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Plans in Saudi Arabia to Counter Gas Shortage Will Likely Have a Negative Impact on Employment

Saudi Arabia : 17 September 2010

Large costs of hydrocarbon explorations are likely to alter the financial landscape in the kingdom and affect growth in the economy

Saudi Arabia has plans to counter the dilemma over gas shortages by exploring unconventional reserves.  These costly plans could lead Saudi job creation and industrialization  incentives taking a big hit.

Exploration and extraction of hydrocarbon carries a high cost that is likely to alter the financial landscape and force the kingdom to rethink the energy subsidies currently in place and driving growth in the economy, according to an energy think-tank.

Continuation with these plans for unconventional reserves, which have a much higher production cost than what the kingdom’s population has seen, will force reformation of the high energy subsidies currently in place.  This is according to Samuel Ciszuk, an analyst at IHS Senior Middle East Energy.

Ciszuk noted that the diversification of Saudi’s economy may fall apart if the kingdom moves away from its place in the low cost energy market.

Currently Saudi Arabia controls 20 per cent of the proven reserves worldwide and has a production buildup of more than 4 million barrels per day in spare crude.  After solidifying itself at the top of the oil industry, Saudi Aramco is now focusing on developing gas that will match the plummeting domestic demand.

The gas resources in the kingdom are stable.  However, since new gas reserves have not been uncovered or are slow to come into stream at sufficient levels, there have been power shortages repeatedly over the last ten years at times when electricity demand peaked.

To ease the pressures of these gas shortages, more crude and other refined products have been burning in the nation’s power plants.  These products have a much lower efficiency than gas and using them in this way results in lost revenue and lost export supplies.

At the beginning of the worldwide financial crisis in 2008 the gas shortage in Saudi Arabia was knocked even lower by a slump in oil prices, since a large portion of the kingdom’s gas production is associated with the production of oil.

As Saudi pulled back hard on oil output based on OPEC quotas, the volume of gas also fell, which contrasted dramatically with rising demand in the nation.  That demand was driven by expansive domestic energy subsidies and a population boom, despite the worldwide recession.

Throughout 2010 the kingdom burned crude and crude derivatives at a rate of almost 880,000 barrels each day to generate power.  As area oilfields mature, Saudi has a growing need for more gas production or water injections.  Extensive and power hungry water desalination procedures would need to be implemented for the latter.

Khalid Al Falih, chief executive of Saudi Aramco, reported that the state oil firm has plans to tackle the gas dilemma with the development of unconventional gas production including shale gas in particular.  Saudi Aramco has been dealing with offshore gas, sour and tight gas reserves in an effort to match near-time demands for gas.

Al Falih stated that $130 billion in investments will support the development of unconventional gas.  He noted that explorations by Aramco hint at the possibility of expansive resources in the hundreds of trillions of cubic feet (tcf), including shale gas, which will amount to twice the proven reserves of 280 tcf.

The capacity for the future needs will not be a result of finding additional reserves of conventional oil and gas, but will come from additions as a result of technical advances in the company.

Ciszuk said that Saudi’s situation carries the possibility of weighty long-term consequences.  Even if large investments were sunk into advancing technologies, base calculations could alter considerably and bring Saudi Arabia’s production costs to the same level as other mature producers.  This result would limit the economic potential and freedoms that are the goal of such a tactic.

Andrew Reid, Staff Writer, Gulf Jobs Market News
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