ANALYSIS-After decades, Saudis may boost natural gas price

* 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)

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