Saudi LNG exports: Overcoming challenges to commercial success

Recent press reports indicate that Saudi Aramco, Saudi Arabia’s state-owned oil giant, is in discussions with TotalEnergies and Sinopec about developing a liquefied natural gas (LNG) export project utilizing the massive Jafurah Field. After issuing positive statements around greenfield blue hydrogen projects in late 2022, the company, Bloomberg now reports, may be migrating away from the hydrogen scheme and toward LNG exports. Both would require significant capital investment; though, this is not an issue for Aramco given its $161 billion windfall profit for 2022. From news accounts and company statements, it appears the firm has a keen desire to participate in, if not operate, a high-profile material gas project with its expected, but as yet unproven, gas resources to be produced from the 17,000-square-kilometer Jafurah basin. The most obvious choice would be to utilize this gas for the domestic market, such as displacing crude and heavy fuel oil-burning power plants and developing the small-scale LNG sector to replace diesel transport fuel required by long-haul trucks. However, building a blue hydrogen plant and/or an LNG export project would clearly be higher-profile undertakings on the global stage. Assuming the company decides to pursue an LNG export project, it will face many potentially value-erosive challenges and risks that must be overcome before achieving economic success.

What defines a commercially successful LNG export project?

According to Matt Schatzman, chairman and CEO of Next Decade, an LNG project developer on the Gulf coast of the United States, successful LNG projects offer their clients:

• Flexibility in pricing, offering multiple pricing options;

• Certainty in confidence that the project developer will deliver, incorporating reputable and proven engineering, procurement, and construction contractors, as well as LNG technology; and

• Proximity to reliable, low-cost, long-term gas supply.

In their “10 Keys to a Successful LNG Export Project,” Philip R. Weems and Kathryn Marietta, of the international law firm King & Spalding, write that state buyers seek credible projects with a strong, proven resource base as well as a host country that has a predictable legal and contractual foundation and a government that evidences support for the project. Aramco has a solid reputation as a credible supplier of crude. However, as Weems and Marietta point out, “While oil and LNG are both hydrocarbon-based products, they are fundamentally different when it comes to the market and terms on which they are bought and sold.”

In short, the market looks for companies with a track record of project delivery, long-term dependable gas supply, strong host country support, and global standard business principles. While Aramco has strong traits, it lacks an LNG track record, and the long-term dependable, low-cost gas supply is unproven. At the very least, it will need to rely on its crude oil delivery record and secure quality partners with LNG experience in the project development phase.

The challenges

Several technical and commercial challenges face LNG project developers. To start, project developers must identify a site with direct water access for loading LNG, space (e.g., 640 acres, one square mile, or more) with a sufficient safety buffer from communities, and infrastructure such as natural gas pipelines and power supply. One site previously proposed for a greenfield LNG plant was the Jubail-Ras Tanura area. In addition to the concentration of other production facilities nearby (including offshore platforms), the region suffers from maritime congestion with crude tankers, Kuwaiti maritime traffic, and other international cargo and military vessels. Additionally, the exit to the world markets requires maritime transit through two geographical chokepoints, the Qatar/Iran passage and the Strait of Hormuz. Intelligent site selection can enhance the commercial attractiveness of the project; and locating a greenfield LNG plant outside the Gulf would reduce maritime risk as well as offer a competitive advantage.

As mentioned earlier, Saudi Aramco needs to secure experienced LNG partners, and the company is reportedly in early discussions with two leading LNG players, TotalEnergies and Sinopec. Both have LNG experience in projects and marketing, and both offer potential offtake. Partnering with either or both of these companies would offer technical support and create the opportunity to place LNG volumes on global markets, thereby generating a revenue stream for the project. Lastly, while Aramco has a strong track record constructing material projects, adding TotalEnergies and Sinopec would result in a globally recognized partnership, thus further building market credibility.

Commercial success relies on the sales and marketing of the LNG. While TotalEnergies and Sinopec may take some of the produced volumes, additional volumes will likely need to be sold elsewhere. Developing and building up an LNG sales and marketing team will be a central part of this effort, something that has proven a hurdle for the company in the past. This challenge must be addressed if an LNG venture is to be commercially successful.

The development of a material greenfield LNG project requires significant capital. Typical LNG development costs must average no more than $1,000-$1,200 per ton of LNG, exclusive of the natural gas cost, to be competitive in the global market. Thus, a two-liquefaction train project with a total capacity of 10.0 million tons per annum (mtpa) should cost approximately $10 billion-$12 billion to construct. Clearly, Aramco can fund material greenfield projects from its massive cash flow, but securing some project partners would provide commercial de-risking and project alignment from the plant to offtake.

The single most significant risk to the commercial success of a greenfield LNG plant is a low-cost, long-term, stable, uninterruptible gas supply. In U.S. LNG projects, the feed gas is typically sourced from several producing basins and plays, offering the project operator redundancy in supply and a portfolio of purchasing terms. International LNG projects are linked to gas fields with material reserves and a forecasted long productive field life. Globally, there are many LNG projects that have been built and are underutilized due to a lack of sufficient feed gas, diversion of gas supply to the domestic market, and underperforming gas fields.

Aramco plans to anchor its gas supply from the Jafurah Field, which is still in the very early stages of development with little production history. Yet with support from Riyadh, the Saudi energy giant is seeking to diversify its revenue stream and Jafurah gas may provide that opportunity in the long term. A 10.0-mtpa greenfield LNG plant will take 48-60 months to construct; thus, the first LNG volumes will not hit the global market until late 2028 assuming the final investment decision (FID) is taken this year, which is highly unlikely as the project is still in its early stages. Aramco has yet to announce the planned LNG capacity for the new project, but a 10.0-mtpa plant would consume 1.4 billion cubic feet per day (bcfd) for its operational life, typically 30 years or more. The company forecasts Jafurah production to reach 2.0 bcfd by 2030.

Should the possible greenfield project consist of two massive 7.7-mtpa mega-trains, like those in Qatar, feed gas consumption would right away rise to more than 2.0 bcfd, the forecasted production peak for Jafurah. As a result, 100% of Jafurah gas would have to be allocated to support the LNG project, leaving no gas for ammonia projects, the domestic market, or small-scale LNG projects. The global market would focus on this risk when considering long-term offtake. Per the above, it is clear then that any greenfield LNG project would be limited to less than 15.0 mtpa due to a lack of feed gas.

In addition to sufficient feed gas supply, a successful LNG project requires a low-cost clean (e.g., processed) gas. Long-term feed gas contracts supplying U.S. LNG projects are linked to Henry Hub or other regional market indices, and costs are usually less than $2.50 per thousand cubic feet (tcf). Adding an estimated liquefaction fee of $2.00-$3.00 per metric million British thermal units (mmBtu) results in a free on board (FOB) cost of approximately $4.50-$5.50/mmBtu. If we assume the LNG is delivered to the European market, adding the shipping charge of $1.75-$2.00/mmBtu would result in a landed cost of $6.25-$7.50/mmBtu. Qatar, with some of the world’s lowest natural gas production costs, has an estimated long-run breakeven cost of $5.00/mmBtu landed into Asia. Thus, a successful Saudi LNG project must be competitive with these two pricing benchmarks. As such, Jafurah gas production costs would need to be no higher than U.S. Henry Hub prices to compete in the European market as they are unlikely to be competitive with Qatari gas costs. Production costs for unconventional gas plays like Jafurah are higher than for conventional fields. Thus, it follows that Jafurah production costs may eventually be cost-competitive with U.S. gas assuming Aramco takes lessons from experienced U.S. operators that have driven lower costs and higher operating efficiency over more than 10 years. While the global market does not necessarily require a low feed gas cost as it focuses on the final LNG sales costs, the project developer should since the project’s commercial viability is heavily dependent on it.

Options

As with any large company, a solid long-term strategy delivers value for the stakeholders and identifies optionality for the company’s future. In this case, it seems Aramco could use some options and what-if scenario development around Jafurah gas production and commercialization. The Jafurah resource estimate is significant but as yet unproven. Rather than reaching for a higher-risk, stretch target such as a greenfield LNG project, it may seem more prudent to incrementally develop projects as Jafurah production is established. For example, the company could develop a portfolio of small-scale LNG projects to gain LNG experience and provide a new resource for the country. Secondly, as production increases, a more conservative, single 5.0-mtpa liquefaction train could be constructed with an option and decision points for a second and third train. An incremental, staircase, strategic approach to LNG portfolio development is lower risk financially, commercially, reputationally, and technically than committing to a single $10+ billion large greenfield project anchored to an unproven resource base.

Closing thoughts

Saudi Aramco must overcome several potential value-erosive challenges before the commercial realization of the announced greenfield LNG project. While the company has the technical capability to execute major capital projects, a greenfield LNG project would be a first in its history. Thus, it will face a learning curve. The company should partner with well-established global LNG players to build market credibility and assist in LNG sales and marketing. Lastly, Aramco must ensure the commercial viability and gas deliverability of the Jafurah field before committing to an LNG project, as the global market will require deliverability assurance. All of this assumes the LNG venture aims to be commercially viable. If the company and country want to build a greenfield LNG plant where commercial returns are not imperative and deliverability is secondary, they would likely need to move forward without global partners, who would not want to risk their market credibility. Optionality and a conservative, prudent, and deliberate approach may be the best option for Saudi Aramco to enter the global LNG business.

Wayne Ackerman has more than 30 years’ experience in the upstream exploration and production sector and major capital project development, including LNG. He is also the founder and president of Ackerman and Associates Global Consulting, LLC, and a member of the Advisory Council for the Program on Economics and Energy at the Middle East Institute.

Photographer: Maya Sidiqqui/Bloomberg