Saudi Arabia’s Energy Problem (BNO, USO, UNG)

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September 9, 2011 11:04am NYSE:BNO NYSE:UNG

Tony Daltorio:  Saudi Arabia, home to more proven oil reserves than any other nation, has an energy problem. HSBC estimates that this year the kingdom will burn 1.2 million barrels of oil a day to generate electricity, double the amount burned in 2010. With the amount of crude oil burned

 domestically climbing sharply, it is leaving less and less oil (NYSE:USO) for exports.

The solution for the desert kingdom? Use natural gas, both conventional and unconventional, to meet domestic energy needs.

About a year ago Khalid al-Falih, head of Saudi Aramco – the world’s biggest oil company – announced that the kingdom could hold trillions of cubic feet of unconventional natural gas (NYSE:UNG). If so, this easily outpaces the country’s current proven gas reserves of 7.461 trillion cubic meters.

That estimate from the Aramco CEO though is just a guess. In a recent report, the Energy Information Agency said only 15% of the kingdom has been “adequately explored” for gas.

Saudi efforts to exploit this resource have been slow off the mark.

In its latest annual report, Saudi Aramco said it plans to boost natural gas output by more than 50% to 15.5 billion cubic feet of gas a day by 2015. The U.S. produced more than 21 trillion cubic feet of natural gas in 2010.

Rig drills for gas.

Karan-6 rig drills for natural gas offshore Saudi Arabia. Source: Saudi Aramco.

Meanwhile, almost 15% of Saudi Arabia’s current natural gas production is lost to venting, flaring and re-injection, the EIA found.

Progress is finally being made. The $10 billion Karan offshore gas field is now operating after four years of development. Production is expected to reach 1.8 billion cubic feet of gas a year when it is fully operational in 2013. By that time, Saudi Aramco also plans to bring online two other gas sources – Wasit and Shaybah – adding another 5 billion cubic feet of capacity.

The Saudis still face difficulties in bringing more natural gas production onstream.

One problem is that about 55% of its gas is associated with oil fields, which means it is linked to oil production and OPEC quotas. Of the rest, only about 25% is free from sulfur and thus easily recoverable.

Much of the new natural gas production is already slated to be used in the kingdom’s efforts to diversify the economy. A key part of that effort is a $20 billion joint venture between Saudi Aramco and Dow Chemical (DOW) that focuses on natural-gas intensive petrochemicals.

One prediction is that Saudi Arabia will only have 6 million barrels a day of oil available for export by 2030, compared with 7.4 million barrels a day in June.

“The country’s domestic consumption of energy, especially oil, at very cheap prices, is likely to continue to rise rapidly, sharply reducing the amount of oil available for export,” Jadwa Investment said in a report.

An ETF which should track oil prices higher is the United States Brent Oil Fund (NYSE:BNO).

Written By Tony Daltorio For Emerging Money

Emerging Money provides insightful and timely information about the increasingly important world of Emerging Market investments. CNBC Emerging Markets Contributor Tim Seymour leads the team of Emerging Money to bring you cutting edge global news and analysis.

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