Tight Gas To Displace Shale

BMI View : Aramco's strategic shift away from shale gas and towards tight gas will offer a more economically viable route to unconventional resource development. However, given various technological and financial barriers to production, we see offshore and associated gas continue to dominate output growth across our 10-year forecast period. 

In its 2013 Annual Review, Saudi Arabian national oil company (NOC) Saudi Aramco made unconventional gas resource development a key strategic focus. More specifically, the company placed a heavy emphasis on shale gas, targeting production of 2bn cubic metres (bcm) per year, by 2018. However, we argued that shale gas development would, under current conditions, prove uneconomic ( see 'Unconventional Projects To See Slow Progress', June 05), and the shift in focus by Aramco seems to confirm us in this view.

Foster Wheeler has been awarded a front-end engineering and design (FEED) contract for work on Saudi Arabia's unconventional gas development programme. The contract covers a five year period and, significantly, will prioritise development of the Kingdom's tight gas, as opposed to shale gas, resources.

Robust Growth With Risks To The Upside
Saudi Arabia Natural Gas Consumption And Production (bcm)

Tight Gas To Displace Shale

BMI View : Aramco's strategic shift away from shale gas and towards tight gas will offer a more economically viable route to unconventional resource development. However, given various technological and financial barriers to production, we see offshore and associated gas continue to dominate output growth across our 10-year forecast period. 

In its 2013 Annual Review, Saudi Arabian national oil company (NOC) Saudi Aramco made unconventional gas resource development a key strategic focus. More specifically, the company placed a heavy emphasis on shale gas, targeting production of 2bn cubic metres (bcm) per year, by 2018. However, we argued that shale gas development would, under current conditions, prove uneconomic ( see 'Unconventional Projects To See Slow Progress', June 05), and the shift in focus by Aramco seems to confirm us in this view.

Foster Wheeler has been awarded a front-end engineering and design (FEED) contract for work on Saudi Arabia's unconventional gas development programme. The contract covers a five year period and, significantly, will prioritise development of the Kingdom's tight gas, as opposed to shale gas, resources.

In our view, tight gas development should yield better project economics. The key factor is the more favourable geology of tight gas, relative to shale. Saudi Arabia's tight gas deposits are largely found in sandstone formations, which have a higher permeability and porosity than shale, and so are easier to hydraulically fracture. Saudi Arabia also contains tight gas reservoirs believed to be both more porous and more permeable than several major tight gas fields currently in production or under development in the Middle East and North Africa region.

Major Domestic Tight Gas Fields In North Africa And The Middle East
Country Field Name Type of Formation Porosity (%) Permeability
Algeria Krechba Sandstone 8.5 <1
Algeria In Salah Sandstone 10 -
Egypt Obaiyed Sandstone 7-13 0.1-600
Iraq Akkas Sandstone 7.6 0
Jordan Risha Sandstone with silty clay 3-7 0.13
Oman Khazzan Sandstone 7 0.1
Saudi Arabia Ghawar Sandstone 12 >1
Syria Arak Sandstone interbedded with shale 13 >1
Source: Schlumberger

However, there are strong parallels between tight gas and shale gas resources and many of the challenges that we have flagged for shale gas projects in Saudi Arabia are also relevant here -

  • Lack of water - hydraulic fracturing requires high volumes of water. Production of tight gas from sandstone reservoirs should use less water than production from shale; however, given the level of water scarcity in the Kingdom, this remains a concern; 

  • High reservoir depth - the bulk of Saudi Arabia's unconventional resources, both tight and shale, are at very low depths, significantly raising development costs;

  • Geologic heterogeneity - as with shale, tight gas formations are highly geologically heterogeneous; extensive data sets are needed to understand the properties of each specific reservoir and to design appropriate stimulation techniques.

The Foster Wheeler contract is set to target tight gas development in three main areas; Rub' al Khali (the Empty Quarter), South Ghawar and Jalamid (in the northwest). Given the factors discussed above, we anticipate exploration will focus in the South Ghawar and Jalamid regions, with limited prospects for tight gas development in the Kingdom's Empty Quarter.

South Ghawar houses the Ghawar field, Saudi Arabia's largest producing oilfield. The region has extensive existing oil and gas infrastructure, and there is a substantial amount of geological data available from the Ghawar field, which could help define the region's tight gas formations. The northwest is less developed in terms of infrastructure, but the Jalamid tight gas deposits are far shallower than in other areas, lowering production costs. In contrast, the Empty Quarter is critically lacking in infrastructure, heavily underexplored and geologically unattractive, with deep reservoirs and highly sour gas.

Pricing dynamics, though, will remain an inhibiting factor for all three prospects. Aramco claims that its tight gas resources could ultimately be developed for around USD2-3 per million British thermal units (/mnBTU); this compares with an estimate of USD12-13/mnBTU for shale gas. Although significantly cheaper, tight gas production would remain uneconomic at these levels, with the domestic price for gas set at USD0.75/mnBTU.

Saudi Arabia keeps its gas prices artificially low, and although the pricing mechanism is currently under review, we see limited room for a significant price increase over the coming years. As such, we expect that interest from major international oil companies will remain muted, despite the Kingdom's attempts to draw greater foreign involvement. Instead we see unconventional development driven largely by Aramco, in partnership with major oilfield service providers.  

Given the slow pace of progress to-date, and the various technological and financial barriers to unconventional production, we expect that offshore and associated gas will be the main drivers of output growth across our 10-year forecast period, to 2023.

Robust Growth With Risks To The Upside
Saudi Arabia Natural Gas Consumption And Production (bcm)

However, we also see tight gas pose a growing upside risk towards the end of the decade, in particular, given its strong strategic significance to Saudi Arabia. In light of rising domestic consumption, increasing its domestic gas production is critical, both to support Aramco's aggressive downstream expansion, and to protect crude oil export revenues.

Currently, we are forecasting natural gas production to rise from an estimated 108bcm in 2013, to 137bcm in 2018, before reaching 155bcm by 2023.

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