The Kingdom could soon develop its heavy oil resources to help dispel fears of a new crisis
Saudi's future weighs heavily
Saudi Arabia could soon move ahead with plans to develop its heavy oil resources, helping to dispel fears that less investment could trigger a future crude supply crisis. Dark and viscous, with the appearance and consistency of treacle, heavy oil has gained prominence in recent years as a source of transport fuel for the world, as new discoveries of more desirable light crude oil have failed to keep pace with the rate at which existing fields are being emptied.
But the price of crude, which has decreased by about two thirds from its record peak of US$147 a barrel last July, and the continuing drop in global energy demand has caused oil producers to rethink investment plans, especially concerning large, expensive heavy-oil projects that require long lead times. The result has been the cancellation and delay of hundreds of billions of dollars of planned investments in heavy oil and oil sands developments around the world.
While heavy oil is traditionally the domain of western hemisphere oil-exporting countries such as Canada, Venezuela and Mexico, some Gulf producers also pump heavy crude. Some of the region's top oil-exporting nations, including Saudi Arabia, Iran and Kuwait, see its development as an indispensable part of long-term plans to boost export capacity. Saudi heavy-oil projects, suspended since late last year, include an $11 billion (Dh40.4bn) offshore oilfield development and a related $12bn refining venture.
But the uncertainty surrounding those projects is beginning to clear. Last week, industry sources said the Saudi national petroleum company, Saudi Aramco, and the US oil company, ConocoPhillips, were planning to seek bids this year for a contract to build the proposed Yanbu oil refinery on the kingdom's Red Sea coast. "The plan is to issue a tender for the bids by midyear," a source told Reuters. "The bids should be in by the end of the year."
A second source close to the project says: "Aramco is holding a series of meetings with contractors." The companies suspended bidding for Yanbu in November due to global financial turmoil and high construction costs, while rising crude oil stockpiles worldwide cast doubt on the need for more refining capacity. The resulting uncertainty over the refinery had a knock-on effect on Aramco's plans to develop the Manifa oilfield, potentially the kingdom's biggest offshore oil development.
Containing roughly 10 billion barrels of heavy oil reserves, Manifa was to supply feedstock to Yanbu, which would be built specifically to process the field's sticky crude. Last July, Saipem, the Italian oilfield services group, was awarded a ?1.44bn (Dh6.94bn) development contract for the oilfield, which was expected to produce 900,000 barrels per day (bpd) of crude by 2011. But Aramco halted the work late last year after oil prices collapsed.
This month, Saipem said it expected Aramco to agree to an amended contract allowing Aramco to delay the start of construction. "Our strong feeling is that they will go for the solution we proposed, which is to stretch the duration of the project and to move the procurement scope from a lump sum to an open book," says Pietro Tali, the chief executive of Saipem. Heavy oil is significantly more costly to extract than the light crudes on which Saudi Arabia built its oil wealth.
Typically, extraction needs energy-intensive processes, such as the large-scale injection of steam into the oil reservoir to heat the sticky crude and allow it to flow more easily into the wells that pump it to the surface. Once produced, heavy crude is also costly to process. Yields of the highest priced petroleum products, such as petrol and diesel, are low unless the oil is specially treated in expensive catalytic "cracking" units that break up the carbon backbones of long hydrocarbon molecules.
By adding hydrogen or removing carbon, the chemical processing produces higher concentrations of the shorter molecules that are better suited for the engines of aircraft and cars. Another problem is that heavy oil often contains high concentrations of sulphur, which must be removed during refining, creating the potential for air and water pollution from sulphurous emissions. Due to heavy oil's high carbon content, carbon dioxide emissions can also be high. Dealing with the emissions in an environmentally acceptable manner also adds significantly to processing costs.
The gas produced with heavy oil is generally high in sulphur, usually in the form of deadly hydrogen sulphide. The safety and environmental measures required for "sour gas" handling at a heavy oil project such as Manifa represent another large part of the project's cost. For all these reasons, falling oil prices have drastically undermined the economics of heavy-oil projects for now. But some cash-rich oil companies continue to invest in them to assure their long-term future when the global economy and oil demand rebound.
Saudi Arabia, the OPEC leader, is prominent among oil-exporting states that see heavy-oil development as essential to ensuring the world stays well supplied with oil in coming decades. In the partitioned neutral zone between the kingdom and Kuwait, Chevron, the second-biggest US oil company, will in the next few months begin large-scale testing of a new heavy-oil production process that could unlock tens of billions of barrels of heavy oil reserves across the Middle East.
This follows a Saudi government decision last September to extend for 30 years the company's licence to operate the Wafra oilfield in the neutral zone, and the success of a smaller-scale field trial. Chevron hopes to show that its technology can overcome problems in using steam to pump heavy crude from a reservoir of carbonate rock, which contains soluble minerals that can block up the reservoir. Saudi Arabia's other heavy-oil deposits are also mainly locked in carbonate rocks such as limestone.
Over the border in Kuwait lie other untapped carbonate fields that the state-owned Kuwait Oil Company (KOC) regards as a key resource underpinning a national plan to boost oil-production capacity. But with the economic and technical feasibility of producing the oil now in doubt, KOC recently cut its 2020 target for heavy oil production to 450,000 bpd from 750,000 bpd. Outside the Gulf, prospects for heavy-oil capacity expansion are much diminished.
Venezuela, an OPEC member producing mainly heavy crude, has cut planned investment in oil development this year by 40 per cent to $12bn. Last month, Hugo Chavez, the Venezuelan president, announced a $6bn deal with a Russian consortium to drill in the Orinoco basin, where the country's heavy-oil reserves are concentrated, but analysts say it will take years to produce results. In Canada, with nearly solid crude found in oil sands, projects worth as much as $200bn have been derailed by the oil-price slide, halting the country's oil-sands development boom.
Canada's oldest oil-sands producer, Suncor, which has been mining and processing the resource since the 1960s, recently announced plans to merge with Petro-Canada, formerly Canada's national oil company. Analysts rate the marriage as the companies' best chance to achieve the efficiency improvements they will need to survive. As expected in such circumstances, a few well-heeled companies are watching developments, including Abu Dhabi National Energy Company, or Taqa.
This month, Peter Barker-Homek, the chief executive of Taqa, said it was considering entering Canada's oil-sands business, and would look at an asset purchase, partnership or acquisition for portfolio diversification and to deepen its expertise. It is unclear what Taqa, which is 75 per cent owned by the Abu Dhabi Government, could contribute to oil-sands development besides money. Technical expertise and oil-refining connections are essential. Taqa, with roots in the electrical power sector, has neither.
Still, Mr Barker-Homek has grasped the long-term importance of heavy oil development, as the world's light crude reserves drain. "There is one thing that doesn't stop in the oil business, and that's decline rates." @Email:email@example.com