Saudi faces gas cost dilemma

As country looks to develop reserves, IEA says price gap will be hard to close.

Close to 60 per cent of Saudi Arabia's gas supply is extracted with oil.

The government of Saudi Arabia will lose millions of dollars a day tapping into much-needed new gasfields because of rigidly low domestic prices, according to the International Energy Agency (IEA). Rapidly increasing electricity consumption and industrial development has led Saudi Aramco, the state oil company, to scramble to develop new natural gas reserves - with many significant successes.

But the cost of developing those fields overshadows the revenue the company will receive from selling the gas to power producers and petrochemical outfits at fixed prices, according to new estimates by the IEA, a Paris-based organisation representing a group of energy importing countries. The cost of extracting a million British thermal units (BTUs) of gas from the new offshore Karan gasfield will be about US$3.50 (Dh12.85), the IEA said, while the domestic sales price for that same gas is fixed by the Saudi government at US 75 cents. The cost of producing gas from the more difficult Arabiyah field will be even higher, up to $5.50 per million BTUs, the IEA estimated.

The two fields will together produce 2.8 billion cubic feet per day of gas (cfd), according to Saudi Aramco's forecasts, leading to average daily losses of more than $8 million if consumer prices are not increased and the cost of the field developments is not reduced. In Saudi Arabia and across the region, the IEA said, "there is greater realisation that additional gas deposits are going to come in at costs much higher than in the past, and if domestic prices ? remain artificially low, a way must be found for the government or the national oil company to bridge the gap".

In a recent exploration round for gas in the country's south-eastern Empty Quarter by foreign companies, "it proved impossible to develop any reserves at a cost anywhere near the Saudi domestic selling price", the IEA noted. The Saudi government has been reluctant to increase gas prices for fear of hurting the international competitiveness of the country's petrochemical industry and the bottom lines of power producers, who sell electricity at fixed prices.

Government officials approved the first power price rise in years last month for industrial clients. The company discovered 13.2 trillion cu ft of new gas reserves last year, putting it well ahead of its annual target of between 3 trillion and 7 trillion cu ft, the company announced this month in its annual report. At the same time, gas output increased 3.6 per cent to 8.6 billion cfd, surprising analysts who predicted it would fall in line with the country's reduced oil production.

As much as 60 per cent of Saudi Arabia's gas supply is extracted with oil and Saudi Aramco has pushed hard to find and develop gas reserves divorced from oilfields. Last year marked the first time that the company's "non-associated" reserves exceeded the amount of reserves tied up in oil reservoirs. But now the company has to bring those much-lauded discoveries into production as fast as possible. Saudi Aramco sees gas output increasing to 13 billion cu ft by 2020, an annual rate of increase of just over 4.2 per cent.

But that may not be enough, with domestic demand expected to increase by 5 per cent every year this decade, the company said last year in its annual report. It offered no update on the consumption rate in this year's review. [e-mail]