In this era of economic liberalization, with open door policies in vogue worldwide, each and every region and each and every economy needs to define and identify the sectors where it can have a competitive edge over others. It now is accepted as a basic economic law that economies can only survive and flourish on their core strengths. Gone are the days when inefficient economic sectors could continue to churn out any and every product with the aim of generating employment — one of the prime goals of the economy managers — on the questionable principle of self-sufficiency.
In the new WTO era, it is now the survival of the fittest in each industry. If the West can exploit the technological edge that it enjoys over this part of the world to ensure its well-being and the prosperity of its citizens, Saudi Arabia and other economies also need to carve out their niches so as to continue to provide their citizens the benefits of a modern, developed society and an affluent lifestyle.
Gas at affordable rates has been an engine of industrial and economic growth in the Kingdom for many years and will continue to be so, not least because of the government’s Gas Initiative — the $25 billion plan to develop downstream industries based on Saudi natural gas reserves estimated at some 6.75 trillion cubic meters or 5.2 percent of known world reserves.
However, in order to achieve this, gas has to be available in abundance — not only to meet the exponentially growing energy requirements of the power and the desalination sector, as well as the proposed aluminum industry — but also to meet the growing feedstock requirements of the burgeoning petrochemical sector in the Kingdom. It is generally conceded that any feedstock shortage could hamstring the industrial growth of the Kingdom and has to be avoided at all costs.
Saudi Aramco, the national energy company, has thus a major task at hand — to keep fueling the robust growth of this important sector in both the public and the private sector. Industrialization and diversification of Saudi economy is thus dependent, to a very large extent, on the availability of gas, both as fuel and as feedstock.
The foundation for a vibrant petrochemical industry was laid in the Kingdom some three decades back, when the Master Gas System (MGS) was established at a cost of $11 billion. The basic objective of the MGS was to utilize the associated gas, which until then was being flared off, to add value to it and produce petrochemicals.
Saudi Arabia can already boast of the fourth largest proven gas reserves in the world, after Russia, Iran and Qatar. However, the growing demands of the industry and the requirements of the planned new petrochemical projects have apparently put constraints on the available gas processing facilities in the Kingdom. The concern about the supply side of the feedstock was very much depicted when SABIC CEO and Vice Chairman Mohamed Al-Mady in a recent statement highlighted, “Ethane (supply) is stretched and we are looking at options, including participation in refinery projects.”
Against this backdrop, “Saudi Aramco is targeting to identify five trillion standard cubic feet of non-associated gas reserves each year,” says Khalid Al-Falih, senior vice president, gas exploration, Saudi Aramco. The company currently produces up to 600 million standard cubic feet (scf) per day of ethane. In view of growing demands, Saudi Aramco has also undertaken a number of major development projects in recent years. According to reports, it plans to invest at least another $3 billion in new ethane and natural gas liquids (NGL) capacity. In order to boost gas supplies, Saudi Aramco is thus working to boost supplies of both the associated and non-associated gas in the Kingdom.
The MGS has, in the meantime, been continuously undergoing expansion and upgrading over the past five years. In October 2002, the Hawiyah gas plant came on stream, at a cost of SR15 billion. This plant was able to process 1.4 billion cubic feet of non-associated gas per day. The deep Khuff and Jauf reservoirs were to supply gas to the plant for processing.
The next step was the Haradh project, with a capacity of 1.5 billion standard cubic feet per day of sales gas to the MGS. The Gas Oil Separation Plant (GOSP) associated with the plant also included a 130 million standard cubic feet associated gas-gathering facility. The Hawiyah gas plant allowed Saudi Aramco to supply gas to Riyadh, and Haradh made available gas for Yanbu. According to Aramco sources, by 2008, after current planned expansions are complete, the system will also be capable of delivering ethane to Rabigh — the new hot spot on the Saudi petrochemical map.
Among the major projects currently in hand are a new one billion scf/day plant in Khursaniyah and an NGL recovery plant in Haradh able to process 3.8 billion scf/day, scheduled for start up by December 2007. The scope of work at Khursaniyah covers construction of two trains of gas conditioning and ethane and NGL recovery. The facilities will produce 550 million scf/day of sales gas, 240,000 b/d of ethane and NGL and 1,800 metric tons of sulfur. The contract to build the two trains was awarded by Aramco to a Bechtel-Technip consortium last March. Italy’s Snamprogetti was selected for execution of the Khursaniyah producing facilities. And also in the pipeline is the project to enhance the capacity of the existing plant in Hawiyah to four billion scf/day by July 2008.
With the target to identify five trillion standard cubic feet of non-associated gas reserves each year in order to meet the domestic requirements, Saudi Aramco now plans to drill 100 exploratory wells and nearly the same number of delineation wells by 2010. Also planned are an average of seven seismic crews at work every year across the Kingdom.
In order to boost the availability of the non-associated gas, concession agreements were signed with a number of global majors, allowing them to participate in upstream gas exploration. These concessions are the search-and-find arm of the Gas Initiative. Royal Dutch/Shell and Total today are jointly operating in blocks 5-9 and 82-85 in Shaybah and Kidan areas of the Empty Quarter — an area of 81,000 square miles. The Russian company Lukoil was also licensed in partnership with Saudi Aramco to explore Block A near Ghawar, the Chinese Sinopec was awarded gas exploration and production license in Block B while Eni of Italy and Repsol of Spain were awarded the exploration and production license to operate in Block C of the Empty Quarter.
Saudi Aramco in conjunction with these operators is undertaking additional gas exploration efforts. “These joint ventures on their own have nine seismic crews currently active in the Empty Quarter. They have already identified a number of new prospects and are planning to drill at least 27 wildcat wells by 2009,” Khalid Al-Falih told a London conference last September.
Linked to this, a new wave of massive petrochemical projects has been planned throughout the Kingdom. So far, 14 new world-scale complexes have been announced. These should come on stream by 2009; an additional four to six plants are scheduled to come on stream by 2010. According to industry reports, feedstock allocation has already been made to eight cracker projects. Meanwhile, negotiations for the next round of allocation for 2010-11 are planned for next year.
While these developments were taking place, radically changing the size and role of the gas sector, Saudi Arabia also swiftly crossed another major hurdle. Prior to the Saudi accession to the WTO earlier this month, one of the prime issues under consideration during the negotiations stage was the petrochemical feedstock price prevailing in the Kingdom. Concerns were openly expressed by other member states about feedstock prices in the Kingdom; the issue remained a sticking point until a very late stage. It was resolved only when the Saudi negotiating team put forward the argument that the existing feedstock pricing was not specific to national companies and that any one putting up a plant in the Kingdom would be subject to same treatment as far as feedstock prices were concerned. The Saudi negotiating team had also been arguing for some time that the prevailing feedstock price in the Kingdom is based on the cost that Saudi Aramco incurs and is not subsidized either by the company or the state.
The establishment of the MGS in the 1970s laid the foundations for the robust growth of the petrochemical industry in the Kingdom. However, the rapid industrial growth in the sector and the burgeoning requirements of the utilities sector have put a strain on the free availability of gas.
Saudi Aramco is alive to these challenges. It has been working to boost gas availability and expand the processing capacity of gas plants. Exploration is being undertaken in the huge Empty Quarter to develop new fields. The Gas Initiative is very much in stream. Gas will continue to fuel the industrial march of the Kingdom for many, many more decades to come.