x Abu Dhabi, UAEThursday 27 July 2017

Saudi Arabia seeks Red Sea energy resources

Now the world's biggest producer of crude oil, Saudi Arabia already has access to proven reserves of 267 billion barrels. Yet to the west of the kingdom lies an area with vast potential.

The Red Sea basin is not without hydrocarbon potential. Egypt has made significant discoveries on its eastern coast, with about 8 billion barrels of proven reserves in its waters. EPA
The Red Sea basin is not without hydrocarbon potential. Egypt has made significant discoveries on its eastern coast, with about 8 billion barrels of proven reserves in its waters. EPA

Saudi Arabia's status in the world of oil is almost mythical.

The Opec heavyweight recently overtook Russia as the biggest producer of crude and its oil wells have made the kingdom a household name across the globe.

Yet Saudis residing on the west coast are strangely unfamiliar with the mass of wells, rigs and processing facilities that crowd the country's oil areas.

The vast majority of its crude is produced in the eastern provinces, where it is loaded on to tankers and exported.

If oil comes close to the western provinces in large quantities, it is in shipments through the "East-West" pipelines that make their way to Europe via the Red Sea and the Suez Canal. A sizeable amount also flows into the petrochemicals complexes in the industrial hub of Yanbu.

But the Red Sea basin is not without hydrocarbon potential. Egypt has made significant discoveries on its eastern coast, with about 8 billion barrels of proven reserves in its waters.

Saudi Aramco, the state oil company, has also been active and its exploration work in the west dates back to the early 1990s when two small onshore discoveries were made.

"At that point we did a lot of geology, we knew there were good prospects but better offshore than onshore," says Sadad Al Husseini, a former executive vice president for upstream operations at Saudi Aramco who was in charge of exploration work at the time.

The kingdom may have proven reserves of 267 billion barrels but Saudi Aramco is constantly on the lookout for new deposits. It resumed its survey work in the Red Sea in 2009 and now has three years of seismic data to analyse.

The national oil company has not released any estimates on the hydrocarbon potential in the Red Sea but this has curbed speculation that reserves under the seabed could amount to as much as 50 billion barrels. This would increase the kingdom's reserves by another 18 per cent.

A prize of that magnitude usually warrants a treasure hunt, and the expectation is Saudi Aramco will proceed with further drilling.

"I presume they got enough encouraging results from the surveys to allow them to plan for the drilling programme," says Mr Al Husseini.

More drilling would not start for another two years at least, as a mountain of data remains to be analysed and a project of this size needs time to get under way.

However, success is by no means guaranteed.

"There has been a lot of drilling in the Red Sea and a lot of dry holes. There is no easy oil or assurance of finding oil and gas reserves," says Mr Al Husseini.

Exploration and production in deep waters requires specialised expertise and technology, and the Red Sea venture will require Saudi Aramco to tap the skill base of foreign contractors with the relevant experience.

Contractors have already taken note and are positioning themselves for future opportunities. There is a lot to play for; conservative estimates put the cost of exploring and developing Saudi's share of the Red Sea basin at US$25 billion (Dh91.83bn). Companies operating in the United Kingdom's North Sea are among those hoping to benefit from this windfall.

"We believe we have something to offer," says Terry Willis, the managing director at the Energy Industries Council, a British trade body. His organisation is holding an event to bring together UK and Saudi oil executives in Al Khobar in December where one of the main talking points will be developments in the Red Sea.

Production techniques, and the companies chosen to deploy them, will depend on the findings. If the reservoirs are filled with crude, floating rigs will be used to puncture a seabed as deep as 1,000 metres below the water's surface, and the oil is likely to be transferred to tankers offshore.

If the reservoirs contain large quantities of associated gas, processing facilities are needed to separate the oil from the gas. These would be built on land, with pipelines connecting them to the rigs. Such a production system would become expensive, says Mr Al Husseini.

Many experts doubt the 50 billion barrel estimate will materialise as proven reserves.

Any large oil discovery would add to Saudi Arabia's reserve pile and would not have any immediate impact on production levels. The country has a depletion rate limit of 2 per cent a year on major fields and output levels are also governed by limits agreed with Opec in accordance with market requirements. The response to unearthing large quantities of natural gas would be different.

Despite holding the fourth-largest reserves of natural gas, Saudi Arabia is short of gas supply and Saudi Aramco has embarked on an ambitious programme to boost gas production by a third in the five years to 2015.

Added production is desperately needed to maintain the drive towards industrial expansion, which is based on the petrochemicals sector and associated downstream industries. Petrochemicals rely heavily on gas as a feedstock, while a growing industrial base requires electricity to power it.

Saudi Arabia currently burns growing volumes of crude oil to feed its demand for power and natural gas is a preferable alternative. It is cleaner burning and also frees up higher-value crude for export.

Saudi Arabia already produces gas off its coast with the Karan field in the Arabian Gulf recently surpassing the 1 billion cubic feet per day mark. But Karan will not meet all the kingdom's demand for gas, which is estimated to triple by 2030.

The need for gas is likely to have been one of the factors that motivated Saudi Aramco to relaunch its activities in the Red Sea and experts believe the chances of striking gas are good.

"Given the temperature and the pressure of the environment geologically, it's very likely that the oil will be light and have a lot of gas in it," says Mr Al Husseini.

One of two operational fields in the west already produces condensate, a light hydrocarbon liquid similar to petroleum, lending credibility to the hopes of striking gas.

Production of hydrocarbons in the Red Sea will not commence on a big scale before the end of the decade.

But the prospect of the next big find will keep the industry abuzz long before then.