Saudi Arabia Building Natural Gas Empire-Lines Up Deal to Buy From US

Canary. Photo by 4028mdk09.

According to a Wall Street Journal report, Saudi Arabia’s oil company Saudi Arabian Oil has made a deal with the US San Diego based company Sempra Energy to purchase liquified natural gas in what is being considered “a new strategic direction for the kingdom as it seeks to establish a footprint in the growing global market for the fuel.”

Saudi Arabian Oil Co., known as Aramco, plans to purchase gas from San Diego-based Sempra Energy’s Port Arthur project in Texas, the companies said Wednesday, confirming an earlier Wall Street Journal report.

The two companies said their respective subsidiaries, Aramco Services Co. and Sempra LNG, have signed a “heads of agreement,” which anticipates the reaching of a definitive 20-year sale-and-purchase agreement covering 5 million metric tons each year from the Port Arthur LNG export project under development.

The deal demonstrates how the U.S. energy boom is dramatically changing global trade. Historically, Saudi Arabia has been a major supplier of oil to the U.S. But with the evolution of shale drilling in the U.S., the Energy Department predicts America will become a net energy exporter next year.

Shale has catapulted the U.S. to being one of the top shippers of LNG, with the Energy Information Administration forecasting it will become the world’s third-largest exporter this year.

Aramco has signaled that it intends to boost its gas investments by tens of billions of dollars, domestically and internationally, following similar moves by major energy companies.Royal Dutch Shell PLC and BP PLC are reorienting their energy portfolios toward gas as demand growth for it is expected to outpace oil.

Aramco doesn’t produce any oil and gas abroad, and while the kingdom’s own gas reserves are some of the largest in the world, they are hard to extract and high in sulfur, making them more expensive to process.

“The cheapest gas is in Russia, the U.S. and Qatar,” said Thierry Bros, senior research fellow at the Oxford Institute for Energy Studies, adding that if it had been economic and competitive, Saudi Arabia would have exported its own gas years ago.

Saudi Arabia burns some of its oil for power generation, reducing what could otherwise be exported, and has plans to boost domestic gas output to address this.

Saudi Arabian made an official announcement May 22 marking “its first steps into a business – the buying and selling of LNG – where is has long lagged behind rivals like Qatar and more recently the U.S.” and is part of Saudi Arabia’s “decadelong $160 billion plan to build up its gas assets, as the oil-rich kingdom’s demand for new energy is projected to soar beyond its capacity.”

In Saudi Arabia’s north, Aramco has launched what some analysts call its smallest-ever project but one of its most important. Around the city of Turaif, Aramco has successfully begun producing natural gas from fracking techniques that unlocked the U.S. shale boom but have rarely been used in Saudi Arabia. The gas is being used to power a mining facility, providing a glimpse into how gas can power new industries in the future.

Aramco has also ramped up natural-gas production efforts on large fields in its oil-rich Eastern Province. The company has begun taking seismic measurements around parts of the Red Sea where some believe there are large natural-gas deposits.

“Gas is something they are growing massively,” said Stewart Williams, a Wood Mackenzie analyst who has studied Saudi Arabia’s gas projects. “They’re after every molecule they can get.”

“Saudi Arabia foresees a natural-gas empire that fuels futuristic new cities and helps develop local industries in manufacturing, mining and technology. The kingdom produces enough crude oil now to meet electricity demands, but Saudi leaders are trying to stop burning petroleum to create power because it lowers its biggest source of revenue—oil exports.”

Saudi Crown Prince Mohammed bin Salman’s economic ambitions are driving the gas push. In his economic plan, called Vision 2030, Prince Mohammed calls for the building of several new cities around new industries, including Neom, a vast new metropolis expected to cost $500 billion. The plans calls for Saudi Arabia to export natural gas by 2030.

Because of the envisioned economic overhaul, Saudi Arabia projects demands its for electricity will double by 2030 and that “the kingdom’s demand for natural gas would grow 40% by 2030 and could soon exceed the company’s capacity.”

The Sempra deal provides the Saudis with a jolt of natural gas without having to find new sources of production. Saudi gas reserves are difficult and expensive to exploit compared with other big producers like Russia. Saudi officials had long treated gas as a less profitable afterthought to oil, despite having the world’s fourth-largest gas reserves.

The Saudis have held wide-ranging discussions with other natural-gas producers and are expected to make more deals in natural gas soon.

“This deal gets Saudi Arabia into the market,” said Jason Feer, head of business intelligence at New York-based consulting firm Poten & Partners. “It is a big statement for someone just entering the market.”

For full content and further context, read:

Saudi Arabia Lines Up Deal to Buy U.S. Natural GasWall Street Journal.

Oil-Rich Saudi Arabia Barrels Into the Gas BusinessWall Street Journal.

Saudi Arabia strikes deal to buy U.S. natural gas from San Diego’s SempraThe San Diego Union Tribune.

About the opinions in this article…

Any opinions expressed in this article are the opinions of the author and do not necessarily reflect the opinions of this website or of the other authors/contributors who write for it.