According to Oil and Gas Journal, Saudi Arabia has the fourth largest proven natural gas reserves in the world with an estimated at 240 trillion cubic feet (Tcf). Over the last decade, Saudi Aramco has added 72 Tcf of non-associated reserves, including the fields: Mazalij, Manjura, Shaden, Niban, Tinat, Al-Waar, and Fazran in the deep Khuff, Unaizah and Jauf reservoirs. However, around 57 percent of Saudi Arabia's proven natural gas reserves consist of associated gas at the giant onshore Ghawar field and the offshore Safaniya and Zuluf fields. The Ghawar oil field alone accounts for approximately one-third of the country's proven natural gas reserves. Both associated and non-associated natural gas has also been discovered in the country’s extreme northwest, at Midyan, and in the Empty Quarter (Rub al Khali) in the country's southeastern desert. The Rub al Khali alone is believed to potentially contain natural gas reserves as high as 300 Tcf, although these are not proven.

Despite sizable reserves and increasing demand, natural gas production in Saudi Arabia remains limited (2.32 Tcf in 2004; estimated 2.87 Tcf in 2005). Highly subsidized prices and soaring costs of production, exploration, processing and distribution of gas has squeezed supply, while limiting investment in the sector and constraining other areas of economic and industrial growth. (Traditionally, petrochemicals, steel and more recently, the upstream oil sector, have made up the majority of demand for natural gas in Saudi Arabia. Consumer demand is also growing). The situation is exacerbated by the fact that majority of gas fields in Saudi Arabia are “associated” with petroleum deposits, or found in the same wells as the crude oil, and plans to increase production in this type of gas remains linked to an increase in oil production. The majority of new natural gas discovered in the 1990s has been associated in light crude oil, especially in the Najd region south of Riyadh. For this reason, Saudi Arabia has concentrated efforts to locate non-associated gas pockets onshore and in offshore formations. According to Saudi Aramco only 15 percent of Saudi Arabia has been "adequately explored for gas."

To meet growing domestic needs, in November 2006, the Petroleum Ministry and Saudi Aramco announced in a $9-billion long-term strategy to add 50 Tcf of reserves by 2016 (an average of 5 Tcf/year). In order to free up petroleum for export, all current and future gas supplies (except natural gas liquids) reportedly remain earmarked for use in domestic industrial consumption and by desalination plants. According to statements made by Aramco, the five-year plan will radically increase the rate of exploration and includes the drilling of 307 new development wells, including 67 exploratory wells primarily in non-associated offshore formations. In comparison, during the period of 1996-2004, just 52 wells were drilled, with an exploration success rate of 44 percent. According to Aramco, exploration and development will also commence in non- producing areas such the Red Sea and the Nafud basin, north of Riyadh.

The backbone of the non-associated gas exploration strategy relies on foreign consortiums exploring for onshore gas in the Rub al-Khali, which officials hope will produce some 2 Bcf/d by 2011.

The South Rub al-Khali Company (SRAK), a consortium of Saudi Aramco, Royal Dutch/Shell and Total, is investing an estimated $2 billion in exploration of more then 210,000 sq-km in two separate concession blocks (Blocks 5-9 and 82-85). The concessions surround the Shaybah and Kidan oil fields, abutting Oman and the UAE, and the Saudi-Yemeni border respectively. The consortium aims to sell 500 MMcf/d gas to the Ministry starting in 2009. SRAK drilled its first exploration well in July 2006, (Isharat-1, a wildcat) and a second is planned in early 2007, with a total of 7 planned over the next 25 months.). Saudi Aramco -- which replaced ConocoPhillips -- and Total have each a 30 percent share in the project, while Shell holds the majority share.

In January 2004, Russia's Lukoil won a tender to explore for and produce non-associated natural gas in the Saudi Empty Quarter in Block A (29,000 sq km), near Ghawar, as part of an 80/20 joint venture with Saudi Aramco, known as Luksar. Luksar drilled two wells and plans a third in 2007. Also in January 2004, China's Sinopec won a tender for gas exploration and production in Block B (38,000 sq km). Sino Saudi Gas, a venture of Sinopec and Aramco, has drilled two wells and reported that there would be another two by year-end 2007. The Eni-Repsol-Aramco consortium, LENIREPSA Gas, was granted a license to operate in Block C (52,000 sq km), and drilled its first well in September 2006. The consortia have some 27 wells planned in total by 2009. The contracts cover a 40-year period, except SRAK, which holds a 25 year contract. Constraints on obtaining rigs have slowed the pace of exploration over the past year.

Outside of the Empty Quarter, recent non-associated gas finds are promising. The Karan gas field, discovered in April 2006, is the largest gas deposit yet discovered in the offshore Khuff formation, some 100 miles north of Dhahran. The first well (Karan-6) was drilled in September 2006 and second (Karan-7 ) is currently underway, while Aramco continues to collect seismic data over the 6,250 sq km region. Initial data shows at least eight gas-bearing structures in the Khuff region around the Karan reservoir. Of those, Karan alone is expected to produce some 1 Bcf/d when it comes online sometime between 2009 and 2011. Development plans are underway.

Another large non-associated offshore natural gas field, Dorra (Durra), is located offshore near Khafji oil field in the Saudi-Kuwaiti Neutral Zone. Dorra development has been controversial since the late 1960’s, however, because 70 percent is also claimed by Iran (called Arash). In addition, the maritime border between Kuwait and Iran remains un-demarcated. Saudi Arabia reached an agreement with Kuwait in July 2000 to share Dorra output equally, although the Kuwaitis are reportedly trying to purchase the Saudi share. According to Saudi Aramco, the field is estimated to contain non-associated gas reserves of between 35 and 60 Tcf of natural gas, and is to undergo extensive seismic study in 2007. The Kuwaiti Ministry of Oil has reported that the goal is to initially produce 600 MMcf/d from Dorra. In September 2006, it was reported that Kuwait and Iran agreed to jointly develop the field, although production plans remain undisclosed.

Onshore, several discoveries have been made near the Ghawar field in the past year. According to a September 2006, statement by Minister Al-Nuaimi, the Kassab-1 test well in the Jauf reservoir could add 16.2 MMcf/d when developed. Close by, the Zamlah-1 well, part of a deposit discovered in August 2006, tested at 20 MMcf/ day and 1400 bbl/d condensate. In addition gas from the Najimaan-1 (Nujayman) well, also near Ghawar, flowed at a rate of 30 MMcf/d, but reportedly has the potential production capacity in excess of 60 MMcf/d, according to Aramco sources.

The Ghazal field, discovered in 2000, has started to produce some 270 MMcf/d from 25 development wells. According to Saudi Aramco, output is expected to increase to 400 MMcf/d by 2008. Production is also set to come on stream from the Midrikah (Madraka-3) well (27 mcf/d, 932 bbl/d condensate), discovered in 2004, that lies adjacent to the Haradh field in the Eastern Province (17 miles south of Ghawar). Finds in Ghazal and Midrika will feed newly expanded South Haradh processing facilities (along with 140 MMcf/d that came online at the Haradh-3 project in April 2006). Most recently, Saudi Aramco announced that approximately 120 MMcf/day of associated gas will be produced from the Manifa field when it comes online in 2011.

In addition to facing domestic supply shortages, Saudi has also come under pressure internationally for its highly subsidized prices. As a full member of the WTO, trade partners have protested supplying highly subsided gas supplies to Saudi industries and utilities, arguing against alleged unfair and uncompetitive trade practices. However, in an attempt to primarily address distortions in the domestic gas sector, Saudi Arabia recently adopted a new pricing policy that indicates a movement toward a liberalized gas market. Generally, gas prices are set by the ministry at $0.75 MMBtu, the lowest in the Gulf.

In mid-2006, the local Eastern Gas Company (EGS) was awarded a two-year contract to become Aramco’s gas distributor consumers in the Dhahran industrial area. According industry reports, EGC has rights to market 45 MMcf/d of gas a year to 35 industrial consumers. According to press statements, the purchase price from Aramco will be US$1.12 per MMBtu and a sale price of US$1.34/MMBtu. In Riyadh, the Natural Gas Distribution Company was granted a license to supply several small-scale manufacturing plants, with a similar pricing structure. For the time being, the price for foreign investors and other consumers remains steady.

Saudi Arabia currently has seven gas processing plants with at total gas production capacity of approximately 8 Bcf/d/d, 1.1 million bbl/d of natural gas liquids (NGLs) and approximately 2,700 tons of sulfur. The newest plants includes Haradh, 120 miles southwest of Dhahran at the southern tip of Ghawar, which came online in the summer of 2004. The $2-billion plant processes non-associated natural gas (both sweet and sour) from four fields in the Khuff formation (Haradah III expansion became operational in March 2006). Hawiya, which first became operational in 2002, was the first plant process non-associated gas from Khuff and Jauf reservoirs. Hawiya is a $4 billion, 1.4-Bcf/d gas plant, and is reportedly processing enough natural gas to free up some 260,000 bbl/d of Arabian Light crude oil for export. It is the largest natural gas project undertaken by Aramco in a decade. Uthmaniya is currently the largest plant, with a processing capacity of approximately 2.5 Bcf/d.

According to the 2005 Annual Statistical Report, Saudi Aramco exported 289.5 million barrels of NGLs in 2005, up from 274 million barrels in 2004. Saudi Arabia, a leading world producer of NGLs, has experienced a rise in demand from developing countries, including India (the major export destination), where is it used for cooking and transportation.

According to Saudi Aramco, the country aims to process an estimated 15 Bcf/d by 2009 through additional facilities and capacity expansion. Mega-project plans are currently underway to build or expand facilities at, Khursaniya, Hawiya, Ju'aymah, and Khurais. According to statement made by Saudi Aramco, the $3-billion Khursaniya plant (KPG), currently in construction, will be located 87 miles northwest of Dhahran, and will have a capacity to process 1 Bcf/d. KGP will be fed by associated gas streams from Berri, Marjan and Safaniya. Reportedly, the KGP may double incapacity by 2011 in order to accommodate Karan and Manifa gas. The facility is expected to come online in late 2007. According to Aramco, Khursaniya will also produce 80,000 bbl/d of condensate, 550-600 MMcf/d of sales gas (methane and ethane) and 280,000 bbl/d NGL.

Aramco, though Japanese subcontractor JGC and Spain’s Technicas Reunidas) is expanding the Hawiya and Ju’aymah gas processing capacity to 4 Bcf/d while. Additionally, Hawiya will include a natural gas liquids recovery facility located approximately five kilometers east of the existing Hawiya Gas Plant. The new facility will recover 310,000 barrels per day of NGL, beginning in October 2007, and will reportedly be one of the world's largest facility of its kind.

In September 2006, a joint venture between Foster Wheeler Energy Ltd. of Britain and South Korea's Hyundai Engineering and Construction was awarded a $780 million contract from Saudi Aramco to build a gas processing plant at the Khurais oilfield, 112 miles northwest of Riyadh. The gas processing plant will some produce 550 million cubic feet of natural gas and 70,000 barrels of NGLs. The project is scheduled to come online in 2009.

Domestic demand, particularly the delivery feedstock to petrochemical plants, has driven consistent expansion of the 7.8 MMcf/d Master Gas System (MGS), the domestic gas distribution network in Saudi Arabia. Prior to the MGS, all of Saudi Arabia's natural gas output was flared. The MGS feeds gas to the industrial cities of Yanbu on the Red Sea and Jubail. A key pipeline project was completed in June 2000 to extend the MGS from the Eastern Province (which contains large potential gas and condensate reserves) to the capital in the Central Province. This is part of a broader expansion of the existing gas transmission system in Saudi Arabia, reportedly to include the construction of around 1,200 miles of additional natural gas pipeline capacity (on top of 10,500 miles of oil, gas, and condensate, products, and natural gas liquid pipelines currently in operation).

In order to feed the expanded gas processing facilities, several additions to the MGS are in the planning or construction phases. The largest pipeline to be built is the 132-mile conduit to the Rabigh complex and the existing Yanbu NGL processing facility. Installation of two four pipelines, totaling some 62, miles will connect Manifa to KGP and Ras az-Zour for gas processing and raw power production.

Reportedly the Riyadh Chamber of Commerce and Industry is planning a feasibility study with Russia’s Stroytransgaz for the construction of another 7 Bcf/d domestic delivery system that will deliver gas from the Empty Quarter to customers in the east, central and western areas, and will include the construction of some 2000 miles of new pipeline. Construction likely hinges on a significant non-associated gas discovery in the Empty Quarter.