When too much is never enough

Dubai Initiative Fellow Justin Dargin speaks to The Gulf business news magazine in a special report about the gas predicaments among the Gulf countries.

By: James Gavin

Despite its huge reserves, the Gulf is grappling with a looming gas shortfall.

People could be excused for believing that the Gulf is short of gas. The rationing of gas allocation letters for industrial users over the past five years, and the increased burning of fuel oil in electricity generation, have highlighted a shortfall in supply in a region where authorities had sought to drive an industrial expansion founded on the now-shaky edifice of cheap and abundant feedstock availability.

But the truth is that in terms of pure resource endowment, the region trounces others. Proved gas reserves are substantial at an estimated at 84.5 trillion cubic metres (tcm) and yield a long reserve life estimated at 146 years, according to new research published by the Arab Petroleum Investments Corporation (Apicorp).

Forty-five per cent of the world’s proved conventional gas reserves are located in the Middle East-North Africa region, with more than two-thirds of that located in Qatar and Iran. Yet Iran itself is an importer of gas, taking in supplies from neighbouring Turkmenistan, and it is Qatar alone that – by dint of its massive North Field inheritance – has sufficient gas to feed to its domestic industries.

"The problem is not that the Gulf doesn’t have enough gas, it’s that they can’t monetise it," says Justin Dargin, a gas expert at Harvard University’s Dubai Initiative.

There have been efforts to boost production, with Saudi Arabia and Kuwait embarking on their own gas-focused exploration and development programmes in recent years. However, it has not made a significant impact on output numbers. Gas production in the region increased by 95 per cent in the last ten years, but it still only accounts for 12 per cent of global gas production at present, says Ernst & Young in a report on the global gas industry released in September last year.

Resolving the gas shortfall has become an acute priority for governments confronted by awkward demographic trends and an urgent need to create industries that will provide employment for growing numbers of entrants to the job market. According to the International Energy Agency (IEA), the growth in gas demand in the Middle East in the period to 2030 will only be surpassed by the Chinese powerhouse economy.

While the global economic slump has slaked gas demand across many regions, in the Gulf, the reduction in demand for power generation from industrial sectors was marginal. And with governments across the GCC cash-rich as a result of high oil prices for more than 18 months, there is sufficient fiscal resource to underpin expansionary capital spending programmes that will ensure demand remains on an upward curve.

Electricity demand forecasts for the next five years make for eye-water reading for Gulf planners. Power generation growth in the GCC is forecast to rise by 8.5 per year annually in the medium term, with 48 gigawatts (GW) of new capacity due to be added in the 2011-2015 period, notes Apicorp.

The use of natural gas in Middle Eastern power generation is also facing long-term increases, rising from 57 per cent of total power generation in 2010 to 63 per cent by 2020.

The Gulf’s big problem is that even with the use of alternative energy sources such as coal, renewables and nuclear energy, these will not substantially reduce the need for gas as the primary feedstock in power generation. Even by 2030, forecasts consultancy Booz & Company, when nuclear, coal, renewables will all be part of the mix, gas feedstock will nonetheless account for more than two-thirds of the Gulf’s power.

Unless major new gas supply increments are made available, the inevitable result will persistent shortages leading to social pressures and sub-optimal economic performance. In some of the largest Gulf states, such as the UAE, shortages are likely up until 2020 as the government will only be able to supply half of projected peak electricity demand of 40 GW by 2010.

Iran’s decision to import almost five per cent of its gas needs from Turkmenistan may be a significant pointer to future Gulf strategies. Importing liquefied natural gas (LNG) would be one way for the Gulf to ensure supply is brought back in line with demand.

LNG importation, though, is not a cure-all solution for the Gulf. Since Qatar sees strategic advantage in maintaining its LNG supply relationships with Asian customers, there may be insufficient excess capacity to quickly deliver cargoes to its gas-starved neighbours in the region. The GCC’s main gas exporters, the UAE, Oman and Qatar, have committed large increments of supply to LNG exports under long-term contracts with Asian customers that yield strong receipts.

Qatar has, meanwhile, shown little interest in repeating its experience with the Dolphin project, sending gas via pipeline to its neighbours. Its own moratorium on further development of the North Field, extended to 2014, in any case limits the amount of gas that could be made available to its neighbours.

How then can the GCC resolve its paradox of plentiful reserves but insufficient supply? Addressing the pricing structure is perhaps the most obvious long-term solution. Domestic gas prices in the region are capped, as part of government strategies to provide a competitive edge to businesses seeking to establish downstream industries – the major job drivers envisaged for the region. Despite more than a decade of talking about gas price reform, little has been done to ensure prices are put on a commercial footing for gas developers.

Increasing power prices in a gradual manner over several years would reduce power demand and have a knock on effect on gas demand, but despite some incremental increases, there remains little appetite to remove the cap on gas prices, which average around US$1/million British thermal units (mm/Btu), against average current wellhead prices of around US$5/mmBtu.

Unless it can monetise its indigenous gas resource, the region will be shackled to supply/demand tightness for the foreseeable future. As Apicorp notes, faced with structurally lower netback prices, regional gas exporting countries will have little choice but to raise domestic prices as part of a more conducive climate for investment and re-investment.

Lacking such a price incentive, the region’s attempts to bring on new supply have been muted. Kuwait began production in 2008 from its first non-associated gas fields, at Sabriya and Umm Niga in the north, at a rate of 175 million cubic feet/day (cf/d), but this is well below the levels needed to satisfy local demand. Only by 2015 does Kuwait envisage significant increases in supply, reaching one billion cf/d from the Sabriya and Umm Niga fields. Plans to develop the offshore Dorra gas field could provide a further 800 million cf/d of gas, but this is not anticipated until 2017.

Saudi Aramco plans to raise its non-associated gas processing capacity to nine billion cf/d by 2015 from around 6.2 billion cf/d to meet soaring demand for industrial use in the kingdom. Yet the vaunted Empty Quarter gas initiative launched in 2004 has failed to result in commercial volumes of gas, despite four years of intensive exploration efforts from a clutch of international oil companies.

Finding an equilibrium between encouraging gas as a building block of nascent industrialisation programmes, and pricing it at a level that encourages exploration and production, has so far proved beyond the ken of the Gulf’s governments. But with Kuwait and others now apparently ready to pay market prices for their LNG imports, a possible route out of the crisis has been glimpsed.

It may take some time, but there are at least some early signs of a preparedness to finally monetise its prodigious, but largely untapped, natural gas endowment.

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