Gas, gas everywhere and not a drop to burn – that could be Saudi Arabia’s complaint. The country has, of course, a lot of gas, but not enough to meet its needs. And, despite lying in a gas-rich region, political storm-clouds are driving it to seek resources on the distant shores of the Arctic seas and the Gulf of Mexico.
The kingdom neighbours the holders of the largest and third-largest global gas reserves (itself ranking sixth). But political problems make it impossible to import from Iran or Qatar. The chief of Qatar Petroleum, Saad Al Kaabi, stated in an interview with The Middle East Economic Survey that, during his February visit to state oil giant Saudi Aramco, he had discussed gas exports. But the subsequent embargo imposed by Saudi Arabia, the UAE and allies has put an end to that possibility.
Instead, Aramco has turned to the world’s second and fifth-biggest reserves' holders. Earlier this month, at the inauguration of the Yamal liquefied natural gas (LNG) plant, Russian president Vladimir Putin announced his country was ready to export gas to Saudi Arabia. Energy minister Alexander Novak had said in July that Aramco could take a stake in the Arctic-2 LNG project, planned to start operations in 2022-23.
And it was reported last week that state oil major Saudi Aramco had held talks with Tellurian, a US LNG developer, about either buying a stake in its business or purchasing gas from it. Tellurian's chairman, Charif Souki, once the US's highest-paid chief executive, has long-time relations in the Kingdom. As I proposed in July, by investing in shale, OPEC national oil companies would understand their rival better, and gain expertise they could transfer to domestic operations.
Drilling in the limestones and shales under the scrubby plains of West Texas may be more congenial to Aramco than the Siberian tundra. The company is remaining true to its DNA by seeking to be involved in upstream production operations.
But it does not have to be. It can simply buy the LNG from a well-supplied and increasingly flexible global market, as the UAE, Kuwait, Jordan and Egypt have turned to in recent years. Traders, such as Vitol, Trafigura, Uniper or the trading arms of Shell, Total or BP, will commit to provide LNG from their global portfolios without reference to a particular country of origin.
The kingdom certainly needs the gas. The National Transformation Programme requires raw gas output to rise from 13.3 billion cubic feet (Bcf) per day now to 17.8 Bcf per day by 2020. Gas contributes about half of power generation today, but this is supposed to rise to 70 per cent in the future. The rest is made up by oil – fuel oil, diesel and crude oil – which is expensive, polluting and cuts into potential exports.
New facilities at Fadhili, Haradh and Midyan will add some 3.87 Bcf per day of raw gas processing, bringing the 2020 target within reach, but beyond that, new sources are required. Aramco has made a start on developing unconventional gas resources in the north-west. But though it has vast shale gas resources – estimated by oil services firm Baker Hughes at 645 trillion cubic feet, twice US reserves – these look to be relatively expensive to extract because of their depth, remoteness and lack of water and infrastructure.
The west and south of the country did not generate power from gas until recently, when pipelines were extended to Rabigh and the King Abdullah Economic City, north of Jeddah. LNG terminals may be an easier way to reach isolated Red Sea coastal markets. If not connected to the national gas grid, they would make it easier for the Saudis to argue that, for now, the import of LNG represents no big change in policy.
Gas imports also bring the challenge of higher prices. In 2015, Saudi Arabia raised its gas price from US$0.75 per million British thermal units to $1.25, but this is still far below world LNG prices, currently around $8.50 in the northern hemisphere winter season. To import LNG, it would either have to subsidise it directly or pool imported LNG with indigenous supplies to bring down the overall price.
This is another complication for the planned initial public offering of Aramco. Our analysis suggests that its gas business could be worth $100 billion or more, but only if prices are raised to approximate international levels. This would help approach the IPO’s valuation targets, but demands sharp price rises to the industrial and power sectors – and ultimately to end-consumers of electricity and water.
Imported LNG would set a new price benchmark in the kingdom, and make the viability of other energy sources plainer. In October, Masdar and partner EDF’s winning bid for the country’s first large-scale solar plant represented a world-record low price. Bids for the first big wind farm are up next, two major hybrid gas-solar plants are also being built, and higher electricity prices would spur improved efficiency.
LNG purchases, if they happen, will be part of connecting the Saudi economy to the world, and testing Aramco’s mettle. Exploring far-off shores will import not just gas, but also invigorating new challenges.
Robin M. Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis