| Summary: | <p>While playing a minor role in the 1970s, Saudi Arabia’s gas sector has witnessed major transformations that have placed it at the centre of the Kingdom’s development strategy. In a recent speech, Saudi Aramco President and CEO Mr Khalid al-Falih stated that ‘the establishment of infrastructure for the gas industry serves as the basis for achieving the goal of economic diversification and provides the vital life blood for the industrial cities of Jubail and Yanbu’ and most recently Rabigh’. The policy of providing cheap natural gas prices is considered by many Saudi policymakers as central to the success of the diversification strategy and to enhancing the Kingdom’s global economic competitiveness as well as key for long-term political and social stability.</p> <p>While past policies have been successful in increasing the importance of natural gas in the domestic energy mix, they have posed some significant challenges to the current economic development strategy. These include the challenges of securing gas supplies to meet the rapid rise in domestic gas demand and reassessing the current gas pricing policy to reflect the rising marginal cost and opportunity cost of utilising gas reserves. It is now evident that the era of low-cost gas production, specifically gas associated with oil production is over. There are increasing signs that the current strategy based on (i) cheap domestic gas prices (ii) a policy of not exporting or importing gas; and (iii) meeting the rapid growth in domestic demand through increasing the pace of exploration and exploitation of domestic gas reserves is facing some serious strains. Policies pursued to deal with these strains, including doing nothing, will have wide implications not only for the future dynamics of the gas and oil sectors in the Kingdom, but also for the wider economy and the longterm sustainability of Saudi Arabia’s industrialisation and development path. They also have implications for global energy markets. According to Saudi Aramco 2007 Annual Report, by meeting domestic needs for fuel, the gas sector currently frees more than 1 million barrels of oil per day for export. Thus, the policy options currently pursued to meet the challenge of rapidly rising domestic consumption and the choices made on the allocation of energy resources within the Kingdom may have an impact on global oil supplies and prices, especially if current expectations that oil markets will tighten in the future turn out to be true.</p>
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