Saudi gas future, betting on two sides

After years of unsuccessfully setting up international joint ventures with IOCs, such as Royal Dutch Shell, Saudi Arabia again is trying to hit a natural gas jackpot. Last week, Saudi national oil company Aramco reported that it has discussing with potential investors the option of opening up its largest unconventional gas fields to foreign investors. At present, around $110 billion investment is expected to be needed to fund the Al Jafurah development, which is estimated to hold around 200 Tcf of rich gas. In stark contrast to global media reports on Saudi Arabia, the kingdom not only holds immense crude oil reserves but also slated to be one of the world’s largest natural gas reserve holders too. The renewed interest for its un- and conventional gas reserves, already shown by several major offshore projects in the Gulf and Red Sea area, is not only based on the diversification from its oil sales strategies, but also looking at the internal energy consumption and potential future hydrogen options. Sources have stated that Aramco already has appointed an advisor to explore a possible equity stake sale to international operators or investors. Media sources have even indicated that Aramco could be open to take commodity traders onboard to reach the targeted $110 billion. The option to raise debt is also still being discussed, but it seems that internal power brokers are leaning towards an equity sale, which would be a major watershed event for the Kingdom. Opening up upstream assets for international investors or shareholders would mean a possible break with a historic position taken by the Kingdom not to sell upstream assets to non-Saudi entities or even others. The discussions at present are still in a preliminary phase, but it seems that Riyadh has been looking at the ongoing success stories in the UAE, where Abu Dhabi’s national oil company ADNOC is paving the way for additional equity stake sales and IPOs. For Aramco, even that the company is now listed on the stock-market, asset sales are still very rare, while upstream assets are a no-go area until now. In the 1990s some moves were made, by taking on international giants such as Shell to open up potential gas reserves, but the latter was a total failure.

Now the time however seems to be right to fully shake-up the oil and gas sector of the Kingdom, as Riyadh, led by Crown Prince Mohammed bin Salman, and financial institutions such as sovereign wealth fund PIF, have embarked on a full-scale economic diversification, in which oil and gas are playing the role of motor and fuel for the future, not anymore the only building block for the House of Saud. By partly monetizing strategic assets, a clear break can be financed without being confronted by possible stranded assets or a lower valuation in due course. Aramco has been stepping up efforts to monetize, or in other words divest and attract, upstream and midstream assets. The ongoing divestment or equity sale of pipeline and other sections of the company fit in the strategy.

While the world has been focusing on Aramco’s crude oil and petrochemical wealth mainly, the company also holds after Qatar the 2nd largest gas reserves in the Arab world. The focus on Al Jafurah is not new, as it is already part of Aramco’s development and production strategy, targeting first production in 2024, with gas production reaching 2.2 billion standard cubic feet per day of sales by 2036.

As shown since 2019 (Aramco IPO), the Kingdom is set monetize assets to the fullest. Based on assessments of the company and its owner PIF, new strategies are being developed to cash in quicker to make diversification an option. The sale of a stake in the oil pipelines unit of Aramco is a prime example, bringing in $12.4 billion. Aramco also is setting up a deal for its gas pipelines.

A still new phenomenon on the Aramco tree is the positioning of hydrogen, and the Kingdom as a new hydrogen champion in future. To promote the latter Saudi sources state that Aramco will split the natural gas unit in two new divisions, Southern Area Gas Operations and Northern Area Gas Operations. One driver for the latter is to better use natural gas for the local economy, mainly as fuel for power generation, but also in the mid-to-long term as supply for the production of blue hydrogen. Increased natural gas usage in power generation is needed, not only for environmental and climate related reasons, but mainly to substitute for crude oil usage, as at present 1 million bpd or more is going up in flames for power generation (and air conditioning). Crude oil on global markets (or petroleum products) have a much higher margin than to be used for subsidized power in Kingdom.

On the other side, Saudi Arabia wants not only to be the King of Oil but also at least the Crown Prince of Hydrogen in future. To support the latter, in addition to green hydrogen, which is still not cost effective and market demand is low, blue hydrogen is targeted as an enabler. The growth of blue hydrogen is clear, and will need immense volumes of natural gas, while emissions are being captured. To speed up the latter, more volumes however are needed, even that Aramco’s gas production already in August 2020 reached a level of 10.7 billion standard cubic feet per day, according to its 2020 annual report.

The still diffuse natural gas strategy however is promising but needs still some tweaking. At the start of 2021 Al Jafurah was framed as a major step to towards a Saudi gas export strategy. Looking at its potential role in blue hydrogen, the message will need to be changed, but could bring the same amount of revenues while pushing a more greener image too. Success still is an option, but speed and prowess is needed to give it a kickstart before critics again remember the Saudi gas debacle of the 1990s again.?