Analysis A scramble for gas in Saudi Arabia's Empty Quarter has turned into an exercise in futility.
Empty Quarter holds its secrets
A scramble for gas in Saudi Arabia's Empty Quarter has turned into an exercise in futility. Four teams of foreign partners have failed to make any major discoveries after five years of drilling, leaving Saudi Aramco, the state-owned company, to find and develop other fields across the kingdom. After four consortiums of international partners have drilled 22 wells, only one team, from the Russian giant Lukoil, said it made a commercial-scale discovery but it remains unclear how significant the find is.
Experts say Saudi Arabia will need more than marginal discoveries as it faces the challenge of satisfying a gas market that will grow by 5 per cent every year, according to Saudi Aramco estimates. The country has the fourth-largest gas reserves in the world but almost all of it is tied up in oilfields. That means gas production depends on the country's output of crude. When OPEC reduces output quotas, as it has in the past nine months, the country's gas output falls dramatically.
The gas shortage has threatened to slow the country's development of a gas-intensive petrochemical industry and has already led power companies to shift from gas to oil products to fuel their stations. In addition, analysts note, Aramco requires ever larger volumes of gas to provide the heat and energy it needs to get crude oil out of the ground. Without a major find, the country's government will face pressure to curb the growth of gas demand by deferring industrial projects, says Muhammad-Ali Zainy, a gas expert at the Centre for Global Energy Studies in London.
"If they let domestic demand expand disproportionately, sometime down the road they are going to feel the brunt of it," Mr Zainy says. "I don't think Saudi Arabia, seeing that the reserves are under pressure, would continue to expand demand for gas." The country was never supposed to be faced with that choice. At the beginning of the decade, exploration for "non-associated gas" separate from oil in the Rub al Khali, or the Empty Quarter, was considered the solution.
Saudi Aramco offered tough terms to international oil companies but they accepted, pleased with their first chance in decades to become involved in the country's upstream sector since Saudi Aramco nationalised oil assets in the 1970s and 1980s. Aramco, which analysts say operates some of the most sophisticated technology in the business, was hardly in need of a helping hand. Instead, its strategy was to shift exploration costs to foreign partners who would hunt for gas deep below ground in one of the harshest climates in the world, says Colin Lothian, a senior analyst at the oil and gas consultancy Wood Mackenzie.
The government awarded exploration agreements to Russia's Lukoil, Sinopec of China and two consortiums of Royal Dutch Shell with Total, the French major, and Italy's Eni with Repsol of Spain. Saudi Aramco took a minority share in each joint venture and offered to buy the gas at an estimated US$0.75 (Dh2.75) per million British thermal units, a deep discount to market prices for gas. It was assumed the companies would make their profit from the sale of condensates, liquid hydrocarbons produced from natural gas that sell at international market rates. Finding condensate-heavy, or "wet" gas, was the focus from the beginning.
Patrick Allman-Ward, the chief executive of the Shell and Total consortium, told a gas trade publication in May 2005 that in order for a discovery in the Rub al Khali to be commercially viable, it would need to yield between 500 million and 1 billion cubic feet per day (cfd) of gas, and between 80,000 and 100,000 barrels per day (bpd) of condensate. Mr Lothian notes that the companies had been given the task of finding a particular type of gas in exploration blocks roughly equal to the size of the UK.
"It's not just a matter of finding a needle in a haystack; it's trying to find a specific colour of needle," he says. "It's about finding wet gas; that's where they'll make the money." Drilling began in earnest after a couple of years of surveying the terrain but well after well turned up dry, with relatively small finds of gas and no real amount of condensates. Prices for each drilling attempt soared. Analysts say Shell's fourth try was the most expensive onshore well in history.
Discouraged by the results, Total abandoned the exploration effort to Shell early last year. All the partner firms have publicly said very little about the exploration effort. A Saudi Aramco official deferred questions on the Rub al Khali to the international partners. Spokesmen for the companies either did not respond to requests for comment or referred to previous official statements. Executives in the companies have grumbled privately that the difficult terms of the deals put commercial viability of some finds out of reach.
A top Sinopec official told Reuters last month, as the company was wrapping up its exploration campaign, that prices for the gas had proved too low, especially after the sharp increase in drilling costs. "We are drilling the last well now ? one of the previous ones barely struck any gas," he was quoted anonymously as saying. "The rest found a small amount of flow with no commercial value as the agreed gas prices were too low."
Lukoil, which is the only firm to have claimed successful finds, said this year it would begin commercial development of two fields it found in 2007 and last year. In 2007, during a visit by Vladimir Putin, then the Russian president, the company's overseas division said one of the fields contained about 620 million barrels of oil equivalent. But Lukoil has offered few additional details about the make-up of the fields since, and experts and executives remain sceptical that the finds would produce more than a token amount of gas.
Developing stronger political ties between Russia and Saudi Arabia, they note, has been a focus of Lukoil's presence in Saudi Arabia since the company began exploration. "Normally when there is a find people celebrate," says Samuel Ciszuk, an energy analyst at IHS Global Insight. "If it had been sizeable, we would have heard more about it." The company did not respond to a request for comment. Faced with these constraints, Saudi Aramco is turning its attention to squeezing more gas from oil reservoirs and developing new offshore fields.
In an annual review released this year, the company said it added 9.3 trillion cu ft of gas reserves to its books last year. First in Aramco's gas development plans are the Arabiyah and Hasbah fields, which could start to flow by 2014, according to Abdulaziz al Judaimi, the company's vice president for new business development. The fields would produce about 1.8 billion cfd, about the same as the offshore Karan gasfield discovered in 2006, Mr al Judaimi said last month on the sidelines of a conference in Abu Dhabi.
In the meantime, Aramco will probably focus on shifting its oil production to fields that produce more gas as it struggles to maintain output levels under its OPEC quota. Mr Ciszuk cites reports that the company had partly shut the capacity of the Ghawar field, which requires injections of gas. Aramco would probably be able to find the gas in the medium term, he says, but the greatest blow of the failed exploration efforts in the southern desert could well be to the company's reputation.
"The Saudis have a notion that they're sitting on huge reserves and that one day they could start drilling in the Rub al Khali," Mr Ciszuk says. "But it's not the case. It has been quite denting to their self-image." @Email:email@example.com