Saudi gas investments: A marriage of economic and geopolitics

 

Credit: Aramco Life

By James M. Dorsey

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A Saudi push to become a major natural gas player is as much about diversifying the kingdom’s domestic consumption and export mix as it is about cementing Saudi Arabia as a global geopolitical, economic, and energy player.

It also is about capitalizing on harsh US economic sanctions against Iran designed to force a change in the Islamic Republic’s policies.

Iran is home to the world’s second-largest gas reserves after Russia.

The Saudi push follows the kingdom’s energy ministry ordering state-owned oil giant Saudi Aramco to shelve its one million barrel a day crude oil production capacity expansion plans.

Credit: Aramco

“Gas is going to take quite a bit of the upstream spending because it’s an important growth area,” said Aramco CEO Amin Nasser.

Earlier, Mr. Nasser noted that “Aramco’s international gas team has been given an open platform to look at gas acquisitions along the whole supply chain. They have been given significant financial firepower – in the billions of dollars.”

Aramco increased its gas expansion goals by more than 60 per cent for 2030 compared to 2021.

This month at an energy conference in Houston, Aramco Senior Executive Vice President for Gas Abdulkarim al-Ghamdi asserted that the company had first become a major player in liquified natural gas (LNG).

Abdulkarim al-Ghamdi addresses Baker Hughes’s 2024 annual meeting. Credit: Baker Hughes

Mr. Al-Ghamdi was referring, among others, to Aramco’s increase this month to 49 per cent its $500 million minority stake in MidOcean Energy.

In June, Aramco and NextDecade signed a 20-year non-binding agreement to buy 1.2 million tonnes of LNG annually from the US company’s Rio Grande LNG project in Brownsville, Texas.

Aramco's acquisitions follow the company's initial forays into gas trading several years ago. In 2019, it sold its first LNG cargo to an Indian buyer and a year later, it sold again to S-Oil Corp, South Korea's third-largest refiner, in which Aramco has a majority stake.

The trades and purchase agreements were designed to position Aramco as a major marketeer and trader in the spot and short-term markets.

At the same time, Saudi Arabia was looking to become a gas exporter by investing billions of dollars in natural gas, including US$25 billion in the Jafurah gas field.

Credit: WPC

Jafurah is the kingdom's largest unconventional non-oil-associated gas field and potentially the biggest shale gas development outside the United States. Its reserves are estimated at 229 trillion cubic feet of gas and 75 billion barrels of condensates.

Mr. Nasser, the CEO of Aramco, said the company was adding 4,000 kilometres of pipelines to Saudi Arabia's gas network. The pipelines would boost the network's capacity to 3.2 billion standard cubic feet per day.

In May, Aramco awarded China Petroleum Engineering and Construction Company (CPECC) a key contract related to the kingdom's US12 billion expansion of its gas network.

Even so, industry analysts wonder whether Saudi Arabia has enough gas to satisfy rising domestic demand as it moves away from burning crude oil and liquids for power generation and industry and positions the kingdom as one of the world’s top exporters.

Credit: Saudi Press Agency

Crown Prince Mohammed bin Salman's vision for Saudi Arabia is for the kingdom to produce half its electricity from gas and half from renewables as it moves towards a net zero target in 2060.

Saudi Arabia, home to the world's fifth-largest gas reserves, ranked seventh globally in domestic natural gas demand in 2018.

The kingdom burns up to 500,000 barrels of crude oil per day for power generation, in addition to large volumes of fuel oil and diesel. At full capacity, Mr. Nasser hopes Aramco’s shale gas program will replace crude in power generation.

“They may free up to 1 million bpd (barrels per day) of liquids (for export) this way,” said Middle East energy consultant Iman Nasseri.

Alexandre Araman, another Middle East energy analyst, noted that Saudi shale projects were disadvantaged because their drilling costs were higher than those of comparable US shale projects but had the advantage of a higher condensate-to-gas ratio.

While primarily driven by economics, energy politics, and the kingdom’s ambition to be a dominant player in all sectors it engages in, the Saudi move comes as newly elected Iranian President Masoud Pezeshkian seeks improved relations with the West to achieve sanctions relief that would allow Iran to increase its oil and gas exports.

In 2018, US President Donald Trump withdrew from an international agreement that curbed Iran’s nuclear programme and reimposed crippling economic sanctions. Mr. Pezeshkian argues that sanctions relief is key to addressing Iran’s economic crisis, which is as much a product of sanctions as of mismanagement and corruption.

In a Chinese-staged deal, Saudi Arabia and Iran reestablished diplomatic relations in 2022. Long rivals for influence and power in the Middle East, Saudi Arabia broke off relations in 2016 after Iranian crowds ransacked Saudi diplomatic missions in protest against the kingdom’s execution of a prominent Shiite cleric.

The restoration of diplomatic relations has reduced tension between the regional powers but has done little to enhance confidence.

Last week, Turki al-Faisal, a former Saudi intelligence chief and diplomat who often reflects Crown Prince Mohammed bin Salman’s thinking, called for stronger international action to halt Iranian support for Yemen’s Houthi rebels.

Mr. Al-Feisal asserted that Iran’s support for Lebanese Shiite militia Hezbollah, Hamas, and groups in Iraq and Syria violated understandings underlying the China-arranged restoration of diplomatic relations.

“The kingdom would have expected Iran to be more forthcoming in showing not just to us but to others that it can be a positive factor in securing stability and removing differences not just with Saudi Arabia but the rest of us,” Mr. Al-Feisal said.

Gas may make economic sense for Saudi Arabia. From Mr. Al Feisal’s perspective, it probably also makes sense for the kingdom not to cede gas dominance to Iran.

Dr. James M. Dorsey is an Adjunct Senior Fellow at Nanyang Technological University’s S. Rajaratnam School of International Studies, and the author of the syndicated column and podcast, The Turbulent World with James M. Dorsey.