Regulation & The Environment: The growing Saudi thirst for crude oil

The world’s biggest crude oil exporter has a problem: it is consuming too much of it at home. If current trends continue, it becomes a problem not just for the kingdom itself, but for the world as a whole. In this week’s Oilgram News column Regulation & The Environment, Kate Dourian reviews the country’s demand for oil and how it’s reacting to this growing drain on its exports.

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It snowed in Saudi Arabia last week. And, as temperatures in the desert kingdom dropped, so did its oil production.

The short winter in this oil-rich country offers a respite from the need to run air conditioners at full blast during the brutal summer months when the mercury can rise to as high as 50 Celsius. So when domestic demand falls, so does the need to burn off crude to generate electricity.

For years, it was accepted that cheap fuel offered at subsidized rates encouraged high consumption. But as oil prices rose to records in 2008 and seem to be creeping up toward the same levels this year, the government is concerned that if current domestic demand growth continues unchecked, oil exports will decline and with that the OPEC state’s income.

Saudi oil production has fallen by more than 700,000 b/d since the peak-demand month of August last year to 9.25 million b/d last month. Saudi officials attributed the decline to lower domestic energy use and a drop in demand from its customers, dismissing suggestions the OPEC giant was trying to influence oil prices.

Because the desert land has scarce water resources, a significant volume of its natural gas production is used to operate desalination plants, which supply 70% of the kingdom’s potable water, another drain on the nation’s energy resources.

Riyadh is now considering measures to curb domestic energy use or risk losing its spot as the world’s largest oil exporter, a position it may well have to relinquish to the US in the coming decade regardless of whether Riyadh succeeds in weaning its people off cheap energy and making more oil available for export.

The kingdom’s target is the household sector, which accounts for the highest consumption of energy for air conditioning.

Deputy oil minister Prince Abdulaziz bin Salman did not mince words when he said on January 27 that Saudi Arabia needed to take urgent action to limit energy consumption or risk harming its oil export volumes.

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The prince said the real estate sector accounted for 80% of total electricity consumption with 70% of that used for cooling.

Because of the summer spike in demand, Saudi Arabia has had to invest heavily in power generation projects with capacity to supply 5,000 megawatts of electricity for no more than 100 hours in total during peak demand while operating at way below capacity during the milder months, a waste of money and resources.

The government has also started a pilot program to switch to energy-saving lighting for its roads, a measure that if extended to the rest of the kingdom will result in annual savings of 3.8 million barrels of crude.

Prince Abdelaziz pointed out that Saudi Aramco supplies crude for direct burning in power stations at $4.50/barrel and fuel oil at $3.50/b, a price that doesn’t encourage conservation.

World crude oil benchmark Brent Blend is currently trading at close to $118/b.

Saudi Arabian oil minister Ali Naimi November 24 called for the rationalization of the kingdom’s domestic energy use as a senior energy official warned that oil consumption was growing at “a frightening level.”

“The kingdom uses around 2.5 million barrels of oil equivalent to produce $1,000 of domestic income, compared with an average 1.3 million to produce the same unit of GDP,” the official Saudi Press Agency quoted Naimi as telling an electricity and water conference.

Riyadh has announced plans to generate 50% of its electricity from nuclear, solar and other renewable energy sources by 2032.

Although more often thought of as a major crude producer and exporter, Saudi Arabia, where energy prices are heavily subsidized, is a significant and fast-growing user of oil. It is already among the world’s top 10 consuming nations and energy demand is growing at 8% annually.

Saudi Aramco CEO Khalid al-Faleh said in December last year that 500,000 b/d of crude oil was being burned for power generation on average. He said total energy consumption in barrels of oil equivalent was in the range of 4 million boe/d, about 50% of which was gas based. Consumption is set to double to 8.2 million boe/d by 2030 if it is not curbed, he said.

The kingdom is also home to the world’s fourth biggest conventional gas reserves, estimated at 282.6 Tcf in 2011. Saudi gas production reached an all-time high of 11.2 Bcf/d in 2011 and more than half that volume is non-associated gas. The balance is gas produced in association with crude and is thereby subject to oil output declines in line with market requirements or OPEC output targets.

Because changing the domestic pricing structure is politically sensitive, the government is focusing on raising energy efficiency while exploring alternative and renewable energy initiatives, which will take time to yield results.–Kate Dourian in Dubai


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  1. argo oil at February 19, 2013 4:41 pm

    We agree with the writer as far as Saudi´s short term future as the world No. 1 oil producer will be diminished however we think that due to the ever increasing oil demand in emerging countries such as India, China and South America, the price of oil remain stable at about $100. per barrel for the next few years.
    Even though in U.S. and some European countries, the effort to produce renewable energy has been the goal and the prospect of having electric car in the market now is more viable, we think long term oil prices will be reflected downward toward $75. per barrel within the next 5 years.

     

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