IHS Global Insight Perspective | |
Significance | There is only limited information on the plan to develop the offshore high-sulphur Arabiyah and Hasbah fields, but it is likely that production of around 1.8 bcf/d is envisaged from the two fields, with the expansion of treatment facilities in Khursaniyah by 2014 at the latest. |
Implications | Saudi Arabia is attempting to speed up its tackling of the kingdom's gas crunch, with demand growth still proving resistant to the global economic downturn, while oil production cutbacks curtail its ability to produce the associated gas that makes up around 60% of its total gas output. The higher amount of non-associated production will, however, mean that overall production costs will be significantly higher, pressing the Kingdom to alter its domestic pricing regime over the long term. |
Outlook | With the last project packages at the Karan gas field development awarded to J. Ray McDermott after price cuts, Saudi Aramco can now move forward with new upstream projects, to address the looming future gas— and electricity—shortages otherwise expected. |
Karan Development Ready to Begin
State-owned oil and gas giant Saudi Aramco has officially awarded U.S. engineering firm J. Ray McDermott the offshore package at its Karan gas development, after the project was held back for around six months last year in order to negotiate down the overall costs. McDermott will manufacture and install four platforms as well as the 110-kilometre subsea pipeline carrying the non-associated field's gas onshore to the expanded Khursaniyah gas treatment plant (recently awarded to Hyundai Engineering & Construction, with Petrofac constructing the utilities) under a turnkey contract, Reuters reports (see Saudi Arabia: 2 March 2009: Hyundai, Petrofac Awarded Karan Field Gas-Processing Contract Packages in Saudi Arabia and Saudi Arabia: 3 February 2009: Retender Principle Proven at Saudi Karan Gas Field; Floodgates Open for More?). There is no news on the value of McDermott's contract, although it has been widely understood that Saudi Aramco was able, during the second half of 2008 and early 2009, to negotiate down with contractors prices by between 15% and 20%, taking advantage of the falling global raw materials prices, as well as the beginnings of a global easing in the shortage of machinery and skilled workforce.
Previous reports have indicated that McDermott has shaved US$100 million off its contract, with the value now at US$1.2 billion, although given the scope of the savings elsewhere in the project, costs could have been lowered even further (see Saudi Arabia: 20 February 2009: J. Ray McDermott Reportedly Awarded US$1.2-bil. Karan Contract by Saudi Aramco and Saudi Arabia: 21 January 2009: Further Delays to Karan Gas Project as Saudi Aramco Faces Down Contractors over Prices). Indeed, while McDermott has been the front-runner for a long time, and initially looked set to win it (that is, before the cost-saving exercise began), the fact that it was the last big contract package to be announced might indicate that last-minute cost negotiations held the official award up.
Saudi Aramco is now hoping to bring Karan onstream in late 2011, only a few months after its original launch date, through fast-tracking its development, although IHS Global Insight believes it is unlikely that the lion's share of its production will come onstream before mid-to-late 2012.
Next Steps
With the Karan tendering and price negotiations out of the way, Saudi Aramco seems intent on forging ahead with the development of two other offshore non-associated gas fields, the Arabiyah and Hasbah, industry newsletter Middle East Economic Survey (MEES) reports. Total production from the two fields is believed to rival the expanded Karan field's production in size, flowing at 1.8 bcf/d of raw gas (before treatment). Like Karan, the field's gas has a high sulphur count, necessitating early processing as the gas comes onshore near the Manifa offshore field's subsea-to-onshore pipeline connections point, before it is treated in a further expansion of the Khursaniyah gas treatment facility. A 900-t/d sulphur-processing train will have to be part of the expansion, MEES understands, adding that there is a certain potential that the two fields might be even be developed within four years, putting their production start at 2013.
Rocketing Production Costs
The increased development of non-associated offshore gas production capacity will, however, greatly increase the amount of "expensive" gas in Saudi Arabia's gas mix, with MEES assessing that Karan gas will cost about US$3.5/mmBtu to produce, while Arabiyah and Hasbah gas might be as dear as US$5.5/mmBtu. These prices are in stark contrast to Saudi Arabia's dirt-cheap costs of producing non-associated gas, and indicates that the kingdom's standard domestic sales price of US$0.75/mmBtu will become increasingly unsustainable going forwards. The set sales price has already made the IOC-led gas exploration ventures in the Rub' al-Khali (Empty Quarter) desert largely unviable and dependent on large finds of associated condensates in order for the companies to be able to turn any profit.
Nevertheless, Saudi domestic gas demand continues to spiral upwards, driven by a continued fast population increase and a government-funded industrialisation investment programme to create jobs for the booming young Saudi population, which is unlikely to be cut, given the political implications, unless the oil slump proves very prolonged. With exploration in the Rub' al-Khali still largely unsuccessful, Saudi Arabia has few places to turn to other than the expensive offshore non-associated fields it has hitherto found too dear to develop. The situation is ironically today exacerbated by its role as OPEC's swing producer—from which the kingdom derives so much of its economical and political clout internationally—as its reduced oil output also results in lower associated gas production and thereby increases its gas shortage at a very inopportune moment.
Outlook and Implications
Saudi Aramco is now closing the contracts on its pioneering Karan gas development scheme and looking ahead, with further development of expensive non-associated offshore gas fields virtually its only option. With around 60% of its gas production coming from ultra-cheap but associated gas fields, the current cutbacks in Saudi Arabia's crude output—in order to stabilise world crude prices—are exacerbating the kingdom's gas crunch, while exploration remains unsuccessful and the industrialisation investments have to be maintained to guarantee the country's political stability.
The sharply rising gas production costs will force a change in the kingdom's set domestic gas sales price, although (again for political reasons) this might be deferred to some time in the latter half of the next decade given that there are no major discoveries in the Rub' al-Khali, forcing the government to offer a better price to make it viable. In the meantime, Saudi Aramco is likely to continue scrambling old offshore gas discoveries and exploration leads, in order to bring significant timely new capacity onstream, with the supply situation looking set to remain tight over the long term. The Karan field is widely understood to have the capacity for further large upstream expansions, but the technical and time-consuming challenge has for now forced Saudi Aramco to prioritise two speedier developments, indicating the urgency with which it will now have to move.