Over the last year, Saudi Arabia has made significant steps toward liberalizing the economy and gradually moving away from the state monopoly on oil and gas production. In the last week or so, the mining sector has been opened up to foreign investment with concessions on tax and the import of mining machinery. The decisive “let’s do it” attitude that characterized the early years of oil exploration and development in Saudi Arabia seems to have been reborn. It has been a difficult decade; It has, however, finally produced signatures on contracts in the last year. The Gas Initiative, and recently, mineral development, seem to be up and running at last.
The decision on the Gas Initiative came from Supreme Council for Petroleum and Minerals earlier this year, in the 7th Five-Year Plan (2000-2005), and is one result of the easing of foreign investment policy introduced in 2000.
May 18th saw the announcement by Foreign Minister Prince Saud Al-Faisal that ExxonMobil had the leading role in the main $15 billion South Ghawar gas deal to develop a field the size of Ireland. Royal Dutch/Shell will take the lead in the $5 billion Shaybah gas development. Exxon had already landed the lead position in the third gas package on offer by Riyadh, the $5 billion development of the Red Sea coast.
The Kingdom announced on May 18 that eight major oil companies would get stakes in the three gas projects, worth a combined $25 billion in initial investment. ExxonMobil, as leader of the South Ghawar development, is to get a 35-percent stake, while Shell and BP are to get 25 percent each and Phillips 15 percent. In Shaybah, Shell will be granted a 40-percent share, with Conoco and TotalFinaElf getting 30 percent each.
In June 2003, the Gas Initiative was shelved, many had thought permanently. Developments since have proved the opposite. 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 sq. km area in Rub Al-Khali (Empty Quarter) in the southeast of the Kingdom. Under the joint venture agreement, Shell assumed the role of operator on the development and took a 40-percent stake, while the remaining 60 percent was evenly split between Total and Saudi Aramco.
Saudi Arabia needs gas to generate electricity for domestic and industrial purposes and run desalination plants. It also needs gas as feedstock to meet the requirements of the rapidly expanding petrochemical industry. The combination of the need for increasing amounts of relatively “green” energy provided by gas, the demographics of industrial growth the Kingdom aspires to and the drive to cater for the rapidly increasing population provided the final impetus. After some further consideration of the pros and cons, the decision was made to go ahead with the initiative.
According to Syed Rashid Husain, “the availability of enough feedstock at the right price is vital to maintain 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 of exporting gas. According to Minister of Petroleum and Mineral Resources 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 eight 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 had to react quickly to meet the requirements of this rapidly changing environment and issued “Gas Supplies and Pricing Regulations” and “Rules of Implementation” that 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. The ministry is held accountable for overseeing the application of the regulations and implementation of rules.
“The regulations,” said Husain, “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 supported by three legal 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 the ministry, consultation process, items for reporting and information required in a license application.
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 sq. km, whereas, the Area “B” offered to Sinopec totaled 38,800 sq. km. Contract Area “C,” totaling an area of 52,000 sq. km in Rub Al-Khali basin was awarded to consortium partners ENI of Italy and Repsol YPF of Spain.
Four companies have succeeded out of the 27 or so from around the world who made bids in their bid to exploit the Kingdom’s gas reserves, estimated at four percent of the world reserve, making it the world’s fourth largest reserve.
ExxonMobil, Royal DutchShell, BP and Philips will participate in the biggest of three gas projects on offer, the $15 billion South Ghawar development in the Eastern Province, Core Venture One. Core Venture Two, on the Red Sea and in the northwest, Exxon share the honors with Enron and Occidental.
Royal DutchShell, TotalFinaElf and Conoco teamed up and were awarded the license for the remote Shaybah gas field in the southeast of the Rub Al-Khali. Russian oil and gas giant Lukoil in January signed a contract with Saudi Arabia for the exploration and production of gas in a 30,000 sq. km area in the Empty Quarter. The exploration company, owned 80 percent by Lukoil and 20 percent by Saudi Aramco, was the first joint oil venture ever between Saudi Arabia and Russia. However, since then, Lukoil and its flamboyant owner have been under threat from the Russian government who are demanding payment of taxes running into several billions of dollars. If Lukoil pays they are in severe danger of bankruptcy. What effect this will have on the joint venture is uncertain. The focus for exploration work is on areas where no exploration work has been undertaken.
The Kingdom currently produces seven billion cubic feet of gas per day through its five gas plants at Hawiyah, Haradh, Shedgum, Berri and Uthmaniyah. By 2025, the expected demand would surge to 14 billion cubic feet. Thus it was fortuitous that in March, the Council of Ministers announced, a day after the Kingdom announced the discovery of a new gas field in the Shaybah region in the Eastern Province, agreements Saudi Arabia signed with Russian, Chinese, Italian and Spanish oil giants for upstream gas exploration and production in the northern Rub Al-Khali or Empty Quarter. The agreements were concluded with Lukoil Saudi Arabia, Sino-Saudi Gas and Enirespa Gas.
These joint ventures also saw Saudi Aramco holding a 20-percent stake. They are expected to fetch total investment worth SR75 billion in five years. In mid-May, Saudi Aramco said it 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.
Ameen Muhammad Al-Shibani, adviser for planning at Saudi Aramco, estimated the total investment in the three Rub Al-Khali projects at about 15 percent of the Kingdom’s gross national product. They will create 150,000 indirect jobs and 35,000 direct jobs.
Petroleum and Mineral Resources Minister Ali Al-Naimi said at the time that the new field would be able to supply 20 million cubic meters of gas and 650 barrels of condensates daily. “It is the first time that non-associated gas has been found in the area.”
Saudi Aramco Vice President Abdullah Al-Saif estimated that each oil company would invest between 20-30 percent into each of the new projects. “However, the actual capital investment is yet to be determined.”
“The Kingdom’s objectives for these investments are to increase gas reserves; to increase production and meet development requirements and to diversify income sources,” Al-Naimi said.
He hoped that the new investments in the gas sector will enhance production in the country and support the Master Gas System. The demand for gas, he said, is expected to rise to 12 billion cubic feet per day by 2025 with the new projects more than able to meet the domestic requirements. Surplus production will be exported.
The minister said Saudi Arabia relied heavily on gas for its energy consumption needs and ranked highly among countries that depended on this resource for energy. “In Saudi Arabia, of the total energy consumption in 1990, 35 percent was used in form of gas. This rose to 40 percent in 2002 and is expected to reach 51 percent in 2008.
He said that the proven gas reserves in the country were around 235 trillion cubic feet. It currently produces 6.9 billion cubic feet of gas per day in the Master Gas System.
The country also produces 345 million barrels of natural gas liquids per year and is the world’s largest exporter. The knock-on effects will resonate throughout the economy. The immediate effects will boost the construction industry and provide a valuable contribution to the job market. As many of the new jobs will be highly specialized, training young Saudis to take up the positions will take time, but that in itself will feed a whole specialist training industry.
In May 2004, Ali Al-Naimi said once the new gas projects go on stream, the increased production will open a new source of revenue for the Saudi economy and provide excellent business opportunities to the domestic private sector.
The huge increase of energy derived from gas will have a multiplier effect on the petrochemical industry and other high energy users, steel and desalination for example. As well as energy and feedstock to the industry, the availability of low cost energy is a step toward the position of Saudi Arabia as a provider of energy, attracting foreign investors to take the opportunity of low cost energy and set up an industrial infrastructure within the Kingdom that in the long term will reduce Saudi Arabia’s dependence on oil for 80 percent or more of its GDP.
The liberalization of the gas fields sends a signal to foreign investors and industrial companies that Saudi Arabia is easing its previously strict regulations. The move may attract industrial giants to locate in the Kingdom gradually increasing manufacturing base and the peripheral support industries. The country’s location between Asia and Europe enable it to import and export to both easily and with the potential of a developing African market, the Kingdom is well placed to supply future demands.
The private sector is the real driver in the development of industry and relies on government to create conditions conducive to growth. It will need to take up the opportunities for investment that will stem from the new availability of cheap energy produced by the gas projects. This is where the Saudi Arabian General Investment Authority (SAGIA) already promoting a program of industrial licensing and the chambers of commerce and industry would do well to act in concert and avail themselves of the new opportunities.
