DHAHRAN, 19 May 2004 — Gas has been the focus of development in the Kingdom this year. And 2004 is already turning out to be an exciting year for the industry in many ways. New beginnings have been made in the sector. Development of the non-associated gas riches of Saudi Arabia, the fourth largest in the world as far as proven gas reserves are concerned, is emerging as one of the major highlights of the development strategy currently being pursued by the Kingdom. The drive to tap and develop the gas resources of Saudi Arabia, to fuel the economic and industrial growth of the Kingdom, is on.
Saudi Aramco is planning to spend almost $19,000 million on a five-year expansion program, encompassing everything from new upstream oil and gas projects to the addition of refining and power capacity.
When in June 2003, the ‘gas initiative’ as it was referred to, was shelved; many had thought that the idea had hit a dead end. However, developments ever since have proved this idea awry. Within months of scrapping the ongoing discussions with oil majors including ExxonMobil, Saudi Arabia agreed to let the European giants Royal Dutch/Shell and Total of France develop the designated 210,000 square-kilometer area in Rub Al-Khali (Empty Quarters) in the southeast of the Kingdom. Under the joint venture agreement, Shell will assume the role of operator on the development and take a 40 percent stake, while the remaining 60 percent evenly split between Total and Aramco. Then in March this year, Saudi Arabia signed concession agreements with Russia’s Lukoil and China’s Sinopec. Lukoil was offered Contract Area ‘A’ totaling 29,900 square kilometers, whereas, the Area ‘B’ offered to Sinopec totaled 38,800 square kilometers. Contract Area ‘C,’ totaling an area of 52,000 square kilometers in Rub’ Al-Khali Basin was awarded to consortium partners ENI of Italy and Repsol YPF of Spain.
Saudi Arabia needs gas, often termed as the green fuel, to generate electricity and run desalination plants. Besides it also needs gas as feedstock to meet the requirements of the burgeoning petrochemical industry in the Kingdom. Adequate availability of economic feedstock is an essential for maintaining the advantage the petrochemical producers in the region currently enjoy over their competitors. With constraints already being felt in free supply of feedstock to the galloping demands of the petrochemical industry, the Kingdom definitely needs a lot more gas to quench the thirst of the industry. Unlike some of its neighbors, Saudi Arabia has therefore no intentions to export gas. According the Saudi Petroleum and Mineral Resources Minister Ali Al-Naimi, the domestic demand of natural gas was expected to double by 2025 to about 14 billion cubic feet a day. Further by using gas to fuel power plants, it would also free up more oil for export. With the current oil production of the Kingdom hovering around 8 million barrels a day, Saudi Arabia uses almost a sixth of its current oil production to run plants that otherwise could be fired by gas. With the window opened to a number of foreign players to get involved in the gas sector, the need for comprehensive, transparent regulations for the sector was also felt.
The Ministry of Petroleum and Mineral Resources was thus required to react quickly to meet the requirements of this rapidly changing environment. Keeping this in view, the government has issued “Gas Supplies and Pricing Regulations” and “Rules of Implementation” that will apply to all areas affecting the gas market, including “transmission, processing, fractionation, storage, distribution, aggregation and sales and marketing of relevant hydrocarbons in Saudi Arabia.” As per the new regulations, the ministry is held accountable for overseeing the application of the regulations and implementation of rules.
The regulations cover the upstream and downstream sectors and “ensure uniform and regulated conduct of gas and NGL (natural gas liquids) activities in the Kingdom,” and “ensure application of the highest standards in the development, safety, growth and operation of regulated activities”. Under the new legal framework, the gas sector distinguishes between three types of facilities that will be regulated by the ministry: Those that are part of Master Gas System (MGS) operated by Saudi Aramco; those that connect to the MGS; and independent systems.
The regulatory framework itself is based on three pillars. The first, “Gas Supplies and Pricing Regulations (GSPR)”, essentially lays out guiding principles and procedures required to resolve disputes. The second covers the ‘Rules of Implementation’, defining the process of how to put the GSPR into practice, clarifying the rights and the obligations of the parties involved in the sector and defining all reporting requirements. The third element is the “Implementation Guidelines”. These set out particular details about information and data that need to be submitted to ministry, consultation process, items for reporting and information required in a license application.
