06 April 2013, Reuters - Saudi Arabia is unlikely to produce much shale gas this decade, hampered by scarce water and prices fixed far below production costs, but it has the reserves, the desire and the potential to become a shale giant one day.
The world?s biggest oil exporter already has sizeable reserves of conventional gas, but more than half is trapped in oil fields whose production is driven by OPEC oil policy. Increases in output are not expected to keep pace with the economy?s voracious appetite for gas to fuel power, petrochemical and desalination plants.
Inspired by a shale gas surge in the United States, which has transformed it from the world?s largest gas importer to a budding exporter, the kingdom has begun investigating its large unconventional deposits and their potential for fuelling long-term growth for its booming population.
?This is a region that needs to create jobs and opportunities for its people ? it is our number one priority ? so the prospects presented by gas are good news,? Saudi Oil Minister Ali Al-Naimi said this week.
Saudi Aramco has more than doubled its proven reserves of conventional gas since 1987, and the start-up of the Karan gas field in 2011 provided a supply boost from a field whose output is not driven by global demand for Saudi crude.
Two more non-associated offshore conventional gas projects should improve gas supplies until around 2017.
But with a decade-long search in the Empty Quarter having unearthed no commercially viable conventional gas, Aramco has been mapping unconventional reserves in the hope they will help meet an expected doubling of demand by 2030 in a country that bans gas imports.
In mid-March Naimi gave an estimate of over 600 trillion cubic feet of unconventional gas reserves, more than double its proven conventional reserves. That estimate would put Saudi Arabia fifth in a 32-country shale gas reserves ranking compiled for the U.S. Energy Information Administration.
Shale is only a long-term prospect, however. Saudi Aramco, which Naimi has said will drill only around seven shale gas test wells in 2013 [ID:nL5E8MK9U0], is still focused on tapping conventional gas.
?The nature of exploration is to target long-term requirements, typically 10 or 15 years into the future ? The shale gas exploration program is just starting, and it?s an important part of the effort to assess the kingdom?s resources for the future,? Sadad al-Husseini, a former top Aramco executive, said.
?This is not a major effort by industry standards ? It will take intense exploration studies and numerous evaluation wells before any assessments can be made in regards to their economics and their ultimate production potential.?
Even in the Gulf, Saudi Arabia will not be the first to tap unconventional deposits.
Neighboring Oman is likely to lead the way if it can reach agreement on price with BP (BP.L) for development of a block that the tight-gas specialist says could start commercial production by 2017 and yield up to 30 trillion cubic feet.
Yet Aramco is keen to increase gas output, because at it can make $100 a barrel by exporting crude oil, which it sells to Saudi power plants for around $4 a barrel due to a lack of gas.
The company that exports more than $800 million a day of crude oil can afford the costs of developing a shale capability. Unlike prospectors in densely populated Europe, it has vast expanses of empty desert in which to drill and faces none of the environmental protests seen in the United States and Europe.
PRICE, PERSONNEL
Many of the factors that drove the U.S. shale gas production boom ? entrepreneurial innovators with access to capital, ample volumes of water and an easily accessible transport grid ? are sorely lacking in Saudi Arabia, however.
Low fixed prices for gas across the Gulf, a remnant of decades past when gas was seen as a byproduct of oil fields, have discouraged investment in new production.
Even after rapid innovation in the United States drove down shale production costs from over $13/mmbtu in mid-2008 to around $4 now, are still far in excess of the $0.75/mmbtu fixed gas price in Saudi Arabia.
?You don?t have market forces in the way of price signals, and private actors for these forces to be unleashed in the way that they were in North America,? said Alex Munton, a Middle East energy analyst at Wood Mackenzie in Edinburgh.
?You have state-controlled industry, essentially one operating company and gas prices that make it sub-economic to develop this resource,? he said, adding that it would probably take a decade to see any significant production in the kingdom.
Aramco is currently hiring unconventional specialists for further appraisal work, but expertise may prove hard to come by in the future.
Analysts say the established best practice is to enlist the help of big service companies that have played a role in the U.S. boom. They are hungry for work in other countries, and some have set up development offices in Saudi Arabia.
But China, holder of the world?s largest unconventional gas reserves, has already signed production-sharing deals and awarded exploration blocks as it targets production of 6.5 billion cubic meters of shale gas a year by 2015.
Its decision to award most blocks in a recent tender to companies with little experience means those firms could soak up the limited pool of expertise from service companies such as Schlumberger (SLB.N) and Baker Hughes (BHI.N), potentially hampering Saudi shale drilling prospects.
TECHNOLOGY BREAKTHROUGH NEEDED
The biggest obstacle for Saudi Arabia is probably the lack of water, because fracking entails pumping huge amounts of fresh water to pressure gas out of rock, shale or compacted sands.
The U.S. Environmental Protection Agency has estimated the annual water requirement of U.S. frackers at 70-140 billion gallons (265-530 billion liters), equivalent to the amount of water used in a U.S. city of 2.5-5 million people.
Ambitious Saudi plans to build desalination plants, and the nuclear and solar plants to power them, still are unlikely to produce the volumes of water required at a low-enough cost.
Saudi Arabia?s prospects will depend on development of a technology that allows Aramco to frack effectively with seawater or with liquefied petroleum gas, and the latter technique is being developed by North American companies.
The creation of Saudi Aramco Energy Ventures (SAEV) in mid-2012 to invest in start-ups and high-growth companies with ?technologies of strategic importance? suggests Aramco is preparing to pounce on such developments.
?The importance of the U.S. venture community cannot be overstated,? SAEV head Ibrahim Buainain said at the opening of its office in Houston on January 30.
?We see great potential for SAEV to work with start-ups throughout North America to support the development of new technologies,? he added.
*Editing by Jane Baird and Richard Mably
Source: http://sweetcrudereports.com/2013/04/06/analysis-saudi-kings-of-oil-join-the-shale-gas-revolution/
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