Saudi Arabia plans gas project to develop reserves

Mar 14, 2002 01:00 AM

Saudi Arabia's project to develop gas reserves for use in the petrochemicals, power and water desalination industries will require the creation of a freer energy services sector. Until now, the services sector has been broadly state controlled, but it could be opened to foreign involvement. Several international energy companies have already expressed an interest.

The gas initiative -- which will allow foreign operators to drill for the first time in 25 years -- will require initial investment of over $ 25 bn. In June 2001, the government signed three core venture agreements with eight major oil companies to develop its natural gas reserves. According to Hashim Yamani, minister of industry and electricity, the key to success is integrating new gas supplies with the industries they will supply.
"To develop natural gas in the absence of an outlet is meaningless, as would be investments in utilities and industries in a situation of gas shortages," says Yamani. Prince Faisal bin Turki bin Abdulaziz Al Sa'ud, adviser to the oil ministry, underlines the need for a complementary supplier of goods and services for the energy sector. He says: "Regular maintenance, upgrades, expansion of existing installations and new grassroots complexes guarantee continuous market growth for goods and services".

The ministry has carried out a detailed study of the energy services sector. One conclusion is that Saudi valve consumption will rise sharply from 2004 to 2015, not only because of new demand from the gas projects, but also for replacement purposes. "This doesn't include the Middle East regional demand for valves, which is expected to average $ 700 mm a year, over the next 14 years," he claims.
The three core-venture agreements "Technically speaking, the platform for a strong domestic energy service industry is in place. What remains is the resolve to encourage both private and public investors to take part in one of the most promising eras of growth in recent times."
The new foreign investment legislation was introduced in 2001. It was designed to make the country more attractive to external funding and would, Faisal says, stimulate growth in the services sector, as well as the flows of capital required for the gas initiative. The legislation established a Foreign Investment Act and the General Investment Authority, which handles foreign investment and streamlines paperwork. Tax laws relating to foreign investment have also been relaxed.

According to Terry Valenzano, managing director for Bechtel in Saudi Arabia, there will be around $ 6 bn-worth of major, non-public-sector, energy-related projects in the kingdom between 2003 and 2012, and a further $ 7 bn of smaller projects -- $ 3 bn in power generation, transmission and distribution, and $ 2 bn each in oil and gas, and water production.
"The potential energy related services market is very large -- especially between 2003 and 2008." The gas initiative and associated infrastructure projects leave the government with "little choice", Valenzano says, but to expand the energy-services support sector through alliances and public/ private partnerships. Joint-ventures with local companies could, he suggests, contain incentives for both parties to encourage local job creation.
To create a more vibrant energy services sector, Valenzano says some legal issues must be addressed, including a faster dispute-resolution process, "innovative" contracting approaches and "more balanced" reward/risk scenarios. At the same time, more information must be made public and the government should attempt to stimulate and act as "the incubator for growth of the energy service sector of the economy".

Alan Thompson, CEO of the Riyadh Bank says the gas initiative is "a golden opportunity for the development of an indigenous energy-services industry". The initiative and associated projects could, he says, create 32,000 jobs over the next five to seven years. In addition to the $ 25 bn investment already expected, Thompson claims the gas initiative could generate an extra $ 100 bn in investment for related sectors and services, including energy, creating up to 1.6 mm jobs in the next 30 years.
Abdulrahman A1-Wuhaib, vice-president of engineering services at Saudi Aramco, says there are "tremendous work-load challenges in the energy services sector". He adds that many of these are linked directly to the gas initiative with "good opportunities for Saudi and international contracts and suppliers".

ABB Lummus' global vice-president, Jimmy Allen, says the critical activity period for downstream projects connected to the gas initiatives, and where the role of the energy services sector will be crucial is between 2003 and 2006. "With the relatively large volume of work to be done... in a relatively short period of time, we could be heading towards potential shortages of manpower, infrastructure support, supply and fabrication facilities, and competent engineering/construction contractors to do the work."
"Once the gas leaves the wellhead, a broad spectrumof design, supply and construction firms will come into play involving local as well as multi-national, stand-alone entities and consortia that will be formed to take advantage of the vast new initiative. Pipelines and treatment facilities will spread out from the gathering facilities. Then distribution to locations for petrochemicals, power and water facilities will have to be added."
Service company participation, he says, will be required in:
-- exploration and development;
-- gathering systems and transport pipelines;
-- treatment facilities and distribution to user industries;
-- and petrochemicals, power and water projects.

Saad Saab, managing director of Arabian Drilling, says the true potential of future services sector work will become clear next year. But it is already evident there will be opportunities for seismic and drilling firms, oilfield services, oilfield construction, transportation management and catering and other support companies.
"The gas development will bring new jobs, new oilfield technology and create more prosperity."

Source: Petroleum Economist
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