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The Middle East Gulf nations are wrestling with persistent natural gas shortages

| Apr. 09, 2010

It is a problem with no simple solution: despite abundant reserves, the Middle East continues to run short of natural gas.

The impact of the shortage, already evident in the feedstock slate for many new petrochemical projects, is gradually being felt in markets as well.

The price rally in many products earlier this year was supported not only by robust demand and delays in the commissioning of projects, but also by lower operating rates at some Middle East plants, the result of reduced gas availability, according to one market player.

During the hot summer months, power production took priority over the industrial sector in the allotment of gas supplies by countries such as Kuwait.

Gas consumption in the Kuwaiti industrial sector has fallen over the past few years from 450m ft3/day (13m m3/day)in 2005 to current levels of 370m-380m ft3/day.

"Indeed, more gas has been going to power plants," says an energy consultant based in Singapore.

"And despite this, Kuwait is still challenged with a supply shortage. The country recently unloaded its fifth liquefied natural gas (LNG) cargo since its Mina al-Ahmadi LNG terminal became operational in late August 2009. Kuwait is the first country in the Middle East to start LNG imports to satisfy its increasing gas demand."

In Saudi Arabia, lower oil production as a result of OPEC-mandated cuts is said to have curtailed the availability of associated gases. There have been reports of reduced propane availability affecting the operations of some polypropylene (PP) plants.

The roots of the gas problem lie in the oil price boom that spurred economic activity in the region. Supported by low prices, demand for gas, especially for power generation, has grown much faster than supply.

And demand is unlikely to slow, as the Gulf Cooperation Council (GCC) countries are committed to huge investments in the power sector. Justin Dargin, energy researcher at the Dubai Initiative, Harvard University, says GCC gas demand is set to grow at 6.6%/year, much higher than the 2.2%/year demand growth projected for oil.

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On paper, Iran and Qatar, which possess the world's second and third-largest gas reserves respectively, are well-placed to meet this spiraling demand. However, both countries have their own problems and priorities.

Iran, despite reserves of 1,045 trillion ft3, faces a shortage during the winter months, and last December, operating rates at its crackers were cut as gas was diverted for heating. The Singapore-based energy consultant thinks a shortage during winter is likely for the next few years as many upstream projects have been delayed due to financial problems and contracting issues.

Iran has drawn up ambitious plans to develop the South Pars gas fields in 26 phases. Only seven phases have been completed, however, while eight are under development. Most of these projects deliver gas to the domestic market to meet growing gas consumption and/or re-injection needs.

Foreign investment is crucial to fully developing reserves, but western majors are hesitant to invest, given Iran's uncertain political climate, its nuclear ambitions and sanctions by the US. Iran has thus had to step up gas imports from neighboring Turkmenistan. A new pipeline between the two countries is due to be completed by the end of the year, although it could be delayed, considering Iran's track record in meeting project deadlines.

Qatar, which shares its gas fields with Iran, has progressed much faster in developing its reserves. But it, too, is seeing delays in the completion of new gas projects.

For instance, commissioning of the second phase of the Al-Khaleej gas project is now expected to take place at the end of this year or early in 2010, a delay of at least six months, according to the consultant. Petrochemical production is likely to be affected, as the Khaleej project is designed to produce 870,000 tonnes/year of ethane.

While the rest of the GCC - Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE) - is keen to draw more gas from Qatar, the country has extended a moratorium on the development of new gas projects from 2012 to 2014.

Qatar is still studying possible reservoir behavior when gas production will rise to 20bn ft3/day in 2012 from 8bn ft3/day in 2008, says the consultant. Several projects, such as the second phases of the Dolphin and Barzan gas projects have been put on hold pending the study's results.

Even if Qatar lifts its moratorium in 2014, further LNG expansion might wait until the end of the next decade, as the focus is shifting to domestic use, the consultant notes.

Given this situation, questions have been raised over the future of the three cracker projects planned by state-owned Qatar Petroleum and its partners. Its joint-venture project with South Korea's Honam Petrochemical Corp. is on hold while another cracker with global major Shell Chemicals is said to have been delayed to 2015. A third project with US major ExxonMobil is progressing slowly.

"Various options are being discussed and a final decision has not yet been taken," says a regional industry source. But he adds that Qatar has enough ethane for one more cracker of 1.3m tonnes/year capacity, which should be on stream in 2013-2014.

As the gas shortage intensifies, governments are looking at alternatives. In the short term, fuel oil is increasingly being used for power generation.

Abu Dhabi, in the UAE, is building the world's first carbon-neutral and waste-free city, called Masdar, which will be powered by renewable energy, and is even considering nuclear power.

Efforts are underway across the GCC to develop nonassociated gas fields, but in many cases, as in the UAE, these fields have a high sulfur content of 25-30%, a huge technical challenge for production and processing, points out Dargin.

"The production cost of the sour and tight gas tends to hover at around $4.00-5.00/MMBtu. However, gas is supplied to the internal market at minus $1.50/MMBtu. This is the crux of the gas crisis in the Gulf," he stresses. Dargin suggests that a GCC gas price in the $5.00-7.00/MMBtu range would not only make exploration and production attractive but also determine the "true" demand for gas.

"When we look at Gulf gas pricing, there are two interrelated aspects," he explains.

"One is the price of gas as it is sold in the region by the two largest reserves holders, Qatar and Iran. For instance, Qatar sold its gas through the Dolphin project for the Phase 1 export at an extremely low price of -$1.50/MMBtu to Oman and the UAE."

Dargin adds that Qatar and Iran no longer accept such an inexpensive price for their gas, and are refusing further sales until a satisfactory price has been met.

"The other is the price of gas supplied to the domestic market. If the UAE buys or produces gas at $4.00-5.00/MMBtu, and supplies its petrochemical industry for $1.50/MMBtu, it is giving a fairly straightforward subsidy to the market," he points out.

"Of course, the gas price in the Gulf, even if liberalized, would likely be less than the price in the West. Even so, it may not be as competitive as before."

A dramatic increase in GCC gas prices is unlikely, as governments will be under pressure to protect the local industry. However, consumers face an unpleasant reality - the cost of gas, from new fields or imports from Qatar or Iran, is rising, and domestic prices will have to be modified in order to reflect this reality.

For more information on this publication: Please contact the Belfer Communications Office
For Academic Citation: Hariharan, Malini. "The Middle East Gulf nations are wrestling with persistent natural gas shortages." ICIS.com, October 9, 2010.

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