Gas-powered growth: Saudi Arabia takes oil know-how to new markets

The Kingdom’s Vision 2030 reforms mean it is cutting the proportion of liquid fuels used to generate power and is setting its sights on a bigger role in global natural markets.

Axel Rangel Garcia

Discoveries have increased the Kingdom’s reserves of an alternative means of electricity generation, helping it move away from liquid fuel and toward a bigger role in the global market.

Gas-powered growth: Saudi Arabia takes oil know-how to new markets

Faisal Faeq

last update on 27 Dec 2023

A series of natural gas discoveries have helped Saudi Arabia move toward a bigger role in the global market for the commodity and helped it become less reliant on liquid fuel for domestic energy.

Increased gas production has broadened the country’s energy mix at a time of rising domestic demand. Utilising natural gas fields is covered by the Vision 2030 policies, designed to diversify the Kingdom’s economy and prepare it for a post-oil world, in which less traditional liquid fuel will be used, and energy efficiency will increase.

Saudi Arabia plans to be a leading supplier of clean hydrogen globally based on its enormous gas reserves. It is focused specifically on producing blue hydrogen, a gas seen as the key to energy transition because it releases zero carbon.

Key infrastructure and potential foreign investment

The Kingdom’s ambitions for the global market come at a time of high local demand. It is the largest gas consumer in the Middle East, using the commodity to generate electricity and as an input in the ever-growing petrochemical industry.

As consumption grows, investment in infrastructure has increased. Around 4,000 kilometres of pipelines have been added to the main gas distribution network. The grid is a vital part of the Kingdom’s diversification plans, shifting electricity production away from oil and liquid fuels.

And a bigger grid throughout the Kingdom brings export markets to neighbouring countries nearer. As the Kingdom gets ready to develop the significant potential of the Al-Jafurah Gas Field, the expansion into export markets could attract foreign investment.

Saudi Arabia has the world's lowest oil production cost – at about $3 per barrel; this has helped Saudi Aramco become the world's largest profitable energy company and the most financially resilient.

Also, the additional coat of tapping associated with gas from the oil fields is minimal. The cost of producing gas from shale reserves – known as “non-associated” gas in the industry – will differ greatly.

Saudi Arabia has the lowest cost of oil production in the world – at about $3 per barrel; this has helped Saudi Aramco become the world's largest profitable energy company and the most financially resilient.

Al-Jafurah

It should be noted that the break-even production cost is the average price of the gas that the producer needs for investment to be feasible. For example, the cost of producing shale gas in the United States isn't precise regarding its specific break-even point.

The same applies to the cost of shale oil production, which is constantly changing and doesn't have a clear price range – this is necessary to attract investments and set the return on investment.

Saudi Aramco engineers walk in front of a gas turbine generator at the Khurais oil field during a tour for journalists in 2021.

According to a previous study by Jadwa Investment, the cost of developing shale gas in the US, the only large-scale shale gas producer globally, ranges from $2.3 to $6 per 1mn British thermal units (MMBtu, the standard industry measure).

Jadwa predicted that the cost of shale gas development in the Kingdom would be at the upper end of the US shale gas cost curve, at $6 per MMBtu. The break-even cost of gas production is still undisclosed but will be shaped by dynamics different from those in the US.

The specifics of the production costs involved at Al-Jafurah and how they fit within global price levels will play a role in attracting investment to develop the field. Many factors will likely give the field competitive advantages, including existing infrastructure, logistics, transportation, storage, and export facilities.

Al-Jafurah is also adjacent to Ghawar, the largest conventional oil field in the world. This means that geological data about Al-Jafurah are available; hence, the cost of data collection will be reduced.

Al-Jafurah field can also leverage the available water supply infrastructure from well water injection facilities and use Saudi Arabia's Master Gas System (MGS) when production begins. The operating cost will also be significantly reduced when hiring local Saudi companies.

Al-Jafurah's competitive advantages include existing infrastructure, logistics, transportation, storage, and export facilities.

OPEC for gas

The Kingdom is likely to play a key role in stabilising the global gas market once it starts exporting gas. Any scarcity in gas supplies can also negatively impact the world's economies. This requires regulating gas markets effectively and sustainably, as is the case in oil markets through OPEC, which has long experience in stabilising markets, prices, and supplies by controlling production.

AFP — A refinery in Jubail Industrial City, about 95 kilometres north of Dammam in the eastern Saudi region overlooking the Gulf.

The Gas Exporting Countries Forum (GECF) was established in 2001. Still, it needs to be restructured from a forum to an effective organisation with an agreed charter that regulates gas supplies on demand. Natural gas and Liquified Natural Gas (LNG) markets have shown a need to be effectively regulated to ensure energy security and energy use for electricity generation, especially during periods of high demand for heating and cooling.

The current GECF doesn't regulate and stabilise gas markets, even though its members control more than 70% of the world's natural gas reserves, 46% of its marketed production, 55% of gas transported by pipelines, and 61% of the world's LNG exports.

Establishing an organisation for global gas markets requires the presence of a "swing producer", such as Saudi Arabia, the largest oil exporter with the largest reserve capacity in the world.

The Kingdom has long played a lead role in OPEC+, helping to keep global oil markets in balance by varying its output. A swing producer is the most crucial factor in any such organisation, acting as a safety valve in the system, helping match supply and demand and absorb any sudden shocks.

Russia and the United States are the world's largest gas exporters. Still, during the global energy crisis caused by the Russian-Ukrainian war, Russia was blamed for the scarcity of gas supplies to Europe. Although the US is one of the largest suppliers of liquified natural gas to Europe, it hasn't been able to adequately provide supplies.

One question remains: If the world's largest gas exporters are likely to be responsible for tight gas supplies during peak winter demand, who could be the likely swing producer of gas to rebalance the global market?

+ / -