Saudi Arabia is committed on both counts!
Steps are in making. Reports are creeping in: Saudi Arabia is building up crude oil inventories now, as the domestic demand is still below the peak and the Iran embargo is not fully in place. This appears in preparation for the worst and offset the risks of "limited" effective spare production capacity, when demand is at peak, Goldman Sachs said in a report last week.
In a note to clients, Goldman Sachs cited a crude oil inventory build of 35.4 million barrels in the period December-February, based on numbers from the Joint Organizations Data Initiative. The reason this increased production was not pooled into exports, Goldman Sachs analysts argued, is grounded in an anticipation of "a substantial increase" in demand that cannot be covered by "simply raising production levels" then.
At a time when each barrel of oil produced and exported by the Kingdom is being watched by crude pundits, as EU sanctions against Iran loom large, the impact of the anticipated rise in Saudi domestic consumption in the coming high demand summer months has taken on an added dimension.
The logic behind the build-up in stocks, which amount to 390,000 barrels per day (bpd) in that period, is primarily in preparation for the strains of peak domestic demand that the summer heat brings to the Kingdom, the report argued. In the past, oil-fired power generation often took its toll on Saudi Arabia's export volumes. With the passage of time, the situation could become more pronounced, one can't deny.
There is now a growing concern in the energy fraternity both inside and outside the Kingdom that if the domestic consumption continues to go up and up - rather exponentially - it may impact the export capacity of the Kingdom. Saudi Aramco too has been warning that Saudi Arabia's crude export capacity could fall by about 3 million bpd to under 7 million bpd by 2028 unless the domestic energy demand growth is checked. And this carries tremendous impact on the global demand-supply balance too.
The London-based Chatham House think tank warned last December that Saudi Arabia's place in the world market was threatened by "unrestrained domestic fuel consumption," which it emphasized, was unsustainable. "The world's largest exporter of oil is consuming so much energy at home that its ability to play a stabilizing role in world oil markets is at stake," Chatham House warned in the report entitled "Burning Oil to Keep Cool, the Hidden Energy Crisis in Saudi Arabia.
"Saudi Arabia's demand for its own oil and gas is growing at around 7 percent per year. At this rate of growth, national consumption will have doubled in a decade," its authors said. Goldman Sachs analysts too pointed out in the above mentioned report that "the implied direct crude burn has grown from 140 thousand bpd in 2003 to 520 thousand bpd in 2011 as Saudi natural gas production growth failed to keep pace with rising electricity demand."
Indeed the desert summer is brute. It requires extraordinary steps to cool down temperatures at our homes, malls and offices. But inefficiency and wastage in the entire system is also a reality. We all burn this scarce and limited asset inefficiently. And this cannot be allowed to continue at this pace, most agree. Steps are hence in the pipeline.
"Warnings last year about what would happen to Saudi oil exports if current levels of domestic usage were left unchecked were taken as fact. But we are not leaving domestic energy consumption unchecked," Minister of Petroleum and Mineral Resources Ali Al-Naimi told a conference earlier this year. Saudi Arabia is definitely acting to keep its place as the global gas station intact.
In its report on April 14, the International Energy Agency (IEA) forecast the total Saudi consumption to see a "notable deceleration" this year, with direct crude burn forecast to decline by roughly 100,000 bpd from an average of 660,000 in the April-September peak period in 2011.
Saudi Arabia's domestic consumption of crude oil rose 4 percent in 2011 from a year earlier, JODI had reported. The world's largest crude exporter used 661.2 million barrels of oil last year, compared with 636.4 million barrels in 2010, JODI website said on Feb. 19. That's about a fifth of its total output of 3.39 billion barrels last year.
One alternative is to burn gas for utilities and free crude for exports. Yet gas has been in short supply and the volume of associated gas available for burning is directly dependent on crude export. The emphasis, in recent years has thus been on tapping non-associated gas. The Ministry of Petroleum and Saudi Aramco have announced a $9 billion strategy to add 50 trillion cubic feet (tcf) of non-associated reserves by 2016 through new discoveries. Only last week it had increased production capacity at Karan, the offshore natural-gas project ahead of schedule apparently to help out the summer squeeze. Aramco also plans to start output at the Hasbah and Arabia fields in 2014.
And the emphasis on renewable is also growing. Recently a pilot project to use solar power instead of fuel for water desalination was completed. Plans are also afoot to expand the use of solar-powered generators for utilities too. Although no official targets for generation of renewable seem around, yet recent Saudi Aramco estimates put this at 7-10 percent of electricity from renewable sources by 2020.
Yet pricing remains an issue in exploring the gas assets. Exploitation of gas from the new non-associated gas projects will be more expensive because of the special processes and technology needed to extract gas in more difficult - offshore, and “tight” (embedded in rock) - geological conditions and to treat sour gas (i.e. with high hydrogen sulphide content). Hence the incentive to exploit the gas reserves currently remains limited. Even Saudi Aramco CEO Khaled Al-Falih has been pointing to this anomaly for some time now.
Providing energy at affordable levels is a prime concern all around, but that should not breed inefficiency. For a sustainable tomorrow that needs to be taken care of.
A major issue seems at hand - none can deny!
