Gas in numbers

21 per cent: Rise in gas consumption in the UAE in 2008

30 billion cubic metres: The UAE’s projected gas supply deficit by 2020

Source: MEED

At the end of September, a cargo of liquefied natural gas (LNG) was loaded onto the Golar Freeze, a floating storage vessel in Qatar. For the world’s largest LNG exporter, this was no surprise. But the destination was the UAE, and the cargo the country’s first ever LNG purchase.

The UAE is desperate for gas. They just need to bite the bullet on prices

Jonathan Stern, Oxford Institute for Energy Studies

For a country that positions itself as energy-rich, not energy-dependent, the delivery of the gas – a commissioning cargo ahead of full start-up next year – was a major watershed. The gas was delivered as part of an agreement signed in April 2008 between Dubai Supply Authority and the UK’s Shell for the purchase of up to 1.65 million tonnes a year of LNG. In theory, the gas can come from anywhere in Shell’s global portfolio, but capacity has been allocated from the Qatargas IV project in Ras Laffan.

The UAE’s long-term energy needs

Originally intended to cover the summer peak in electricity demand, when air-conditioning and increased water usage ramp up power consumption, the imports could soon become an all-year-round fixture. “The original idea was just to have it for the summer, but now they are saying that the economic recovery is so fast that they will probably need it all year round,” says Andy Flower, a UK-based LNG consultant.

UAE gas imports
(Billion cubic feet)
2000 0
2001 7.063
2002 7.063
2003 7.063
2004 49.441
2005 49.441
2006 49.441
2007 227.78175
2008 591.52625
Source: EIA

Nor is it likely to be a temporary measure. “Short fixes are turning into long-term dependencies for the Dubai government,” says Justin Dargin, research fellow at the Dubai Initiative, a partnership between the Dubai School of Government and the US’ Harvard University. “Dubai is going to be a major LNG importer for some time into the future.”

The UAE’s energy crisis has been several years in the making. The country’s natural gas production has increased rapidly in recent years, from 38.4 billion cubic metres in 2000 to 50.3 billion cubic metres in 2007. But consumption has increased even more quickly, from 31.4 billion cubic metres in 2000 to 49.2 billion cubic metres in 2007. More worrying still, production growth stagnated in 2008, and then fell in 2009, to 48.8 billion cubic metres.

Strong economic growth followed by government stimulus packages to handle the global downturn meant that gas demand did not fall to the same degree due, in particular, to increased industrial activity. Gas consumption surged 21 per cent in 2008 to 59.5 billion cubic metres, exceeding domestic gas production for the first time in recent memory.

UAE gas exports
(Billion cubic feet)
2000 245.43925
2001 250.0302
2002 252.50225
2003 251.08965
2004 264.1562
2005 252.1491
2006 250.7365
2007 269.1003
2008 267.22861
Source: EIA

In 2009, in the face of the downturn, it eased by just 0.7 per cent to 59.1 billion cubic metres. In the past two years, the emirates of Ajman and Sharjah have suffered from power blackouts, and Dubai was on the verge of its own energy crisis when gas first began to arrive from Qatar through the Dolphin pipeline in 2007.

“Dubai would have the same issues as the Northern emirates had Dolphin not come on stream just in time,” says Dargin. “There was a blackout in Dubai just two days before it came on.”

It is only thanks to Qatar’s gas that the UAE has been able to keep the lights on. Between 2000-07, electricity consumption rose every year, almost doubling from 36.2 billion kWh in 2000 to 66 billion kWh in 2007, according to the US government’s Energy Information Administration (EIA). But every year, generation has managed to stay just ahead of the demand curve. Output increased from 37.5 billion kWh in 2000 to 71.5 billion kWh in 2007.

A continuing programme of power plant investment means electricity demand is likely to continue to be met in the medium term. But the UAE will have to find the gas feedstock for the new power stations, as well as for a raft of planned industrial projects.

UAE gas supply deficit

By 2020, the UAE’s gas deficit will have widened to at least 30 billion cubic metres, says Dargin. “By then, we expect production to be about 78 billion cubic metres a year (cm/y) and consumption to have reached 108 billion cm/y – and that’s a conservative estimate. The governments have not stepped back from petrochemicals and aluminium smelter projects even though it [the UAE] has had serious problems finding gas.”

An upturn in the global economy, and with it an increase in oil demand, would help boost the UAE’s gas production. Most of the Middle East’s gas is produced in association with oil, so as crude production increases, so does that of gas. But it is unlikely that any such increase would be able to match the upturn in gas demand and the additional demand for gas injection to help meet higher oil output.

“Increased oil production will free up more associated gas, but how much surplus there will be after injection is difficult to assess,” says Samuel Ciszuk, senior Middle East energy analyst at consultancy IHS Global Insight. “I don’t expect the UAE’s dependence on imports to go away.”

With little or no prospect of the UAE being able to close its gas deficit in the foreseeable future, it must turn to either, other sources of gas, or other means of producing electricity.

The Abu Dhabi government has embarked on a nuclear power programme, but the impact of this policy will take some time to come to fruition and it is still unclear exactly how the other emirates will benefit. In the meantime, the UAE will become increasingly reliant on foreign gas, either from an increase in supply through the Dolphin pipeline, or higher imports of LNG.

Dolphin pipeline

Under the existing Dolphin supply agreement, gas is supplied to the UAE, and then divided between the emirates. A further 200 million cubic feet a day (cf/d) is supplied to Oman, leaving about 1.2 billion cf/d of the 3.2 billion cf/d capacity uncontracted.

Of this, Qatar has agreed to export an additional 300-400 million cf/d to the UAE on an interruptible basis, meaning that it can choose to divert the gas to alternative markets if it can secure a better price.

In the short term, the interruptible supply agreement has worked well for both the UAE and Qatar. The UAE needs the extra gas, while the downturn in European gas supply and discoveries of shale gas in the US have meant that Doha has been able to divert capacity through the Dolphin line. But in the longer term, the interests of the two countries might not dovetail so neatly.

The main barrier to increased gas supply from Qatar to other Gulf states is the price. In their initial deals to secure Qatari gas through the Dolphin pipeline on a long-term basis, the UAE and Oman agreed a price of around $1.30 a million BTU.

Ideally, they would like the line to be expanded and to be able to sign another long-term deal at a similar price. Even if Qatar’s moratorium on the development of North Field gas is eventually lifted, it is still likely to be reluctant to sell any more gas at such a discount to the global market price.

“The Dolphin deal was a unique phenomenon,” says Dargin. “At the time, Qatar was trying to increase its political influence in the region. From an economic perspective, it was not in Qatar’s interests to supply gas at such a price, but the royal family believed that the price was worth paying for political reasons. Since then, Qatar has shown no enthusiasm to increase gas supply through Dolphin.”

Higher gas prices for the UAE

The price of the additional gas sold to the UAE through Dolphin illustrates the point. The interruptible supply deal was agreed at a price of $4-5 a million BTU, according to industry sources in the UAE.

As the global economy recovers, increased gas demand will to push up LNG market prices, making Qatar all the more likely to turn back to the spot market to sell shipments to the highest-paying customers. “The UAE is desperate for gas,” says Jonathan Stern, director of gas at the Oxford Institute for Energy Studies in the UK. “They just need to bite the bullet on prices.”

For the UAE to accept buying gas at market prices on a more structured, long-term basis would take a shift in psychology. Even in the face of an increasing power shortage, it still has the mentality of a resource-rich nation.

Historically, Gulf oil and gas producers have been unwilling to pay more than about $1.50 a million BTU for gas. But the high sulphur content of much of the UAE’s gas, together with the difficult drilling means the real cost of production and processing already far exceeds that.

“There’s potential for there to be a GCC price of around $5 a million BTU, which would be equivalent to the cost of production in countries like the UAE and also acceptable to exporters,” says Dargin. “Qatar will accept this, and the UAE will start to understand that this is the new reality.”