdom’s oil and gas fields with industrial and petrochemical plants and power and water facilities. However, sales gas is not supplied by pipeline to homes and businesses, which primarily rely on gas canisters; 89% of the Kingdom’s households used gas for cooking in 2019.

Mega-Projects

Most of the Kingdom’s gas fields and production facilities are located in the east of the country, with new capacity due to come on-stream by the time Jafurah’s first phase is completed. The first non-associated offshore Karan field was discovered in 2006, and within six years it was feeding the Khursaniyah gas plant near Jubail via a 110-km subsea pipeline. By 2021 an expansion at the Hamiyah gas-processing centre will see capacity increase by 1bn scfd to 3.6bn scfd. In 2015 the giant Wasit gas-processing facility 150 km north of Jubail came on-stream, reaching full capacity of 2.5bn scfd in 2016.

At the same time Wasit reached full potential the Shaybah natural gas liquids recovery plant located at the edge of the Empty Quarter came on-stream. It is designed to process up to 2.4bn scfd of associated gas and recover 275,000 bpd of ethane for use as petrochemical feedstock. In 2020 the Fadhili gas plant, located 30 km west of Jubail, is expected to start up, with the capacity to process 2.5bn scfd of raw non-associated gas from both offshore and onshore fields. In the north-west of the country on the Red Sea near Tabuk, some 75m scfd of gas and 4500 bpd of condensate from the Midyan field are used in power generation. The country’s gas-processing capacity is expected to grow from 15.5bn scfd in 2019 to 21.6bn scfd in 2023, according to Saudi Aramco.

Demand

Natural gas demand is expected to grow at an average rate of 3.6% annually, from 9.1bn scfd in 2017 to 14.6bn scfd in 2030. Increased petrochemical production and other industrial consumption are likely to drive demand as well as the need to reduce the opportunity cost of burning oil in power generation. One of the biggest consumers of gas in the Kingdom is the utilities sector, with desalination plants, power stations and combined cogeneration units producing electricity and drinking water for a growing population, typically seeing peak demand in the summer months when air conditioning units are used more frequently. Many of these facilities are configured to run on oil or a mixture of oil and natural gas. Data from the Electricity and Cogeneration Regulatory Authority (ECRA) shows that in 2018, natural gas accounted for 57% of all fuel consumed by Saudi water and power plants, with oil accounting for the remainder. There were, however, considerable regional differences in fuel usage. In the eastern and central regions, which are close to the gas fields, the portion of gas used was 95% and 72%, respectively, while in the western and southern regions, oil accounted for 89% and 100%, respectively, of the fuel burned to produce electricity and water.

Gas Pricing

Saudi Aramco is the sole supplier of gas in the Kingdom under the Law of Gas Supplies and Pricing Regulations enacted by Royal Decree M/36 of 2003. Prices for gas are set by the Council of Ministers. The Ministry of Energy is responsible for allocations of gas to the electricity, desalination, industrial, oil and petrochemical sectors. Although some neighbouring countries have experimented with importing liquefied natural gas (LNG) in the summer months to reduce the burning of oil in peak months in power stations, Saudi Aramco’s IPO prospectus only makes mention of LNG as part of its strategy to develop an integrated global gas portfolio through investments in joint ventures outside the Kingdom. Among these investments is a joint venture with Malaysia’s Petronas: the Pengerang Refining and Petrochemical complex, which includes a LNG regasification plant and LNG storage facilities.

Bangladesh LNG

In November 2019 international media reported that ACWA Power and Saudi Aramco were to build a 3600-MW LNG power plant near Cox’s Bazaar in Bangladesh. Under the $3bn agreement penned with Bangladesh Power Development Board, Saudi Aramco will supply the plant with LNG. The deal is a part of a broader strategy by Saudi Aramco to add LNG to its portfolio of products marketed globally, leveraging its close and long-standing relationships with many oil importing countries. According to Reuters, Bangladesh imports 700,000 tonnes of Arab Light crude annually for its only refinery.

Port Arthur

In January 2020 Saudi Aramco and the US’ Sempra Energy announced that two of their two subsidiaries, Sempra LNG and Aramco Services Company, had signed an interim project participation agreement for the Port Arthur LNG facility being built in Texas. The project will see the construction of two liquefaction trains with a combined capacity of 11m tonnes per annum (tpa), as well as storage and export facilities. The move followed the signing of a heads of agreement in May 2019 that would see Saudi Aramco purchase 5m tpa of LNG produced at the facility while taking a 25% stake in the project.

A report on Saudi Aramco’s LNG strategy published by the King Abdullah Petroleum Studies and Research Centre (KAPSARC) in November 2019 pointed out that many of the Kingdom’s traditional customers in China, Japan and India have started to noticeably shift away from oil to LNG. The report proposes that by adding LNG to the mix of fuels the Kingdom offers to these countries, Saudi Aramco can better work to maintain its market share. It also reported that Aramco Trading Company was formulating plans to launch an LNG trading business from its Singapore office. The KAPSARC notes that Saudi Aramco has not ruled out importing LNG at some point in the future if the development of non-associated and unconventional gas ventures within the Kingdom proves more costly than imports.