Since a large part of its natural gas is associated with oil, reduction in the Gulf Kingdom’s crude output in line with an Opec agreement to trim supplies to prop up sagging prices will depress smother gas extraction at a time when the country’s energy demand is growing fast, Jadwa said in a study.
The problem has already forced Saudi Arabia to sign contracts for the import of gas oil and other alternative fuels to keep its gas-fed facilities running although they are costlier than natural gas, the company said.
“Cuts in Saudi Arabia’s oil production designed to stimulate oil prices have reached a level at which gas supply (the bulk of which is produced as a by-product of oil production) is close to falling below demand… this situation is manageable in the near term, but highlights the long-term supply issue the Kingdom faces,” said Jadwa, one of the largest Saudi private investment firms.
It said that Saudi Arabia had committed to trimming its crude output to around eight million bpd by January compared with more than nine million bpd in September. The Kingdom, the world’s top crude exporter, is also planning to reduce production by an additional 300,000 bpd this month.
The reduction is in line with Opec agreements to reduce output by a cumulative 4.2 million bpd between September and January and some ministers are already talking about further cuts at their forthcoming meeting in Vienna.
Around 60 per cent of Saudi Arabia’s gas output is associated with oil, mostly at offshore fields. This means that a substantial reduction in oil output will depress the amount of gas available, according to experts.
“Gas is a vital feedstock for the petrochemical industry and power and water projects. It is estimated that if oil output falls below eight million barrels per day the Kingdom may not produce enough gas to meet demand,” Jadwa said.
“A temporary dip in production from the January level would not, however, be a problem, as power facilities can be run using alternative feedstock, such as fuel oil.
“Liquids can also be used as feedstock for petrochemicals. However, in both cases they are more costly than gas,” he said.
The report said heavy reliance on gas would reduce the scope for sustained oil production of much below eight million bpd.
Since some other key Opec producers are also heavily reliant on associated gas, the chances of further large oil production cuts are limited, the report said.
It said that in preparation for increased use of liquids and to take advantage of low international prices the state-owned Saudi Aramco has taken the “unusual” step of securing imports of gas oil on a long-term contract.
It referred to a recent agreement by Aramco to buy three million barrels of gas oil from Japanese trader Itochu and a further 7.4 million barrels of gas oil from Reliance Industries of India over the course of 2009.
“Although the Kingdom will not be greatly affected by the temporary reduction in the availability of gas, it highlights a long-term supply issue. Gas demand is growing rapidly and supply constraints have prevented the award of any new ethane feedstock allocation to a petrochemicals venture since 2006,” it said.
According to the Riyadh-based Jadwa, many of the heavy industrial projects and economic clusters planned in the Kingdom are also premised on the availability of cheap gas and while more expensive feedstock can be used this undermines the competitiveness of the end products.
But it said that some new non-associated gas fields will soon be entering production, including the expansion of the offshore Karan field with a production capacity of 1.5 billion cubic feet per day, to come on stream in 2012.
“The new oil fields that are coming on stream over the next few years will provide new sources of associated gas. However, the four consortia that continue to search for non-associated gas in the Empty Quarter, where there are believed to be the large reserves that the Kingdom needs, have yet a make a commercially-viable discovery,” it said.
Nearly a decade after they were awarded massive concession areas in the Empty Quarter (Rub Al Khali desert), Shell and several other companies have failed to find major quantities of gas, prompting France’s Total oil giant to withdraw from the largest consortium last year.
The consortium – The South Rub Al Khali Company (SRAK) – is now equally owned by Saudi Aramco and Shell Saudi Ventures.
SRAK’s concession covers 210,000 square kilometres, almost the size of Britain.
Total had owned 30 per cent of the venture, while the Dutch Shell Group controlled 40 per cent and the rest was held by state-owned Saudi Aramco.
Besides SRAK, other joint ventures are hunting for hydrocarbons in the Empty Quarter after winning separate bids within the so-called “Gas Initiative” that was launched by the Custodian of the Two Holy Shrines King Abdullah bin Abdulaziz of Saudi Arabia nearly 10 years ago.
Saudi Arabia hopes new gas discoveries would boost its existing reserves to meet its fast growing gas consumption and build export projects.
The Kingdom, which controls nearly a quarter of the world’s recoverable oil deposits, has the fourth largest proven gas reserves after Russia, Iran and Qatar. They were estimated at around seven trillion cubic metres at the end of 2007.
Independent estimates put its gas production at around 80 billion cubic metres in 2007, accounting for nearly a fifth of the Middle East’s gas output and almost the same percentage of the region’s gas consumption.
For some reasons, Saudi Arabia which controls nearly a quarter of the world’s proven oil wealth, has been reluctant to join the UAE, Oman and other Gulf countries in getting gas from Qatar, which controls the world third largest gas resources after Russia and Iran and has the largest reservoir of non-associated gas in its massive offshore North Field.