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Outlook for the Middle East

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LNG Industry,


Since the commissioning of Trains 1 and 2 at the Das Island 1 LNG terminal (the UAE) in 1977, the construction of liquefaction terminals in the Middle East has been mainly focused in Qatar, starting with the construction of Train 1 at Qatargas 1 in Ras Laffan. Following the first cargo shipment from this facility in December 1996, Qatar has gradually increased its LNG export capacity from 2 million tpy to its current output capacity of 77 million tpy – making Qatar the world’s largest exporter of LNG. Other countries, such as Yemen and Oman, also contribute to the region’s export capacity. However, with the former having declared force majeure on its Total-operated Yemen LNG facility a number of times in the last couple of years, this has restricted its ability to operate to its full potential.

Over the same period, when the construction of export facilities thrived within the region, import facilities have been practically restricted to floating units, with the exception of the Marmara Ereglisi (1994) and Izmir Aliaga (2006) land-based import terminals in Turkey. Israel, Jordan, Kuwait and the UAE have all deployed floating import units over the past eight years in order to meet increasing domestic demand for natural gas. The use of LNG for power generation in the region has been rising over the past decade. This trend is forecast to continue, with Bahrain and Lebanon expected to commission their first floating import unit over the 2017 – 2021 period.

Middle East in focus

The Middle East is currently the largest LNG exporting region in the world, with six operational facilities that run on 25 trains. However, the majority of these facilities came onstream prior to 2011 and export levels are expected to remain at current levels for the foreseeable future as Qatar’s North Field production moratorium remains in place. No liquefaction terminals are expected onstream in Qatar within the forecast period. Consequently, Australia is expected to overtake Qatar as the world’s largest exporter by the end of 2017, and the US soon after the forecast period.

A major influence on expenditure in the region over the 2017 – 2021 period will be developments in Iran. With the lifting of US, UN and EU nuclear-related sanctions, investment is expected to gradually stream back into the country – potentially restarting Iranian LNG plans.

The majority of Iran’s planned LNG projects have been stalled or suspended due to the impact of economic sanctions. The Iran LNG project is currently the only project under construction, comprising two LNG trains, each with a capacity of 10.5 million tpy. The facility, which is reported to be over 60% complete, is expected to be operational by 2019. Other liquefaction expenditure is associated with the prospective completion of other LNG projects in Iran that were stalled due to the international sanctions. The revival of these stalled projects (Pars LNG and Persian LNG) should guarantee that the Middle East remains the world’s largest exporter of LNG for the foreseeable future. However, the financing structure of these abandoned projects is currently unclear. The only other expenditure on export facilities in the region over the forecast is expected to be the replacement of the Das Island 1 facility.

Export capacity in the Middle East over the 2012 – 2016 period remained at 100.1 million tpy. However, this is expected to increase to 110.6 million tpy by 2021, driven by the construction of the Iran LNG terminal. However, due to large increases in capacity in Australia and the US, the Middle East’s market share of just over 28% in 2016 will fall to 23% by 2021.

Despite the region being a major exporter of LNG, a couple of import terminals are expected to be built – with Turkey accounting for the majority of expenditure on import facilities. Another potential import project within the region is the Kuwait National Petroleum Corp. (KNPC) LNG facility in Kuwait, which is expected to come onstream by 2020.

Market overview

A combination of sustained low oil prices and lower than expected economic growth profiles of many Asian countries (particularly China) has led to oversupply in the market, causing LNG spot prices to fall substantially. Asia will continue to be a key region of demand growth, yet prices have struggled. In August 2016, Japan’s LNG spot price averaged US$5.40/million Btu – a 50% decline compared to the same period 12 months prior. The low oil price remains a concern for the LNG market, as most long-term LNG contracts are linked to oil price, with the flexibility to vary according to market conditions greatly reduced. With long-term contracts in place, LNG suppliers’ ability to swap cargoes to the highest-priced bidder, or to adjust their LNG trading to where they can gain the most profit, is restricted.

Douglas-Westwood (DW) forecasts that CAPEX on LNG facilities between 2017 and 2021 will total US$284 billion – an increase of 50% compared to the previous five years. Over the forecast period, the Middle East will experience a 30% compound annual growth rate (CAGR) and, overall, the region will account for 3% of global expenditure.

While the Middle East has historically been a net exporting region, in recent years there has been a clear rise in domestic gas consumption, with two cargoes of LNG from the Sabine Pass LNG plant delivered to Kuwait and the UAE in 2Q16. However, import projects will remain in the minority over the forecast period, accounting for only 7% of regional expenditure.

Conclusion

In recent years, oversupply within the market has increased due to weaker demand from Asia. This is likely to remain the case in the short-term due to additional export capacity from Australasia and North America. However, seasonal gas demand will remain a key driver, particularly in Western Europe and Latin America, as LNG demand in these regions is often driven by prolonged winter seasons, while declining local gas production will also play a part. Global LNG CAPEX will experience a 14% CAGR over the next five years, and the use of natural gas will continue to play an increasingly important role in meeting global energy demand. Qatar retained its position as the world’s largest exporter of LNG in 2016. However, DW expects to see a shift in the market, with Australia forecast to become the biggest supplier by the end of 2017. With many countries in the Middle East having large gas reserves, ongoing political tensions and proxy warfare are a big stumbling point for the development of these capital-intensive projects, hence curtailing further investments over the near-term.


This article was originally published in the October 2016 issue of LNG Industry.


Written by Mark Adeosun, Douglas-Westwood, UK. For more information on the 'World LNG Market Forecast 2017 - 2021', click here.

Read the article online at: https://www.lngindustry.com/special-reports/11102016/outlook-for-the-middle-east/


 

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