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Thu 9 Aug 2012 04:24 PM

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Sino Saudi Gas to delay drilling in Empty Quarter

Drilling delayed as evaluation ongoing; joint venture has been hunting for natural gas for years

Sino Saudi Gas to delay drilling in Empty Quarter
GCC refinery, GCC energy, GCC oil and gas, Middle East energy

Sino Saudi Gas, a joint venture between China's Sinopec and Saudi Aramco, will delay drilling in the kingdom's Empty Quarter as the evaluation of the well is still ongoing, an industry source familiar with the matter said.

The joint venture has been hunting for natural gas for years, but what little they have found has not been exploited due largely to industrial gas prices fixed far below international market prices.

Nevertheless, the two partners will press on with a second phase of exploration, planning to drill one well.

The well was scheduled to be drilled in September but the venture, 80-percent owned by Sinopec and 20 percent by Aramco, was evaluating it, the source said but he did not say how long the delay would be.

A Sinopec executive said no decision has been made on the exploration well yet as the company was still evaluating "the economic and technical aspects" of the well.

Aramco did not respond immediately to e-mail requests sent by Reuters.

Saudi Arabia, which keeps its oil reserves off-limits to foreign companies, invited investors in 2003-2004 to find and produce gas in the Empty Quarter.

But the gas price terms agreed were so low that companies needed to find condensate - a form of light oil that can be sold at international market prices - to cover the costs of development.

The joint ventures included Italy's Eni and Spain's Repsol which have abandoned the Empty Quarter, industry sources told Reuters in January.

Aramco's CEO Khalid al-Falih in January acknowledged the challenge of low gas prices in Saudi Arabia, saying they do not make unconventional gas or tight gas in the Empty Quarter economic.

The government-set transfer price of natural gas in the kingdom is 75 cents per million British Thermal Units (btu), a fraction of the price paid for gas in most countries.

"There is little likelyhood for a major change in domestic gas prices. In any case, they are unlikely to be raised sufficiently to match the steep production costs of the source rocks that have been found in the empty quarter which are too costly to fracture and too deep to produce," said another industry source.

Saudi Aramco, the world's largest oil exporter, is looking for gas all over the kingdom to boost gas production to help meet rapidly rising Saudi fuel demand.

It is developing Arabiyah and Hasbah and considers developing new gas fields Midyan and Sidr, in the Northwest area.

South Rub Al Khali Co (Srak), the joint venture between Aramco and Royal Dutch Shell, is the only JV to report finding substantial quantities of gas in the region so far and the sulphur-rich gas there could prove too costly to be commercially viable.

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