Domestic Saudi Arabian oil consumption increasingly cuts into oil exports, reducing the valuable revenue those exported barrels provide, which funds the country’s current account surplus. Subsidized domestic prices incentivize direct burning crude to generate power needed to cool a growing Saudi population. As the Kingdom shifts more to natural gas for power generation – freeing up oil for export – the national oil company Saudi Aramco needs rigs and oil field services, which could be beneficial to select oil service, equipment, and drilling companies, according to a recent Barclays research note.

Read more detailed Breaking Energy coverage of Saudi Arabian oil and gas consumption, regulated domestic pricing and non-associated gas development, here.

“In 2012, Saudi Arabia consumed 2.9 million barrels of oil per day or 25% of its daily oil production, up from the 1.6 mbod consumed or only 17% of the daily oil production in 2000… If oil consumption continues to grow at its twelve-year rate of 5%, consumption will surpass the current oil output level around 2040 and the 12.5 mbod full capacity production level at that time,” Barclays said.

Most if not all of Saudi Arabia’s associated natural gas is currently consumed by the industrial and power generation sectors, which makes non-associated gas development a high priority. After many years of exploration and some disappointing results, it appears Saudi Aramco and its international partners are finding some non-associated gas drilling success.

Regulated domestic natural gas prices capped at $0.75 per million Btu remains a challenge because the Kingdom’s non-associated gas tends to be deep, under high pressure and high in sulfur, making development more expensive than gas produced along with oil. Barclays believes the resource’s strategic importance will motivate Saudi leadership to increase the regulated domestic gas price paid to international operators producing the more expensive gas.

“The primary hurdle for developing Saudi Arabia’s gas fields stems from subsidized natural gas prices that are much lower than those around the world…The current pricing economics conflict with the commercial viability of the high-sulfur gas coming from the unconventional discoveries and development of those fields is not favorable for Aramco’s foreign joint venture partners. However, the country’s increasing energy needs and desire to free more crude for export will likely change the domestic gas pricing. We think gas prices will rise in the near future and improve shale activity in the region.” – Barclays

However, industry observers have predicted movement on the regulated gas price issue “in the near future” for many years.

The bank believes the “Big Four” international oil field service companies – Baker Hughes, Halliburton, Schlumberger and Weatherford – that have existing relationships with Saudi Aramco stand to benefit most from the Kingdom’s push into non-associated gas and unconventional resources, including those contained in tight formations like shale. Jackup rig providers Rowen, Seadrill and Ensco could also benefit from Aramco’s increasing E&P activity, while Neighbors Industries and Superior Energy Services could also be well positioned, the analysts said.