As the global oil and gas industry turns on its head, Saudi Aramco - the world's largest oil-producing company -- is not sitting still, but tapping into its formidable unconventional natural gas reserves.
Schlumberger Ltd., one of the world's largest oil and gas services companies, reported in a second-quarter conference call that Saudi Arabia's rig counts will rise to 170 by the end of the year - compared to 126 at the end of last year.
"Based on the current demand environment, we could see 200 rigs operating in Saudi Arabia by the end of 2014," said James C. West, analyst at Barclays Capital. "However, we think Aramco's ambitions to develop its gas and unconventional resources could accelerate rig growth beyond our estimates."
State-owned Aramco's capital spend for this year is expected to reach USD 15 billion, a 36% jump over last year's USD 11 billion, primarily focused on unconventional shale and deepwater opportunities.
Apart from being home to the world's second largest conventional oil reserves after Venezuela, Saudi Arabia also has 600 trillion cubic feet of unconventional and shale gas reserves, placing its deposit fifth in the world.
The company's gas output averaged 10.72 billion cubic feet a day in 2012 from 9.88 billion cubic feet a day in 2011, while gas reserves rose to 284.8 trillion standard cubic feet from 282.6 trillion standard cubic feet.
The kingdom is looking to develop its non-associated offshore gas fields, namely Karan gas field, in the Arabian Gulf, 160 kilometers north of Dhahran, Arabyiyah, near the Karan field, and Hasbah, which is closer to Jubail.
Aramco is also working on developing the Northwest (offshore of the Tabuk Province), South Ghawar in the Eastern Province, and Rub' al-Khali (Empty Quarter) regions.
"We're focusing on three major regions in the kingdom. In the Northwest, the search is characterized by shale at shallow depth," said Khaled A. Al-Buraik, Aramco's vice president for Petroleum Engineering & Development, in a speech in Houston, in May.
"In the East, excellent tight gas opportunities have been identified for appraisal, and we could lower costs by leveraging our existing infrastructure. In the Southeast, prospects are economically attractive given the existing petroleum system.
Shallower prospects in the northwestern region and established infrastructure in South Ghawar make those two regions the most favorable targets, says the Barclays' West.
"Existing joint ventures with Royal Dutch Shell and Lukoil have yielded success in the Rub' al-Khali region. However, ongoing gas-purchase price negotiations are delaying further development. We think price increases will eventually come to fruition and further co-development and expertise exchange will continue with Shell and Lukoil in that area."
Despite its immense natural gas reserves, Saudi Arabia faces a chronic shortage of the fuel. Rising population and an expanding economy is stretching beyond the established urban centers and making huge demands on insufficient natural gas resources.
Huge fuel subsidies are also leading to inefficiencies of power usage, which is exacerbating the problem for the country.
In addition, Saudi authorities are also looking to reduce oil consumption at home and switch to natural-gas-fuelled power plants, to free more oil to generate greater export revenues.
"Saudi Aramco is currently conducting a number of environmental studies in wasteland reclamation, biodegradation of hydrocarbon wastes, and even the development of microorganism technology to remove impurities in oil fields," Deloitte said, noting that Gulf states are investing USD 68 billion to develop their natural gas resources.
Aramco hopes to start production at its Midyan gas plant by 2016.
"The development of the Midyan field is progressing steadily as planned on all levels to produce 75 million standard cubic feet of gas per day and 4,500 barrels [per day] of condensate," chief executive Khalid Al-Falih said in a press release on Aramco's website.
It is also developing a gas facility to process 1 billion cubic feet per day from offshore Hasbah and Khursaniyah.
"Total processing capacity today is 13.2 bcf/d and Aramco has an ultimate goal of processing 15.5 bcf/d by 2015," said Barclays. "The proximity of this refining capacity to two of the Kingdom's non-associated gas offshore fields is favorable for spurring further offshore development, in our opinion."
Saudi Arabia faces huge challenge in developing its massive natural gas reserves including lack of infrastructure, water resources and funding hurdles.
A key impediment is natural gas price that are fixed at USD 0.75 per million British thermal units (BTU), compared to North American prices of USD 3.70 per m Btu, and Japan's USD 15.75.
"The current pricing economics conflict with the commercial viability of the high-sulfur gas coming from the unconventional discoveries and development of those fields is not favorable for Aramco's foreign joint venture partners," said Barclays.
"However, the country's increasing energy needs and desire to free more crude for export will likely change the domestic gas pricing. We think gas prices will rise in the near future and improve shale activity in the region."
In late August, Aramco also opened three research and development facilities in the US cities of Houston, Boston and Detroit to develop research and learn from technology developments that has revolutionized the US oil and gas industry.
Since 2010, the company has set up 11 international research and development centers such as Scotland, Netherlands and China and developed partnerships with key science institutes in France and South Korea.
The Dhahran Techno-Valley, a research park of King Fahd University of Petroleum & Minerals, located near Saudi Aramco's main office, already features a number of major oil field service companies such as Schlumberger, Baker Hughes, GE, Halliburton, Yokogawa, Honeywell, Weatherford and ARGAS.
In addition, the Saudi Aramco Energy Ventures scours the world for innovative technologies focused on upstream, downstream and renewable sectors.
"Our strategy has a long-term outlook, seeking to develop high-impact technologies addressing the challenges we face," Aramco's Al-Buraik said. "We are enabling this through substantial internal growth augmented by the establishment of external global research centers, while working to foster a broad research and technology environment within the kingdom."
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