Saudi Arabia's power play will unleash crude oil supplies: Fuel for Thought

Saudi Arabia’s energy strategy could put to bed questions over its spare oil capacity in the coming years.

The kingdom’s plan is two-pronged: Expand and develop oil fields to offset production decline, and diversify away from crude for power generation. It is this latter move that is key to unlocking further oil exports.

The OPEC doyen plans to burn less crude as it pushes ahead with a swathe of important gas and high-sulfur fuel oil power plants to drive its economy and keep homes cool.

S&P Global Platts Analytics sees high-sulfur fuel oil displacing 200,000 b/d of crude burn by 2020, as Saudi Arabia ramps up use of the cheap and undesirable by-product of the refining process rather than its precious black gold.

The International Maritime Organization’s regulation that will cut the sulfur limit from 3.5% to 0.5% from the start of 2020 and see shipowners scramble to find cleaner alternative energy sources is likely to play into the kingdom’s hands. The UN agency’s ruling will see a probable global glut of fuel oil that could find a home powering much of the Persian Gulf.

In 2016, Saudi Arabia became a net consumer of fuel oil, especially during the summer months when more is needed to meet peak electricity demand, and that trend is likely to become entrenched with fuel oil set to be a key substitute for crude.

“As IMO regulations come into effect, Saudi Arabia will not only be able to consider the option of supplying more diesel due to its complex refineries, but also divert fuel oil towards the power sector,” APICORP stated in its September energy research.

“Over the next four years, Saudi Arabia is expected to add more than 25 GW of generation capacity, of which around 9 GW of oil-fired capacity will come on line in the next two years,” it added.

(opens in a new tab)

NATURAL GAS AND RENEWABLES

Gas is also playing a much bigger role in Saudi’s energy mix in synch with its Vision 2030, making up almost half of its 90 GW of total Saudi capacity and with an extra 9 GW coming online by 2020.

The recent commissioning of the 1.2 GW combined-cycle gas turbine Waad A-Shamal plant will mean gas and fuel oil will make up the lion’s share of Saudi’s power generation and allow the country to maximize its profits from lucrative crude exports.

Saudi Arabia has often waxed lyrical on renewables but has now started to back these lofty goals with solar projects. The Skaka 300 MW solar PV plant and a 600 MW Green Duba plant in the works aim to utilize the sun-blessed kingdom’s natural resource.

The benefits of nuclear have also been talked up, with plans to build the kingdom’s first two nuclear power reactors this year with a goal that 15% of Saudi power comes from the radioactive energy option by 2032.

CRUDE CAPACITY

But for Saudi Arabia to truly take advantage of this diversification, the OPEC stalwart needs its oil industry to thrive.

Saudi Aramco is bidding to bring on 300,000 b/d of Arab Light from its Khurais field, has awarded offshore drilling contracts to boost output at Berri and wants to boost the capacity of the Zuluf offshore field by 600,000 b/d.

Moreover, the national company is dusting off the mothballs from its Damman onshore oil field, and production at the Sheybah field has already been ratcheted up.

There is also the potential to add up to 500,000 b/d from the so-called neutral zone, an area of oilfields between Saudi Arabia and Kuwait that has been in limbo since 2014. The Gulf states are close to settling their issues but it could take time to get production back up to speed if production is brought online early next year.

Saudi Arabia produced 10.60 million b/d in September, according to a S&P Global Platts survey, which is one of the secondary sources OPEC uses to monitor compliance to the production cut deal. There are doubts whether the kingdom can produce its 12 million b/d capacity over the long term to plug any shortfalls in the market, with some analysts seeing limits being tested at closer to 11 million b/d for any sustained period of time.

With around 1.7 million b/d set to come off the market due to sanctions on Iran, according to Platts Analytics, risks that Venezuela output could fall further and with Libya production extremely fragile, the market is looking to Saudi Arabia to flex its muscles.

If Persian Gulf powerhouse wants to maintain its considerable strength, then freeing up crude from power generation will be as important as developing and expanding its oil fields.