* Industry has boomed on the back of cheap gas
* But exhaustion of easy sources threatens this policy
* Domestic price hike would be important economic shift
* Could reduce waste, save billions of dollars in subsidies
* But political weight of petchem industry to limit any rise
DUBAI/KHOBAR, Dec 19 (Reuters) - Saudi Arabia may as early
as next year do something it has resisted for decades: raise
what is currently the world's lowest price for natural gas, in
order to reduce expensive subsidies and curb energy waste.
A price hike would be an important economic shift for the
country but a difficult one, since it would risk hurting the
competitiveness of industries such as petrochemicals.
Energy-hungry industries have boomed in Saudi Arabia over
the last decade, thanks largely to the cheap gas, priced for
domestic industrial users at just $0.75 per million British
thermal units (mmbtu) - a small fraction of prices paid by
competitors around the globe.
The Saudi price, unchanged for decades, was set when gas was
a plentiful by-product of the country's giant oil fields.
Since then, Riyadh has shied away from raising the price,
despite escalating production costs, for fear of hurting
companies which provide jobs for a young and growing population.
But sources of gas that can be tapped cheaply have now run
low, a shortage intensified by waste. So Saudi Arabia is
increasingly having to look at costly offshore or unconventional
sources of gas to meet soaring demand.
The government has had some success reducing waste by
demanding that petrochemical projects, which use natural gas as
a raw material, introduce more efficient technologies before
allocating them any gas.
Raising the domestic selling price could do more to
discourage waste, while saving the government billions of
dollars in gas subsidies.
"There are plans to increase the gas price, and this will
happen because Saudi Arabia wants to eliminate inefficient use
of gas, because it's running out," said a Saudi industry source
familiar with government discussions on the issue.
The source, who declined to be named because of the
sensitivity of the subject, said a decision on concrete action
had not yet been made, but that a price hike might occur by the
end of 2013.
Top government officials have declined to comment publicly
on the issue. But over the past year, Saudi Arabia has shown
increasing willingness to grapple with economic reforms,
introducing a law covering home mortgage lending, for example.
Reform of gas pricing may follow as soon as next year, many
industry participants and analysts believe.
Kamel al-Harami, an independent Kuwaiti oil analyst, said
that after years of debate among government officials, the gas
price might be lifted next year - but that any hike would be
small and calculated to avoid harming the petrochemical sector.
SUBSIDIES
Saudi Arabia keeps its domestic gas selling price down with
huge government subsidies paid out of the hundreds of billions
of dollars which the kingdom makes from exporting crude oil.
The subsidies have drawn complaints to the World Trade
Organisation (WTO) by China and India, whose own petrochemical
companies compete with Saudi firms.
But the Saudi petrochemical industry has gained great
political weight because it generates thousands of jobs in a
country whose leaders are keen to avoid the kind of youth unrest
that fueled the region's Arab Spring uprisings of 2011.
So the government has so far resisted outside pressure to
cut the subsidies, arguing that since none of the gas is
exported, it is not breaking WTO trade rules.
Some Saudi petrochemical executives have warned higher gas
prices would make them less competitive in the global market.
They point out that Chinese competitors pay lower wages to their
workers, while North American rivals are starting to benefit
from low energy prices thanks to the proliferation of shale gas.
"The decision on the Saudi gas price is now even more
important in light of the U.S. shale gas revolution," said Aman
Amanpour, an independent petrochemicals and energy consultant.
The price of gas for U.S. industrial users tumbled from
highs of around $13 per mmbtu in 2008 to a record low of about
$3 per mmbtu in April 2012, according to the U.S. Energy
Information Administration (EIA).
The U.S. price has rebounded somewhat since then, however,
with the EIA expecting industrial consumers next year to pay
well over $4 per mmbtu and often more than $5.
So Riyadh could double or triple its gas price for Saudi
industrial consumers without coming close to the prices faced by
U.S. competitors.
Also, analysts expect U.S. gas exports to rise over the next
few years, which would keep upward pressure on U.S. domestic
prices and therefore help safeguard the big price advantage
enjoyed by Saudi firms.
MODEST INCREASE
The result of such calculations, industry participants and
analysts believe, may be that Saudi Arabia raises its domestic
gas selling price to around $1.50 per mmbtu - a level high
enough to make firms think harder about conserving gas, but not
so high as to make a big dent in their earnings.
"The increase in price will not eat too much into the
profitability of petchem companies, because right now the price
is very, very low," said the Saudi industry source.
"I don't necessarily think that the Middle Eastern producers
will be less competitive," said David Seaton, chief executive
of U.S. engineering firm Fluor Corp, which is active in Saudi
Arabia's downstream petrochemical sector.
Yet a natural gas selling price of $1.50 per mmbtu might
still not be high enough to resolve Saudi Arabia's looming
supply problems.
State-owned oil and gas monopoly Saudi Aramco has the fourth
largest conventional gas reserves in the world and aims to
increase its production from 10.2 billion cubic feet per day
(bcfd) in 2010 to over 15 bcfd by 2015.
But with most of its easily exploited gas deposits
associated with oil fields already developed, Aramco is being
forced to map out its "unconventional" gas reserves, such as
those trapped in heavy formations of rock and sand, which will
be much more expensive to exploit.
If the domestic selling price remains far lower than global
levels, there will be scant incentive for foreign companies to
explore for gas in the vast deserts of the Arabian Peninsula,
leaving the Saudi state to foot the bill.
"In order to enhance the growth of petrochemicals in Saudi
Arabia you need two things: you need innovation, and you need
more searching for future gas," said Mohamed al-Mady, chief
executive of the country's largest petrochemical producer, Saudi
Basic Industries Corp.
(Additional reporting, writing and editing by Daniel Fineren;
Editing by Andrew Torchia and Jason Neely)