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Energy Insight: Conventional onshore oil & gas in Saudi Arabia

The following Energy Insight provides you with information regarding the status of conventional onshore oil and gas in Saudi Arabia, offering a brief introduction to:

  • Early history and developments in the oil and gas sector in Saudi Arabia
  • Current production of hydrocarbons in Saudi Arabia; 
  • Impact of oil prices on the economy of Saudi Arabia; and
  • Oil and gas regulations in Saudi Arabia.

 

Summary

Prior to the discovery of oil, Saudi Arabia’s economy depended heavily on agriculture and tourism revenue from Muslims’ pilgrimages to the holy city of Mecca. After the discovery, a strong infrastructure dotted with wells, pipelines, refineries, and ports was established. Today, the oil and gas sector is the most important contributor to the Kingdom’s economy, as well as a major source of the country’s global financial and political influence. Reports suggest that as of 2016, Saudi Arabia has 260.8 billion barrels of proven reserves, accounting for 22% of the world’s global oil reserves, and up to 298.7 trillion standard cubic feet of natural gas, the fourth largest reserves in the world. The Kingdom is currently the largest exporter of petroleum.

 

Figure 1. The world’s biggest oil producers

Data source: BP Statistical review of world energy 2017

 

The oil and gas sector accounts for about 50% of the country’s gross domestic product and 75% of the country’s total export value. The discovery of oil also changed the demographics of the kingdom. Today, thousands of foreign workers live and work in Saudi Arabia.

 

Figure 2. Saudi Aramco workforce origin (2016)

Data source: Saudi Aramco (2016)

 

Early history

How BP lost the opportunity to drill first

The history of oil in Saudi Arabia dates to the early 20th century. In 1908, the first oil well in the Middle East was successfully drilled in Iran by the Anglo-Persian Oil company, which later became British Petroleum (BP). The discovery of oil in neighbouring Bahrain caught the attention of King Ibn Saud of Saudi Arabia, who initially sought an oil concession with the Anglo-Persian Oil Company in exchange for cash and loans. However, the company rejected this demand, because it concluded that there was no oil in Saudi Arabia. The view was also shared among some of the most notable geologists of that time.

The United States seize the opportunity

The US-based Standard Oil of California (SoCal) were the only company to believe in the existence of the Kingdom’s oil reserves. In 1933, King Ibn Saud granted SoCal an oil concession. SoCal assigned the concession to a wholly owned subsidiary, California-Arabian Standard Oil (CASOC). Drilling began in 1935 following the definite discovery of oil at Dammam. Before the 1930s ended, Saudi Arabia was producing 500,000 barrels of oil a year. Later, CASOC became the Arabian American Oil Company (Aramco), a conglomerate of four US oil companies: Chevron, Texaco, and ExxonMobil

OPEC and the nationalisation of Aramco

The American conglomerate handled the daily operations of the oil fields, while King Ibn Saud owned the oil from the underground. Oil revenues were then divided between both parties. However, concerns emerged within the Saudi government that the oil revenues were not divided fairly. As a response, Saudi Arabia founded the Organization of Petroleum Exporting States (OPEC) in 1960 together with Iran, Iraq, Kuwait, and Venezuela. OPEC primarily served as a vehicle for negotiating the terms and conditions, including royalty and revenue-sharing agreements of member countries with Western oil companies. By 1980, the Saudi government acquired a 100% stake in Aramco and in 1988 a royal decree changed the name of the company to Saudi Arabian Oil Company (Saudi Aramco).

Today, a world leader

Most of Saudi Arabia’s oil fields are located in the Eastern Province. A comprehensive map displays the country’s oil and gas infrastructure in detail. The Ghawar oil field is the largest production site in the Kingdom and also one of the most established, largest and well-known oil fields in the world. Discovered in 1948, the field accounts for about 6% of the world’s total daily crude oil output and approximately 60% of Saudi Arabia’s total daily production.

 

Figure 3. Total oil production in Saudi Arabia (1965-2016)

Data source: BP Statistical review of world energy 2017

  

Oil production in Saudi Arabia peaked at 12.3 million barrels a day in 2016, with an average of 10.5 million barrels a day, setting a record-breaking year for the Kingdom. The country has been maintaining high levels of production for the past few years despite a global supply cut in line with a strategy to defend its market share against rival producers from the US and Russia.

The oil mix and low production cost

Saudi Arabia produces a diverse range of crude oils. There are five types of crude oil being produced in the Kingdom. Three of those types are produced from the onshore fields: light, extra light and super light crude oil. It is considered that the lighter the crude oil is, the more valuable and expensive it is. The Kingdom also benefits from relatively low oil production cost. To begin with, the national oil company, Saudi Aramco, has no royalties to pay out. The company also manages the entire value chain from upstream to downstream, including transportation, processing and refining. Furthermore, the oil is located in conventional formations in relatively porous rocks at a reasonable depth, making it easy to extract. Unconventional recovery methods such as horizontal drilling and hydraulic fracturing are not needed. Lastly, the land is not in competition for other resources in comparison to rival countries such as the United States.


Refining capacity

In addition to dominating the crude oil market, the Kingdom is also the leading nation in terms of refining capacity. According to the most recent data from Aramco (2016), the country’s refining capacity in 2016 reached 3.1 million barrels a day compared to the total worldwide capacity of 5.4 million barrels a day, placing Saudi Arabia at the forefront of the global refining industry with a market share of 57%. The Kingdom and the national oil company, Saudi Aramco, have declared their commitment and strong interest in expanding the country’s global refining capacity. This is achieved not only through Aramco’s sole efforts, but also through participating in joint ventures and forming strategic partnerships worldwide. Recently, Aramco completed a joint venture with The Dow Chemical Company – the Sadara chemical complex – making it the first chemicals facility in the region to crack naphtha (Aramco, 2016). The company has also formed strong partnerships in Asia, particularly in China, South Korea and Japan. In the Netherlands, Aramco is working closely with the German chemicals company LANXESS in a joint venture focusing on synthetic rubber and elastomers. Those products are used in the global tire industry, car manufacturing and construction, widening Aramco’s reach and influence globally.

Oil price crash

The oil revenues of Saudi Arabia were strongly hit when the price per barrel (Brent) plummeted to under US$35 in early 2016, a sharp drop from the US$115 per barrel in 2014. Despite the low production costs, the country has not been able to reach the breakeven price needed to balance its budgets. Reports from 2017 suggest that the breakeven price per barrel for Saudi Arabia in 2018 will be US$70, while the World Bank forecasts price per barrel to be US$50 to US$60. More up-to-date information on global crude oil prices can be found in our dedicated data sheet.

 

Figure 4. Historical Brent crude oil prices (1987-2018)

Data source: U.S. Energy Information Agency (2018)

 

Exports

Saudi Arabia is the world’s leading petroleum exporter. As such, the country is exporting the vast majority of its production.

 

Figure 5. Crude oil production and exports (2015-2016)

Data source: Saudi Aramco (2016)

 

According to latest data from 2016, both crude oil production and exports have been on the rise. Exports accounted for 70% of the crude oil production in 2015, increasing to 73% in 2016. A different trend can be observed with the production and exports of refined products. Whilst Saudi Arabia is the leading country in refining capacity worldwide, the nation exported 36% of its production in 2015 and 44% in 2016, a significant difference compared to the 70% of crude oil exports compared to crude oil production.

 

Figure 6. Refined products production and exports (2015-2016)

Data source: Saudi Aramco (2016)


Figure 7. Crude oil exports by destination (2016)

Data source: Saudi Aramco (2016)

 

The vast amount of crude oil Saudi Arabia produces is shipped to Asia, accounting for nearly 67% of the total exports. Following is the United States with a 16% share. In Europe, the Kingdom supplies roughly equal amounts of crude oil to both Northwest Europe and the Mediterranean.

 

Figure 8. Refined products exports by destination (2016)

Data source: Saudi Aramco (2016)

 

In comparison to crude oil exports where Asia is the dominating market, most refined products are being exported to countries outside of Asia, the U.S. and Europe. In fact, there is no data for refined products being exported to the United States. Another interesting trend is observed with the exports to Europe. Refined products exports to both Northwest Europe and the Mediterranean are higher in comparison to crude oil exports, with the former having a minor lead. 

 

Decarbonisation efforts

In their corporate vision, Saudi Aramco have stated the aim to decrease greenhouse gas emissions while at the same time continue meeting the world’s energy demand. The company is planning to achieve this through four key measures:

  • Increased energy efficiency;
  • Increased supply of gas;
  • Production of ultra-clean oil fuels;
  • Use of advanced technologies; and
  • Use of renewables.

In addition, the company has also placed importance on expanding its R&D operations as a tool for achieving greater decarbonisation. Through its Global Research Network, Aramco has created three research centres within Saudi Arabia and eight more abroad.  

 

Regulation

The Basic Law of Saudi Arabia vests all of the Kingdom’s oil and gas wealth in the government. The Ministry of Energy, Industry and Mineral Resources develops and implements policies relating to oil and gas and represents the Kingdom’s oil production and pricing policies internationally. In May 2016, the Kingdom announced reorganisations of the oil and gas sector, including appointing the chairman of Saudi Aramco as the country’s new oil minister. Saudi Aramco is responsible for all exploration, drilling and production activities in the Kingdom. International oil companies operate through joint ventures with Saudi Aramco in Saudi oil fields and refineries.

 

Saudi Vision 2030

The Saudi Vision 2030 represents the Kingdom’s vision for the future. Inspired by the falling oil revenues, the Vision focuses on diversifying the Kingdom’s economy in an effort to reduce the reliance on hydrocarbons. It involves governmental restructuring, the identification of new sources of revenue and reduction of government expenditure. The Vision also introduces plans for partial privatisation of the public sector, including a 5% IPO of Saudi Aramco in 2018. 


Further reading:

History of oil in Saudi Arabia.
https://www.geoexpro.com/articles/2008/06/the-emergence-of-the-arabian-oil-industry

OPEC country profile.
http://www.opec.org/opec_web/en/about_us/169.htm

Production data.
https://tradingeconomics.com/saudi-arabia/crude-oil-production

Aramco annual review 2016.
http://www.saudiaramco.com/content/dam/Publications/annual-review/2016/English-PDFs/2016-AnnualReview-full-EN.pdf

Regulation.
http://www.jonesday.com/saudi-arabias-oil-and-gas-sectoran-update-part-1-08-12-2015/

Overview of the oil and gas sector.
https://info.drillinginfo.com/saudi-arabia-oil-need-know/

Saudi Aramco IPO.
https://www.ft.com/saudi-aramco-ipo

Saudi Vision 2030.
http://vision2030.gov.sa/en


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