Discovered back in the 1930s, oil really began to propel growth in the 1960s, transforming the country into one of the world’s leading economies. Today, despite significant progress in diversifying the economy, oil’s relevance is set still to dominate for the foreseeable future, accounting as it does for 90 per cent of the kingdom’s exports and nearly 75 per cent of government revenues, with current production levels believed to last another 70-80 years.
In the global context, Saudi Arabia was the world’s leading producer in 2008, delivering 13.2 per cent of the world total, ahead of Russia (12.4 per cent) and the US (7.4 per cent). With proven reserves estimated at 264 billion barrels, it has, according to BP’s Statistical Yearbook 2009, approximately 21 per cent of the world’s aggregate reserves, approximately double the second largest in the league table, Iran.
But the Gulf’s energy story is clearly no longer only about oil, and Saudi Arabia’s control of the fourth-largest gas reserves in the world, with 267 trillion cubic feet (trc) (though some way behind Russia with 1,529 trc, Iran with 1,046 trc and Qatar’s 899 trc) is supremely relevant.
Gas development
The kingdom has begun harnessing the natural gas it produces in association with crude oil, but “most of the gas is not ‘free gas’, and so output is determined by Opec oil production quotas”, says Kate Dourian, Middle East Editor, Platts. “This is why the Saudis have embarked this year on developing their first non-associated gas field, the offshore Karan field, which will produce 1.8 billion cubic feet per day.”
Saudi’s enormous hydrocarbon resources are managed, almost exclusively, by the state-owned company, Saudi Aramco. Headquarted in Dhahran, it is the world’s largest fully-integrated oil company, based on proven reserves. Its oil operations encompass not only the mainland kingdom but also territorial waters in the Arabian Gulf and the Red Sea, totalling more than 1.5 million square kilometres. Most production comes from fields in the coastal plains of the Eastern Province, in an area extending 300 kilometres north and south of Dhahran. Company data shows an extraction rate of 8.9 million barrels per day (bpd) in 2008.
Transported by one of the world’s largest tanker fleets, with 21 very large crude carriers (VLCCs), most Saudi oil exports leave from east-coast terminals at Ras Tanura and Ju’aymah, the remaining portion via the east-west pipeline across the desert to the western port of Yanbu. Export markets are spread across Asia and the Far East, North America and Western Europe.
While many companies have slowed exploration amid the current economic malaise, Aramco has stepped up its investment, aiming to expand capacity from 11.3 million bpd to 12 million bpd by the end of this year, aiming to reach 15 million bpd in 2011. New spare capacity — more than 4 million bpd out of the estimated world total 6-7 million bpd — only enhances that dominant status.
A key element in this expansion is the Khurais oilfield, covering 2,890 km2 southwest of Dhahran. It is the single largest integrated oil project not only in Saudi Aramco’s history but in that of the global oil industry.
As one of the five founder members of Opec, whose members account for nearly 45 per cent of the world’s oil production, Saudi Arabia has traditionally led the management of oil prices, as so-called ‘swing producer’.
Regarding the extreme volatility over the past two years — with the price surging on the back of an extended boom to an all-time high of $147 (Dh539) in July 2008 and then plummeting upon the global economic crisis briefly to below $40 in December 2008 — Saudi Arabia reduced its oil output to about 8.1 million bpd in January this year following Opec’s last quota adjustment, to reduce supply.
Yet, as Platts’ Kate Dourian says “it can, if it so desires, turn on the taps” if prices are deemed to go too far the other way.
Structural factors
Forecasting oil prices is the stuff of crystal balls, but medium- to long-term structural factors, such as recent reductions in exploration and production across the globe, and the expected return to high levels of demand by emerging markets, should mean that oil prices will be well supported once global recovery is established. Already prices have broken $70 this summer. Tending historically to dovish sentiment and a consensual stance within Opec, Saudi Arabia’s own preferred price has been declared as $75 per barrel.
Meanwhile, Aramco’s gas production forms the backbone of the kingdom’s industries and utilities inputs, as it is heavily used for electricity generation, water desalination, aluminium production, and as a petrochemical feedstock. It is a measure of Saudi Arabia’s own growth potential and industrial requirement that some new developments have actually struggled to secure the gas required.
Dourian says, “The growth in demand from industry and utilities for fuel and feedstock has resulted in the expansion of the natural gas industry in recent years, but volumes are still not enough to meet domestic demand, which is growing at a rate of 7 per cent, double the average growth in the previous decade. The country’s oil minister Ali Al Naimi said earlier this year that increased consumption of refined oil products and natural gas would have an impact on future oil exports and income if it is not addressed. He also called for a rationalisation programme, unheard of in the kingdom.”
Domestic gas demand is expected to reach 14.5 billion cubic feet per day (cfd) in the next 25 years, compared with around 5.5 billion cfd at present. Saudi Aramco has stated that to maintain supply at reasonable costs will require extensive exploration, and the use of known lower-quality reservoirs.
A number of projects — for example the Khursaniyah Gas Plant, with a processing capacity of 1 billion cfd, expected to be completed by this year-end — are under way to meet demand for this fastest-growing energy source. Consumption is expected to accelerate at a rate of 2.4 per cent over the next 20 years, as against 1.7 per cent over the past decade, demand also being driven by modern environmental concerns of pollution and efficiency as to traditional energy sources.
Still, while green may be the ‘new black’, clearly the ‘old black’ of oil will remain the dependable standby for a very long time yet.
Rachel Latham is a freelance writer.