Saudi Arabia Faces Challenge in Balancing Deep Oil Cuts With Need for Gas
For Saudi Arabia and other Gulf states such as Kuwait and
the UAE, there are no real technical impediments to oil startups and shutdowns,
but there are costs. Among the costs is lower production of needed natural gas
and ethane, which are byproducts of crude production.
Saudi Arabia consumes all the associated gas it produces to
power air conditioners and as feedstock for its petrochemical industry. In
2018, Aramco produced 8.9 Bcf/D of natural gas and 1.0 Bscf/D of ethane.
Combined ethane-based ethylene production in Saudi Arabia, the UAE, and Kuwait
was approximately 10% of the global ethylene supply last year.
Saudi Arabia’s ability to deliver on the cuts it has agreed
to is not in question. And, it is well known that opening and shutting in oil
wells is technically easier for OPEC’s biggest producer than in other parts of
the world. The dilemma is the delicate process of balancing the supply and
demand of gas for the kingdom’s residential sector and industry.
In addition to the agreed-upon OPEC+ April agreement to
reduce output by approximately 9.7 million B/D in May and June, Saudi Arabia,
Kuwait, and the UAE have pledged to deepen their cuts by an extra 1.180 million
B/D in June.
Approximately 15% of ethane-based ethylene supply in the
Middle East could be lost this year due to oil supply dynamics, according to
Wood Mackenzie. This equates to approximately 1.5 million tons of ethylene.
According to industry experts, most of the ethylene capacity
in Saudi Arabia, Kuwait, and the UAE has limited to no flexibility to adjust to
alternative feedstocks, such as propane, under economic or supply constraint
scenarios. For example, the drone attacks that took place in Saudi Arabia
during September 2019 had a considerable and rapid impact on oil supply and,
consequently, ethane supply in the region.
All Barrels Are Not Created Equal
In Saudi Arabia, fields that produce lighter crude also tend
to produce more associated gas than fields with heavier and sour grades. The
lighter crude is also less expensive to produce. So, although Gulf oil
producers benefit from the world’s lowest per-barrel production costs, the
relative cost of production of different grades must be considered when
deciding where to make cuts.
“Heavy oil is discounted in terms of its export price
relative to the lighter crudes. Arab Heavy would generate lower export revenues
than Arab Light,” said Sadad al-Husseini, a former senior executive at Saudi
Aramco and now an energy consultant. He continued to explain that offshore
fields such as Safaniya and Manifa that produce heavier grades generally have a
higher operating cost than the lighter-crude oil fields and generate much lower
volumes of associated gas and other liquids. For example, a barrel of Arab
Light may have an associated 500-600 ft3 of gas, while a heavy crude from
Manifa may have as little as 90 ft3, he said.
According to analysts, Saudi Aramco has often concentrated
production cuts on offshore fields, which produce heavy crudes, to avoid
offering big discounts for the heavy oil. That could point to a relative
increase in exports of already oversupplied lighter grades as production is
curbed, potentially worsening the current global glut.
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