It’s a much debated topic around the world that, will KSA be a dominant player in global energy market in future? The global energy landscape is changing. The world is moving from crude to shale, oil to gas, conventional to unconventional energy sources. With the invention of new technologies like Horizontal Drilling and Hydraulic Fracturing or Fracking new energy frontiers are emerging like Canada and Iraq. Shale Revolution has spurred US oil production which has given them a hope of reaching long-awaited goal of “Energy Independence”. Russia is now planning to explore its share of Arctic region and for that Rosneft, world’s largest oil company, has signed agreements with ExxonMobil, ENI and Statoil.
Shale revolution in collaboration with Fracking is leading US to “energy independence”. US oil production is at the highest level since 1991. According to IEA, USA will overtake Russia and Saudi Arabia as top oil producer by 2015 and by 2030 it will become net oil exporter. Crude oil production in 2012 was 6.5 million barrels per day and in 2013 and 2014, EIA forecasted production to increase to 7.42 million barrels per day and 8.17 million barrels per day respectively.
Only last year total oil production increased by 1.16 million barrels per day. Total oil production of US in 2012, including crude oil and field condensates, natural gas liquids, renewable fuels and refinery processing gains, was 11.2 million barrels per day at the end of 2012 making the United States the second largest oil producer already last year.
Crude oil and petroleum import in 2006 was 13.7 million barrels per day but in 2012 it was down to 10.5 million barrels per day. Interestingly, Saudi oil imports have increased over the last two years despite the American Officials claiming US won’t need Saudi oil in future. According to EIA, oil imports increased from 1.039 million barrels per day in 2010 to 1.359 million barrels per day in 2012, which means the US will still need Saudi oil many years from now because US refiners upgraded themselves to process heavy crude oil long before the local oil boom unleashed.
Despite the oil glut, USA won’t have any impact on global oil price and they will still be dependent on countries which are not stable. In 2011, due to war in Libya their light sweet crude oil production halted driving the US gas prices higher by 33% per gallon in two weeks even though Bakken Shale was producing nearly half a million barrel of oil. The repercussions of high oil production would be more domestic jobs and better energy security but even if US doesn’t import any oil from Middle East, they will still be vulnerable to oil price shocks.
Canada is an emerging energy frontier on the global energy map. Canada controls the third-largest proven oil reserves in the world, after Venezuela and Saudi Arabia. The oil sands now account for approximately 173 billion barrels, or 98 percent, of Canada’s oil reserves. Canada’s oil production in 2011 was 3.7 million barrels per day. According to IEA, Canadian production could grow to 6.6 million barrels per day by 2035 due to an expansion of unconventional output from the oil sands.
Since 2006, Canadian production has grown by 510,000 barrels a day. According to Alberta government, oil industry needs $364 billion to develop its oil sands over the next two decades. Canadian Prime Minister Stephen Harper said last year that Canada is open for foreign investment but last year after CNOOC acquired Nexen Inc. for $15.1 billion and Petronas acquired Progress Energy Resources Corp. for $5.5 billion, Canadian government changed the foreign investment rules restricting National Oil Companies (NOCs) to acquire Canadian oil companies and take controlling share. However, only under exceptional circumstances NOCs can buy oil sands assets. This will dent the investors’ confidence to invest in Canadian oil sands and will possibly slow down oil sands development. Canada has an estimated 388 Tcf of technically recoverable shale gas resources.
Russia is the largest oil producer and gas exporter in the world. Russia is vying with Saudi Arabia for the global energy dominance. Rosneft has signed agreement ExxonMobil, ENI and Statoil to explore Arctic untapped reserves. According to US Geological Survey, Arctic holds 412 billion barrels of oil equivalent (boe).
The USGS assessment concluded that about 90 billion barrels of oil, 1,669 trillion cubic feet of gas, and 44 billion barrels of natural gas liquids (NGLs) can be found in the Arctic.
Arctic development will face substantial challenges. Firstly, the cost of oil extraction will be very high (estimated between $30 and $100 according to IEA) in order to make it commercially viable oil price should sustain above $100 a barrel. Secondly, the potential environment cost of Arctic is too high. Its reserves are notoriously hard to reach and present huge environmental challenges like harsh climate, limited existing infrastructure, exceptionally long project lead times, spill containment/spill recovery, country-specific environmental laws/regulations.
Another problem is no company has developed equipment to clean up oil spill in sludgy waters yet.
Rosneft, largest publicly traded oil company, alone plans to invest $125 billion in order to bring their production 4.5 million barrels per day by 2020 but after the acquisition of 100% shares in TNK-BP paying $56 billion, their current bank accounts are empty.
Russia needs estimated $500 billion investment over the next 30 years to explore untapped resources in offshore Arctic energy projects. The question is how will Russia attract foreign investment?
In Russia, bribery is considered a normal way of doing business. Corruption cost Russia $300 billion a year, 16% of its GDP. In 2011, Gazprom lost $40 billion because of corruption and inefficient practices. Same is the case with Rosneft. BP, in its internal documents, labeled Russian business environment as corrupt, inefficient resource utilization and ineffective courts. Mikhail Khodorkovsky, former billionaire jailed since 2003, in an interview with Bloomberg said “in Russia nobody is safe from extortion. If Russia really wants to grow she needs to introduce economic reforms to ensure 100 percent guarantees for private property and an effective lawful state because under the current political and economic model, Russia needs oil prices to remain above $200 a barrel”.
Russia is concerned about its vulnerability to fluctuation in oil prices. With half of the Russian budget coming from oil and gas revenues, the government could be crippled if prices fall. Russia is now forced to lower the gas prices to Europe because of declining sales.
Russia is the world’s most corrupt major economy according to Transparency International’s 2012 Corruption Perceptions Index. The country ranked 133 among 178 countries.
Iraq is another emerging energy frontier in the world. It contains 5th largest oil reserves, 143.1 billion barrels, in the world. Iraq is now the second largest oil producer in OPEC, replacing Iran, after Saudi Arabia. The country which was shattered by decades of conflict, war and sanctions, is now awarding oil blocks to International Oil Companies (IOCs) and National Oil Companies (NOCs) to ramp up its production by significant amount from the current 3.15 million barrels per day to 6.1 million barrels per day in 2020 and 8.3 million barrels per day in 2035, according to IEA.
But Iraqi officials say Iraq wants to increase their production to 9 million barrels per day by 2020, which many analysts termed as “overambitious”. After the American Armies exit Iraq and handed over the reins of the country to local people, Iraq’s future is highly uncertain. In order to meet their goals Iraq has to overcome many obstacles like infrastructure development, skilled workforce capable of operating drilling rigs, insufficient water supply because water is required to pump oil from ground, increase investment, improve security and resolve political differences with Kurdistan Regional Government (KRG).
IEA in their report on “Iraq Energy Outlook” says the country, whose oil and gas fields deteriorated over the decades because of war, conflict and international sanctions, will need to invest $530 billion in infrastructure till 2035 to reach the oil production goals. It won’t be a problem because Iraq still enjoys lowest cost of oil production.
The dispute between Iraq and KRG revolves around the Kurds demanding to sign oil contracts independently, while Baghdad wants KRG oil contracts to be approved by Iraqi oil ministry. Kurdish areas produce 10% of Iraqi oil. Baghdad fears that Kurdish Regional Government will secede if complete autonomy is given to them.
International Oil Companies (IOCs) have exploited the differences between these two. Almost all the major oil companies are signing contracts with KRG. “There are better operating conditions [in the Kurdish region], with less bureaucracy, better security and more openness to foreign companies,” says Wladimir van Wilgenburg, an analyst and correspondent for Rudaw English.
The problem for Kurds is that they are unable to export their oil without Baghdad despite their desire for independence over oil laws and contracts with IOCs because Kurds have to used national pipeline network which is controlled by federal government, which also has a control on treasury. To make things worse, Kurds are now constructing their own pipeline network with their neighbors, currently with Turkey which will be completed by 2014.
Iraq contains 10th largest natural gas reserves, 126 trillion cubic feet, in the world. It is also planning to increase their gas production by significant amount. According to IEA, Iraq could be producing 90 billion cubic meters (bcm) in 2035, up from current 10 bcm in 2010, which will make it the sixth largest producer in the world. Iraq needs to be efficient in their production methods because 60% of gas produced in South Iraq is flared which is wastage.
The recent surge in Iraqi oil production is also because of declining Iranian oil production but IEA’s director Maria van der Hoeven and chief economist Fatih Birol couldn’t predict what will be the effect on Iraqi oil production if Iranian oil output rebounded.
Other countries are also making arrangements to increase their local production to reduce foreign dependence. UK, Romania and Germany has removed moratorium from Fracking. Poland (187 tcf reserves) and Ukraine (42 tcf reserves) are developing their shale reserves with the help of IOCs. China to tap its world largest shale gas reserves, 1275 tcf. Argentina holding shale reserves of 774 tcf, world’s third highest, signed agreement with Chevron to develop its resources.
WHAT KSA IS DOING
Despite emergence of new energy frontiers, Kingdom of Saudi Arabia (KSA) is strategically committed to expanding capacity, striving to add value to its fossil fuel resources by converting it into plastics and polymers. In order to maintain their global dominance the Kingdom is moving ahead with investment in renewable energy, nuclear power and other alternatives to fossil fuels so that it could use its vast oil reserves for other goods. Saudi Aramco will invest $35 billion over the next five years to preserve its spare capacity. Not just that, Aramco is looking to tap its massive gas resources, 286 tcf of gas reserves, to meet its galloping domestic demand. KSA is too much dependent on oil but now they are changing their energy mix. KSA should sell finished product rather than just crude.
Changing Energy Mix
Saudi population is increasing at fast pace so is the demand for electricity. Currently domestic consumption of oil stands at 3 million barrels per day. Saudi Arabia needs to change its energy mix. At current consumption level, domestic consumption will go up to 7 million barrels per day by 2030 and in this case Saudi Arabia will become net importer of oil, Citi report cited. In 2011 only, Saudi Arabia burned 520,000 barrels per day of crude oil to produce electricity. Changing energy mix will free up their oil resources for export.
Saudi Arabia should also develop other energy sources. KSA holds 286 tcf of natural gas, so instead of oil gas should be burned for utilities but apparently gas is in short supply. To overcome this shortage, Riyadh is keen to add 50 tcf of non-associated gas reserves by 2016 through new discoveries.
Saudi Arabia also has abundant amount of unconventional energy sources. The Kingdom holds 5th largest shale reserves, 645 tcf, in the world more than the natural gas reserves and they have already started drilling for shale gas.
Saudi Arabia is also rich in renewable energy sources. The Kingdom is targeting to add 41 gigawatt(GW) of solar power and 17 GW of nuclear power by 2032 in their current installed capacity of 50 GW for power generation.
Set up Refineries
Saudi Arabia wants to increase their refining capacity by significant amount to cater the needs of Asian consumers. Instead of selling crude KSA wants to sell more refined products to get more value of their oil. SATORP refinery with Total with the capacity of 400,000 barrels per day (bpd) at Jubail was completed in late 2012. YASREF refinery with Sinopec with the capacity of 400,000 bpd at Yanbu will start operations in September 2014. Jazan refinery with the capacity of 400,000 bpd will be completed in 2016. Ras Tanura refinery capacity will be expanded by 400,000 bpd which is estimated to be completed in 2016.
WHAT KSA SHOULD DO
Kingdom of Saudi Arabia needs to take drastic actions if they want to remain a dominant player in the energy market. The kingdom needs to introduce energy conservation methods and increase efficiency in consumption. The Kingdom also needs to bring oil prices down. It’s the high prices that make the unconventional energy resources a viable business. The Kingdom should also open up fields for energy companies like Abu Dhabi doing. This will help Saudis to get the latest technologies used in drilling.
Increasing Energy Efficiency
The biggest challenge currently Kingdom of Saudi Arabia facing is to curb the domestic oil consumption. Currently daily oil consumption of 28 million residents, 3 million barrels per day, is nearly as much 1.25 billion people of India, 3.4 million barrels per day. The Kingdom needs to introduce the energy reforms for the ridiculously low domestic energy prices. Gasoline is available at SAR .45 per liter (US $0.95/liter) and Diesel SAR .27 per liter (US $1.03/liter). If we take current exchange rate of SAR 3.75/US$ then the Gasoline and Diesel price per liter in Saudi Arabia is $0.12 and $0.07 respectively. In 2011, The Kingdom provided $80 billion worth of subsidies on petroleum products which was actually lost revenue for Saudi Arabia.
It seems difficult for KSA to maintain its dominance because of the emergence of other energy frontiers BUT in price setting KSA will still be ruling the global energy market. With Hugo Chavez is dead and Iran under sanctions, Kingdom of Saudi Arabia will be dictating the oil prices in OPEC and in the world and reigning the global energy market many years from now.
by Moin Inaam