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Simon Watkins

Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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What’s Behind Saudi Arabia’s Pivot To Natural Gas?

  • Saudi Arabia is making some big bets on natural gas as a push to clean up its energy mix.
  • According to Saudi Arabia, its much-hyped Jafurah field has an estimated 200 trillion cubic feet of gas (TcF).
  • Saudi Arabia will probably need gas production of around 23-25 Bcf/d within the next 15 years just to cover its own power and industrial demand.
Saudi Arabia

Saudi Aramco’s request for bids from local and international companies to build out a water desalination plant project in the Jafurah shale gas field brings back into focus the Kingdom’s claims to be at the forefront of the global energy transition towards cleaner energy through the reduction of carbon emissions. As with many of its biggest claims regarding its oil industry – analyzed most recently here – this claim regarding its drive towards cleaner energy is also extremely misleading, and would also appear to align with the country’s alleged attempts to lobby the UN to play down the need to move rapidly away from fossil fuels. Saudi Arabia announced with much fanfare early in 2020 that it is to spend at least US$110 billion on the Jafurah gas project, with the intention being that it would become the world’s third-largest gas producer by 2030, after the U.S., and Russia, and a net exporter of gas by that time. As even Aramco has noticed that Saudi Arabia does not have abundant freshwater supplies - its chief executive officer, Amin Nasser, keenly observed early on that ‘we are not rich with water’ – the company will use seawater instead for the fracking process, hence the new contracts for a desalination plant. 

According to the Saudis, the Jafurah field has an estimated 200 trillion cubic feet of gas (TcF), a figure that should be taken in the context of all other Saudi energy reserves estimates but let us pretend for the purposes of debate that it is true. In the meantime, Aramco has natural gas reserves supposedly of 319.5 trillion cubic feet (TcF), according to figures released in 2019. This number had bewilderingly increased from the previous 302.3 TcF just a year before and even more bewilderingly just a couple of years before it had been 233.8 TcF. Nonetheless, again, for the purposes of this debate, let us pretend that this figure is true as well. The plan is for Aramco to start production from Jafurah in 2024 and to reach 2.2 billion cubic feet (Bcf) per day of gas by 2036. In 2018, just before the hike in gas reserves estimates and without Jafurah in production, Aramco produced around 8.9 Bcf/d of natural gas. With this amount of gas being produced and used in Saudi Arabia’s energy mix at that time, it was still the case that from 2015 to 2018 the amount of highly polluting fuel oil that the Kingdom used in domestic power generation increased from 400,000 bpd to 500,000 bpd, Richard Bronze, a cross-energy analyst for global energy consultancy, Energy Aspects, in London, told OilPrice.com.

Related: Renewables And Roller Coasters: How To Recycle An Oil Well

This supposed move to gas, in turn, was part of Saudi Arabia’s broader drive to pretend that it was moving towards a cleaner energy program. A key part of this was its statements that it was also aiming for compliance with the International Maritime Organization’s (IMO) global sulfur cap for marine fuel being cut to 0.5 percent from 3.5 percent, the target date for which was the end of 2020. Despite the comments around that time from Saudi Aramco’s senior vice president of downstream operations, Abdulazziz al-Judaimi, that the company’s fully-owned refining assets were already 85 percent IMO-compliant, Saudi Arabia was one of the very few places in the world that actually imported fuel oil at that point, according to Bronze. This meant that it could legitimately – sort of – state that it was decreasing its own production of the dirty fuel oil product. 

The principal reason for the increasing substitution of imported fuel oil for domestically produced fuel oil was locational, in that currently vast bulk of Saudi’s home-produced fuel oil is produced in regions that are a long way from the populous areas where it is needed to burn as a fuel oil for power generation. Therefore, it is easier and less expensive for the Saudis to import fuel oil to places where it can be readily used for power generation rather than build a costly logistical network to move it from where it is produced in Saudi to where it is needed. This apparent inability to move fuel oil from one side of the country to the other is interesting to note when viewed in the context that the Saudis did manage to do precisely that for crude oil, with its 746 mile East-West Pipeline having been built in the 1980s. 

For Jafurah, then, all other factors remaining equal, one billion cubic feet of gas equals 0.167 million barrels of oil equivalent, so 2.2 Bcf/d (the future Jafurah output) equals 0.3674 million barrels of oil equivalent or 367,400 barrels. Therefore, the total projected new amount of gas to come from Jafurah is around 367,400 barrels per day. This amount is not even enough to cover the current volume of highly polluting fuel oil being burned for power generation in Saudi Arabia, even if Aramco’s already elevated gas production holds steady. However, based on independent industry estimates on changing Saudi demographics and corollary changing power demand patterns, the Kingdom will probably need gas production of around 23-25 Bcf/d within the next 15 years just to cover its own power and industrial demand. 

By Simon Watkins for Oilprice.com

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