DUBAI Feb. 23, 2007 (Dow Jones Newswires)
Saudi Arabia is gearing up to meet surging domestic demand for natural gas that is key to sustaining its industrialization drive, experts say.
Amid rapid industrial expansion, Saudi Arabia is seeing a record surge in gas demand. Between 2005 and 2030, consumption is forecast to rise threefold to 14.5 billion cubic feet a day, according to recent data from the country's Petroleum & Mineral Resources Ministry.
Further pressure on gas supplies comes from rising electricity demand and from annual population growth rates above 2.2%. The kingdom will need to raise power generation capacity by 24,000 megawatts to about 59,000 megawatts by 2020, according to Fichtner, a German engineering consultancy firm involved in Saudi power projects.
Much of this capacity was originally planned to be from clean-burning, gas-fired power plants, but due to high demand the gas is being diverted to growth industries such as petrochemicals and plastics.
Until now, Saudi Arabia has had no problems meeting its own gas requirements. But while the country holds the world's fourth-largest proven gas reserves, at 242 trillion cubic feet, they need to be made available more quickly as demand grows.
"Regarding the demand-supply situation, we expect strong growth in Saudi gas demand over the medium term. Clearly, the potential for proving up additional gas reserves and increasing production exists; the key challenge is to realize this," said Rajnish Goswami, vice president for gas and power at Wood MacKenzie in London.
The Saudi government is promoting new, natural gas-based industries to local and international private investors. Supporting these industries with the profits of higher oil prices, it is offering gas at a highly competitive rate. The kingdom is also providing financial assistance via soft loans through government bodies such as the Saudi Industrial Development Fund.
The government hopes the investment will be a launchpad for tens of thousands of jobs in labor-intensive industries along the gas value chain. With unemployment in the kingdom of 25 million people running at an unofficial rate of up to 25% - officially it stood at about 8% last year - the creation of new jobs is a top priority.
Recent initiatives to present the kingdom as an attractive destination for investment, in particular in the petrochemicals and fertilizer industry - a heavy consumer of cheaply priced domestic natural gas - have already resulted in interest from private local and international investors in projects that convert natural gas, and the ethane it contains, into plastics.
According to figures from Taylor-DeJongh, a Washington D.C.-based specialist merchant bank, investment requirements for proposed petrochemical projects in the country until 2010 stand at more than $25 billion. The investment wave will turn the kingdom into one of the world's largest petrochemical production and export hubs.
"We stand at the threshold of a new phase of industrial development," Khalid al-Senani, gas supply and pricing department manager at the Petroleum & Mineral Resources Ministry said at a Saudi energy conference in November.
Saudi Basic Industries Corp., or Sabic, the world's largest chemicals company by market capitalization, is leading the investment drive; it has earmarked $74 billion under its capital expenditure program until 2020, blazing a trail for others.
U.S. oil majors ExxonMobil Corp. (XOM) and Chevron Corp. (CVX), and Europe's top polyolefins producer Basell are among those increasing their investments in petrochemicals projects in the country to benefit from low-cost and - until recently - widely available natural gas.
State-owned Saudi Arabian Oil Co., which pumps about 10% of the world's daily crude oil, and the Saudi government have shied away from detailed discussion of tightening gas supply. But the need to plan around gas-supply limitations is evident.
Under a Royal Decree issued by the Saudi government last year, some of the country's largest future power plants, for example, initially planned to run on cheap, clean-burning natural gas, will now be crude oil-fired, which is more expensive and polluting.
"All new coastal power plants will run on liquid fuel," said Abdulwahab al-Sadoun, director general at the energy department of Riyadh-based Saudi Arabian General Investment Authority, or Sagia, a government body that promotes the kingdom to foreign investors and assists them in setting up shop in the county. "The gas is too valuable."
Instead of the gas firing power plants, it will be directed to industries such as petrochemicals that "add value to the Saudi economy", according to Sadoun.
Even the prioritized petrochemicals sector has been affected by the need to manage gas supplies. Several large scale olefins complexes to be developed by local and international investors, including one planned byIneos PLC (INEO.YY) in eastern Saudi Arabia, have been trying for months to secure gas feedstock - and they are still waiting.
To overcome the gas bottleneck, Saudi Aramco has launched an aggressive investment program that involves fast-tracking the estimated $10 billion development of the Karan gas field, located offshore in the Persian Gulf and estimated to contain nine trillion cubic feet of gas.
Aramco plans to invite international companies that have already expressed an interest in Karan, such as Fluor Corp. (FLR), Foster Wheeler Ltd. (FWLT) and Technip S.A. (13170.FR) by the end of this month to bid for the contract to manage the project and carry out engineering.
On completion, targeted for 2011, Karan is set to produce an additional one billion cubic feet a day of gas. Other initiatives are underway to meet the gas challenge.
"In order to support gas-based industries and utilities, several major gas facilities are under plan, design or construction. Allocation of gas resources to projects are prioritized in order to ensure maximum value is added to the kingdom's economy," Aramco told Dow Jones Newswires in an emailed reply to questions.
Under the program, Aramco will also start exploration of prospective areas along the Red Sea coast and in the country's northwest. And it will continue its search in the Empty Quarter desert, known as Rub al-Khali, where the Saudi oil giant and international partners including Royal Dutch Shell PLC (RDSA), Total SA (TOT) and ENI SPA (E) are already involved in exploring an area larger than Italy.
The success of this exploration program is crucial as 57% of Saudi gas reserves are held in the form of so-called associated gas that is directly linked to the production of crude oil. If, for example, oil production falls, so will associated gas output. With OPEC beginning to cut back on crude production quotas to meet changing market conditions, associated gas production could therefore fall.
According to Khalid al-Falih, Aramco's senior vice president for industrial relations, this is unlikely.
"We have adequate swing capacity in our gas plants that we can feed with non-associated gas to deal with various production scenarios," he said at the November conference. "We also built flexibility with our customers. We have many customers that are dual fuel users so in the event of lower crude production, which we don't anticipate but we plan for, we would swing some of our utilities for example, to liquids to deal with that."
Still, finding new gas reserves under the exploration program is key. Aramco has said that it expects to add at least 50 trillion cubic feet of gas to existing reserves in the next 10 years.
"Saudi future gas potential hinges on the prospects of discoveries by the international joint ventures currently involved in the Rub Al Khali basin," Ali Aissaoui, head of research at Saudi Arabia-based Arab Petroleum Investments Corp., or Apicorp, said in a research note in January.
The chances of finding gas in the concession area explored by Shell with Total and Aramco stand at only about 20 percent, Shell has said.
Copyright (c) 2007 Dow Jones & Company, Inc.
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