After decades of supplying the world with vast volumes of LNG, the Middle East is now turning its eyes on domestic and regional gas demand developments. The growth of local gas demand in countries such as Bahrain, UAE and even Saudi Arabia, is putting increased pressure on future LNG export plans in the region. Not only has it become attractive for LNG producers such as Qatar to diversify its client base by addressing gas markets in Kuwait or Dubai, but local demand will also lower overall export volumes. Some first indicators for this have already emerged in the last few months, as Gulf Cooperation Council (GCC) suppliers have indicated that they will lower LNG supply volumes to Europe.
After getting used to a long list of success stories coming from Qatar, Oman and Yemen, all supplying large volumes of LNG to the world, the first cracks are appearing in their armour. Local demand has increased in such a vast way that these LNG producers have been forced to cut their supplies to the world for the first time in 20 years. Qatar, Yemen, Oman and Abu Dhabi are currently supplying 40% of the world’s LNG. In 2011, these countries exported around 96% of their total gas production. In a report from the International Group of LNG Importers (GIIGNL), based in France, GCC LNG producers have now indicated that this will decrease to 94% this year.
Falling gas production
One of the main problems facing several of the Middle East gas exporters is lower gas production. Declining production figures from several gas fields (such as in Saudi Arabia), a lack of new finds or even a moratorium on increased gas developments (Qatar) is occurring, while local gas demand is increasing exponentially. The call for economic diversification in GCC countries and North Africa has resulted in the set-up of multibillion dollar projects in downstream, power and desalination. All of the latter are calling for increased gas supplies. To cope with this, several countries, such as Bahrain, Kuwait, UAE, Israel and Jordan, are setting up new projects to build import terminals to meet their power needs. These regional developments will have a direct negative effect on LNG availability in Europe and Asia.
The increased demand has already resulted in an attractive regional market for smaller volumes of LNG in places such as Dubai and Kuwait. The IEA published a report stating that Middle Eastern demand for natural gas is expected to increase faster than supply over the next five years. The region is expected to face a gas demand rise of 70 billion m3, or 20%, in the period between 2011 – 2017. Total gas production will only increase at present by 7 billion m3 in the same period. This situation is forcing one of the world’s biggest gas reserve holding regions to import more. Growing demand, supported by low gas prices, which encourage consumption and discourage production, are some of the other underlying factors.
The results of the so-called ‘Arab Spring’ in the GCC are minimal, but some countries are feeling the brunt of the regional instability. Bahrain’s booming financial sector and aggressive plans for a revamp of its oil and gas sectors have been hit hard by the growing confrontation between the Sunni ruling family and the Shi’ite opposition. Several plans have been put on hold, but remarkably its LNG import plans are still going strong.
Steps have already been taken by GCC countries such as Kuwait to import LNG in the last few years. Kuwait started LNG imports in 2009, when it commissioned the Middle East’s first LNG import terminal. In 2010, the UAE also joined the market when Dubai opened a regasification plant. Kuwait and Dubai together imported 3.7 million t of LNG last year. These two countries will soon be joined by others, as Bahrain, Jordan, Israel and Lebanon have announced several other terminals. Saudi Arabia, which has encountered the largest growth in gas demand, has chosen to take another route, developing renewable energy and several major nuclear power plants.
Outside of the Gulf region, several projects are likely to have a direct impact on the Gulf LNG sector. The negative impact of the Arab Spring, especially in Egypt, has forced two of its main gas importers, Israel and Jordan, to look for alternatives. Since the beginning of the uprising in Egypt, militant groups in the Sinai have been attacking the so-called Arab Gas Pipeline. The Israeli government and stakeholders in the country’s gas sector have decided to look for an LNG option. State-owned Israel Natural Gas Lines has already signed a deal with the Italian company Micoperi to construct an offshore LNG regasification terminal.
Jordan, another client of Egyptian gas, is also setting up plans to build an offshore terminal in the Port of Aqaba. Discussions are underway to start the project as soon as possible, but until now no definite decisions have been taken.
LNG supplies for Middle Eastern customers will probably not just come from GCC producers. Some analysts even expect that the current competition for LNG in the region by Asian clients will force Bahrain, UAE and others to source their LNG from far-away regions such as Australia, Russia or even the US. LNG clients in the GCC will have to compete in a market in which Asian customers are paying US$ 16/MBtu (US$ 100/bbl).
Another issue has become apparent to most operators. If the current price settings in the local market (UAE, Qatar, Saudi Arabia) are not changed, and subsidies are not removed, then new investments in gas fields will not be economical. Abu Dhabi has already been confronted by the fact that its enormous sour gas reserves (Shah field) are not going to bring a relief to the domestic market situation as long as prices are below US$ 3 per MBtu. Analysts have indicated that the cost of the Shah field development needs a price of US$ 6 per MBtu or more.
Overall, an unattractive gas development market is confronting operators and investors at present. Investments in gas projects are not being supported financially or legally by GCC countries, especially in the eyes of international parties. Until this changes, the appetite for large investments in GCC or North African gas projects will be very low. This is not only the case for LNG supplies. ‘Normal’ gas pipeline projects between regional markets are not an easy task in the GCC. Because of these problems, LNG is a major substitute option in the coming years.
The LNG future in the region looks promising. However, as always, not all that glitters is gold. The increasing attractiveness of importing LNG in the region will result in higher local gas prices. Moves are already being made to increase gas prices in Bahrain, the UAE and Qatar as increasing local gas prices in line with global market prices will incentivise previously uneconomic exploration and production projects.
Author: Cyril Widdershoven, TNO
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