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Shell hopes for more Saudi gas

Riyadh, March 14, 2011

Royal Dutch Shell is optimistic a second phase of exploration in Saudi Arabia's Empty Quarter will yield gas, although it is unclear how economic it will be, it said in an interview.

Shell is one of the five companies state oil company Saudi Aramco teamed up with in 2003-2004 to drill in the Empty Quarter, or Rub Al Khali.

So far they have failed to find the volumes of gas needed to fuel Saudi economic growth or to guarantee returns for investors.

South Rub al-Khali Company (SRAK), a joint-venture between Aramco and Shell, said last year it had entered a second phase of exploration in the Kidan field area.

"We are optimistic otherwise we wouldn't have entered the second exploration (phase)," said Michel Faure, chief executive officer of the Shell Companies in Saudi Arabia. But he stressed it was still only the exploration phase.

"We have not reached a point where we have enough confidence about the volume in place. We know there is gas, that is for sure," Faure told Reuters in an interview.

"It's difficult to talk about commercialisation of the project, that's why we are still in the exploration phase."

Finding gas alone would not be enough to guarantee profits, analysts have said.

Terms agreed with Aramco were so poor, the consortia need to find condensate -- a form of light oil that can be sold at international market prices to cover the cost of development.

Faure said the investment in the Empty Quarter was "significant", but declined to elaborate.

Saudi Arabia has said its oil capacity of 12.5 million barrels per day is sufficient for now and that it would instead focus on increasing gas capacity.

The kingdom needs gas to help cover domestic fuel demand and conserve oil for lucrative export markets.

Aramco's focus on gas, includes difficult-to-extract tight gas, which is particularly hard to justify commercially.

"The development of tight gas is not commensurate with the current gas price that is in the kingdom. It requires lots of drilling wells, and there may be some alternatives which are more favorable and attractive than tight gas," Faure said.

Saudi Oil Minister Ali al-Naimi has said the kingdom might consider boosting the domestic price of gas.

For now, the transfer price of gas in the kingdom is 75 cents per million BTU (British Thermal Unit), a fraction of the cost on international markets.

That price has helped many companies, including Saudi Basic Industries Corporation (Sabic), to become the world's largest petrochemicals company by market value.

Shell also has a petrochemical joint venture with Sabic in Jubail. Faure said there was a need to strike a balance so all parties could achieve profitability.

"You have to satisfy both, they have to find a way for prices to remain competitive (for petrochemicals) and acceptable for investors exploring for gas," said Faure.

SRAK submitted its plan last year to continue exploration in Kidan, an area already discovered by Aramco years ago, after announcing gas had flowed from Kidan.

"This gas is very sour we have to look at what we can do with the sulphur that will be produced in Kidan, will impact commercialisation, we need to get better knowledge on condensate rates," Faure added.

One factor that could improve the economics of the Kidan exploration area is its proximity to the Shaybah oilfield, where infrastructure for both oil and associated gas is in place.

"That's part of the study to see how to interconnect the Kidan with Shaybah because Shaybah could be a hub to support Kidan," Faure said.

"If you see the gas plant they have, the infrastructure could be used if we want to dispose of the gas to the grid Aramco has already built," he added.-Reuters




Tags: Shell | Saudi gas |

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