Saudi Arabia develops natural gas industry
To diversify its domestic energy mix, the Kingdom of Saudi Arabia is investing in developing its natural gas resources. If the Kingdom is to make the most of the cost opportunity granted to it by oil, it must reduce the amount of oil used to generate power for factories and petrochemicals plants. Oxford Business Group has this report
According to its analysis of the role natural gas will play in the Saudi Vision 2030 development plan, Jadwa Investment has calculated that gas output will have to rise by as much as 6.6 per cent on average each year in the decade to 2030. More than two-thirds of sales gas produced in Saudi Arabia comes from the Ghawar field in the Eastern Province, which is tapped for both associated and non-associated gas. Electricity use expanded by 85 per cent in Saudi Arabia between 2005 and 2015. The National Energy Efficiency Programme was launched in 2002 to promote best practices in the economic consumption of electricity. Saudi peak electricity demand is expected to reach 120 GW by 2030, according to Jadwa, and the company calculates that this means the Kingdom will need 135 GW of installed capacity by that time – nearly double the capacity it had in 2015
Most of the gas due to come on-stream between 2017 and 2020 is conventional non-associated gas. While the weather conditions of the region certainly presented difficulties during construction, it also gave way to opportunity. Plans for a 400-MW wind farm are in the works, a first for the Kingdom’s renewable energy strategy. To maximise its use of natural gas resources, Saudi Aramco is also developing an unconventional, or tight gas, facility in Turaif in the north-west of the country
Petro-dollars earned from oil exports comprise the majority of Saudi Arabia’s revenues, yet gas is seen as key to diversifying the economy. The medium-term National Transformation Programme (NTP) calls for a 48 per cent increase in dry gas production by 2020 – from 12bn standard cu feet per day (scfd) in 2016 to 17.8bn scfd. The country is also seeking to make optimal use of the associated gas alongside oil recovery, as well as develop non-associated gas fields.
According to its analysis of the role natural gas will play in the Saudi Vision 2030 development plan, Jadwa Investment has calculated that gas output will have to rise by as much as 6.6 per cent on average each year in the decade to 2030 to meet the demands of a growing population and industrial development.
Jadwa Investment’s paper on Natural Gas and Vision 2030, published in October 2016, notes that the target in the NTP is in keeping with the last decade’s expansion of gas production, which it said grew by 47 per cent between 2005 and 2015 when it reached 11.6bn scfd. The report notes that over that period, the country’s power, water and petrochemicals plants have consistently used all the gas produced in the Kingdom. Domestic demand peaks in the summer months when electricity is used to power air conditioning, and it is at this time of year that the country’s power producers directly burn crude to meet any shortfalls.
Economists have long since warned that burning this valuable commodity rather than refining or exporting it is a costly action. With production costs of US$5 per barrel, the country was losing approximately US$31 with each barrel of oil burned in the low-price environment of the first half of 2016, when the average sales price of Saudi crude was just US$36 per barrel. Jadwa estimates that by 2030 lost earnings could reach US$71 for every barrel of oil used to generate electricity domestically.
More than two-thirds of sales gas produced in Saudi Arabia comes from the Ghawar field in the Eastern Province, which is tapped for both associated and non-associated gas. The Kingdom has invested in exploration and development of non-associated gas because production from these fields is unaffected by fluctuations in oil production, such as the reductions Saudi Arabia made in 2017 as part of the supply-cut pact between members of the Organisation of the Petroleum Exporting Countries and other oil producers, including Russia. By 2015 associated gas accounted for one-third of the country’s sales gas, down from 42 per cent in 2005, thanks to the development of non-associated fields.
Electricity use expanded by 85 per cent in Saudi Arabia between 2005 and 2015. The National Energy Efficiency Programme was launched in 2002 to promote best practices in the economic consumption of electricity, and was followed by the establishment of the Saudi Energy Efficiency Centre. However, reducing wasteful use patterns was a difficult task, as individual and industrial consumers alike have benefitted from highly subsidised electricity.
In 2016 the government began to reduce subsidies as part of its fiscal consolidation programme, but also to encourage more moderate use of electricity. At the start of 2016 the price of natural gas and its derivative – the primary source of feedstock for petrochemicals – cost US$0.75 per million British thermal units (Btu). After subsidies were reduced, customers were expected to pay US$1.75 per million Btu for propane and US$1.25 per million Btu for gas. Even at these prices, gas in Saudi Arabia is 50 per cent cheaper than in the US and 400 per cent below prices in Asia.
Saudi peak electricity demand is expected to reach 120 GW by 2030, according to Jadwa, and the company calculates that this means the Kingdom will need 135 GW of installed capacity by that time – nearly double the capacity it had in 2015. The report points out that for gas to power a high proportion of this generation capacity, significant investment will be required for exploration and production activity in the country’s gas fields. If gas is used for 70 per cent of generation, for example, the nation must produce 32bn scfd, significantly more than the 17.8bn scfd target for 2020 outlined in the NTP.
Most of the gas due to come on-stream between 2017 and 2020 is conventional non-associated gas. Saudi Aramco, the country’s state-owned oil company, is developing three new gas complexes at Wasit, Fadhili and Midyan which will have a combined non-associated gas processing capacity of more than 5bn scfd, according to the company. The Wasit Gas Plant (WGP) near Jubail is supplied by two new fields at Arabiyah and Hasbah, which began production in 2016. Hasbah has seven single-well platforms and Arabiyah has six wells, with each field capable of feeding the WGP with up to 1.3bn scfd of non-associated gas.
The WGP was the first Saudi Aramco facility designed to process non-associated gas. The plant processes 2.5bn scfd of non-associated gas and supplies 1.7bn scfd of sales gas or methane to the master gas system, while also producing 4800 tonnes per day of molten sulphur. Furthermore, the WGP also processes 250,000 bpd of gas to make feedstock – including ethane, propane, butane and natural gasoline – for the petrochemicals industry.
Heat waste of the WGP is turned into steam at its on-site co-generation plant that is capable of generating 750 MW of power, 600 MW of which is distributed to other Saudi Aramco facilities through its own supply network. Approximately 40 per cent of the materials used to construct Wasit were sourced in Saudi Arabia, and more than 1800 Saudis, including technicians, engineers and managers, were employed as contractors on the project.
The Fadhili complex is being developed 85 km north-west of Jubail at a cost of SR50bn (US$13.3bn). The facility at Fadhili will process 2.5bn scfd of non-associated gas including 2bn scfd from the Hasbah offshore field and 500m scfd from the onshore Khursaniyah field. Fadhili is expected to produce 1.5bn scfd of sales gas and 4000 tonnes of sulphur. It will supply 470m scfd of gas to a co-generation plant that will provide Fadhili with steam and power while also feeding 1100 MW into the domestic electricity grid. “Saudi Aramco’s multibillion-dollar investment in Fadhili will considerably increase the share of gas in the Kingdom’s energy mix and fits in with our long-term strategy to lower emissions,” said Amin Nasser, CEO of Saudi Aramco, when he announced the Fadhili project in June 2016. “Gas will be of vital importance to the Kingdom’s ongoing industrial diversification and economic development, while enabling better energy efficiency in the utility sector.”
In July 2016 Saudi Aramco awarded 10 contracts for the project, including an offshore facility award for Mumbai-based conglomerate Larsen & Tubro, a downstream contract for Saudi KAD, and a combined heat and power generation contract to Saudi Electricity Company and France’s Engie. Then in December 2016 South Korea’s Doosan Heavy Industries and Construction announced it had been jointly awarded a contract with Engie worth US$900m for the co-generation facility at Fadhili.
Upon completion, the power plant will be jointly owned by Saudi Aramco Power Holding Company and Saudi Electricity Company, each with a 30 per cent stake, and Engie with 40 per cent. Doosan Heavy Industries will be in charge of the engineering, procurement and construction of the co-generation plant, which is due to be completed in November 2019.
The Fadhili complex is expected to create 4500 jobs for Saudis, and a dedicated training centre is to be established in collaboration with government agencies to ensure citizens receive skills training and work experience as part of the project. Education and employment drives are important to spur diversification in the energy sector, and lead the country away from a reliance on oil and the jobs that it supplies. Local oil players recognise the need for this, and the exciting opportunities new energy sources and solutions will bring. “Diversification is key to job creation, not only because it increases the number of jobs, but also because it creates possibilities for more high-tech jobs that young Saudis would be interested in taking,” Salaheddine Dardeer, CEO of oil refinery Luberef, told OBG.
While output from the Midyan field in the north-west of Saudi Arabia near Tabuk may be more modest at 75m scfd and 4500 bpd of condensates, it is an example of innovative, cleaner power generation. Midyan is fed by seven non-associated wells producing sweet gas, i.e., low in sulphur. It supplies Al Muwaylih power plant near Duba, which will generate 520 MW per day using Midyan’s gas, and a further 50 MW per day through Saudi Electricity Company’s solar thermal power plant.
During construction from 2013 to 2016 the teams who worked on building Midyan often had to contend with winds of up to 70 km per hour, which made it impossible to work with cranes. While the weather conditions of the region certainly presented difficulties during construction, it also gave way to opportunity. Plans for a 400-MW wind farm are in the works, a first for the Kingdom’s renewable energy strategy. The farm was initially conceived to be at Midyan, but in mid-2017 the location was moved to Dumat Al Jandal.
New energy sources In Turaif
To maximise its use of natural gas resources, Saudi Aramco is also developing an unconventional, or tight gas, facility in Turaif in the north-west of the country. It aims to generate 50m scfd that will be used to power the Saudi Arabian Mining Company’s (Ma’aden) phosphate mine at Waad Al Shamal industrial city. According to Jadwa Investment, this project may be comparatively modest in scope to others in the sector, but it has greater long-term significance, as it marks Saudi Aramco’s first step in unlocking the Kingdom’s reserves of unconventional gas.
An experiment in wind energy also took place in Turaif, with the completion of the Kingdom’s first individual turbine there in February 2017. Wind Turbine No. 1 provides power to the bulk plant and thus reduces the amount of electricity Saudi Aramco has to buy from the Saudi Electricity Company. The wind turbine project was developed by specialists from Saudi Aramco’s Power Systems team, with GE selected to design, supply and construct the turbine.
To what extent has OPEC’s decision to adjust production achieved its intended target?
Mohammad Sanusi Barkindo, Secretary-General, Organisation of the Petroleum Exporting Countries (OPEC): Thus far, the results are encouraging. From January 1, 2017 OPEC and a group of 11 leading non-OPEC oil producers began the implementation of production adjustments totalling 1.8m barrels per day (bpd). We have seen a steady rise in conformity. In January 2017, conformity levels were 86 per cent, while in February this improved even further, rising to 94 per cent. In March and April conformity reached 98 per cent and 102 per cent, respectively. Inventory levels are decreasing, investor sentiment has improved and industry investment is starting to pick up. This high level of conformity is bearing fruit, especially when you consider how far the oil market has evolved since the market rebalancing process began. These are all signs of a renewed sense of positive momentum and stability in the global oil market.
What can be done to improve coordination on production between OPEC and non-OPEC members?
Barkindo: We are making every effort to achieve our common goal of lasting stability in the global oil market. The decisions taken at a recent meeting of OPEC and non-OPEC states in May 2017 have provided a renewed sense of forward momentum to this collaborative process, and are a testament to the determination of the 24 participating countries to achieve healthy oil market growth. This is the only way forward for our industry.
How will unconventional production affect OPEC member states moving forward?
Barkindo: The future energy environment will certainly have an adequate number of challenges, but it will also offer many opportunities. In the coming years the world will need more energy to fuel a rapidly growing global economy, which is expected to more than double by 2040. It must also meet the increasing needs of the world’s massively expanding population, which is forecast to reach a staggering 9bn people by 2040.
To meet this demand, all forms of energy will be required, including renewables such as wind and solar, which are expected to continue increasing. In terms of non-OPEC supply, we have seen a decline in recent times due to the low oil price environment. However, there has been an uptick of late, mainly due to the resurgence in US tight oil production. In the long term we expect non-OPEC supply to continue to rise steadily, reaching a high of 61.4m bpd in 2027, before dropping to 58.9m bpd in 2040. This all boils down to the fact that OPEC will be needed to fulfil most of the additional long-term oil demand. For crude oil this means an estimated 8.9m bpd between 2015 and 2040, and 12.6m bpd for liquids.
How will the global oil trade evolve in the future?
Barkindo: Trends in long-term global oil trade point to an increase in crude imports being delivered to the Asia-Pacific region from the Middle East. Our “World Oil Outlook” estimates that imports to the Asia-Pacific region will grow by 9m bpd between 2015 and 2040. Of that, we forecast that 6.5m bpd will come from exports originating in the Middle East.
By contrast, product demand and crude runs are expected to decline in developed nations, along with their crude oil imports. This can be seen with imports to the US, Canada, Europe, Japan and Australasia, which are forecast to drop by 3m bpd during the same timeframe. There could be a gradual increase in flows from Russia and the Caspian region via the Eastern Siberia-Pacific Ocean oil pipeline; however, we expect the Middle East to Asia-Pacific link to dominate trade growth.
As far as Africa is concerned, we foresee export volumes decreasing in the long term, due to increasing domestic demand and rising domestic refining capacity, along with additional declines in ageing production areas. Other contributing factors relate to decreasing African exports to the US and Europe, caused by the recovery in US tight oil production growth and progressive declines in European refinery runs, respectively.
What advantages have the development of industrial zones provided to manufacturers?
Mohammed Al Badr, Managing Director, Saudi Chemical: The main advantage of having a factory established in an industrial zone, such as Sudair, Al-Kharj and Jeddah, is having to deal with one counterpart for logistics and operations, rather than different government entities. However, industrial zones in major cities are currently congested and have limited land available, while those located in remote areas require a lot of work. In addition, companies cannot develop permanent bases in such areas, as the Ministry of Municipal and Rural Affairs has the right to reallocate the land originally devoted to warehouses to residential use at any time. The establishment of a stronger logistics authority and permanent land allocation to factories with appropriate cargo and ports logistics would allow for longer term industrial planning and growth. The country is currently developing logistics hubs across different regions with free zone incentives and Customs and handling facilities. This will help promote economic growth and regional diversification.
In what manufacturing areas do you see potential for public-private partnerships (PPPs)?
Al Badr: The potential is usually greater in industries such as defence where the government is the only client and contracts have to be long term to incentivise investors. At the moment, however, there is no unified regulatory framework for PPPs, which restricts their wider use. Pharmaceuticals are another sector in which PPPs could play a greater role in the future. One form of partnership the Ministry of Health is looking at relates to the outsourcing of medical or pharmaceutical supply to the private sector, rather than buying and storing large numbers of items at the ministry’s facilities. This links local pharmacies to primary or secondary care hospitals so that patients can collect prescriptions from any pharmacy using their national ID numbers. The pharmacy then collects the money directly from the government, which saves around SR4bn (US$1.1bn) in logistics costs and eliminates the sale of counterfeits.
How is the government seeking to increase the local output of pharmaceutical products?
Al Badr: The government is increasingly giving preference to local production and procurement. In the pharmaceutical industry one way of doing this is to facilitate product registration by the Saudi Food and Drug Authority. It used to take two years to register a drug locally, compared to six months in Europe. With the new rules now being implemented, a drug that has already been registered in advanced economies will automatically also be available in the Kingdom. This improved ease of doing business will incentivise manufacturers to localise production. As a result of the government’s strategy to increase local content, we have also signed agreements with a number of international companies to localise the production of pharmaceuticals in Saudi Arabia.
What role can research and development (R&D) play in expanding product manufacturing?
Al Badr: Deepening local manufacturing of generic drugs constitutes the low hanging fruit, but partnerships with international companies and the transfer of specialised technology can yield greater results in the long term. The priority is for products that tackle diabetes and other lifestyle-related diseases. Despite high demand, we do not produce such products locally. However, there are universities and pharmaceutical colleges – including King Abdulaziz City for Science and Technology – which are starting to collaborate with international companies in this field. R&D is a long-term investment with a minimum nine-year return prospect. Having international companies manufacturing specialised, patented products in local factories would contribute to the quality of manufacturing and provide positive branding for Saudi Arabian pharmaceuticals.