Gas exports: States juggle competing gas export demands

30 October 2008
Developments in Qatar and Algeria will bring substantial amounts of gas to the global market in coming years, but export capacity elsewhere in the region is at a standstill.

Gas consumers the world over are looking to the Middle East to meet their gas demand deficit.

Slow gas production growth elsewhere in the world, coupled with rising demand for clean-burning fuels to meet new environmental standards in Europe and fast-rising energy consumption in developing markets, has created a huge opportunity for the region’s gas producers to step in and fill the gap.

But increasingly, countries in the region are turning their attention to their own problems. Although the Gulf boasts four of the five largest gas reserves in the world, rising energy demand in the GCC leaves little capacity for exports.

Iran is also struggling to meet its own energy demands, and although both Algeria and Egypt have substantial reserves, they too are facing barriers to production growth.

The prospects for global exports of Middle East gas are bleaker than they have been for some time.

That is not to say the region’s role as an important source of global gas exports is set to come to an abrupt halt.

For the next five years at least, gas production growth from the Middle East will be the major source of incremental gas supply to the world’s consumers. But that growth will rely almost exclusively on two sources: Qatar and Algeria.

International relations

Qatar is the region’s success story. Production from the enormous North field has enabled the small emirate to become the world’s largest liquefied natural gas (LNG) producer.

The 40 billion cubic metres of LNG it produced in 2007 was the most ever produced in a single year by any country, and a 28 per cent increase on its own production the previous year.

An ongoing programme of liquefaction infrastructure development will take production up to 105 billion cubic metres within the next five years.

But concerns that Doha has benefited insufficiently from its partnerships with international oil companies, and fears that it may be over-exploiting its gas reservoirs, led in 2005 to the imposition of a moratorium on new projects using North field gas.

Initially imposed until 2010, it is now unclear when this ban will be lifted, but industry sources predict that it will be in place until at least 2013.

“Planned infrastructure development in Qatar will add enormously to world gas supply,” says Michael Corke, senior vice-president of US energy consultant Purvin & Gertz.

“But it is not clear that there will be any more beyond that. Part of Qatar’s thinking is that it wants to maintain its good relationship with its international partners, particularly [the US’] ExxonMobil.

If they come up with plans for more terminals, Qatar will listen. But it might not go ahead with them. It might decide that it does not need to save the world.”

The region’s other major player on the international gas market is Algeria.

The source of the world’s first-ever export of LNG, it is now the fourth-largest producer in the world, with 24.67 billion cubic metres of exports in 2007, a shade behind Indonesia, at 27.74 billion cubic metres, and Malaysia, at 29.79 billion cubic metres, according to UK energy giant BP.

Expansion projects are under way at the country’s two LNG terminals - Arzew and Skikda - which will increase capacity by 9.2 million tonnes a year by 2012.

Algeria is also a major supplier of piped gas to international markets. It already accounts for about 11 per cent of Europe’s gas supply, and new pipelines to both Spain and Italy are due to come on stream by 2012.

Algiers is also collaborating with Niger and Nigeria on a proposed 4,300-kilometre-long pipeline to connect the south coast of Nigeria to the Mediterranean (see feature, page 50).

Restricting supply

The $15bn project is still in the conception stage, but has political backing from the EU, and Russia’s Gazprom and France’s Total have both expressed an interest in its construction.

“If it goes ahead, the project will further underline Algeria’s transit potential and its strategic position,” says Samuel Ciszuk, Middle East analyst at US-based forecasting company Global Insight.

But Algeria is not without its problems. Industry sources say the Arzew LNG terminal has been running at just 73 per cent of its capacity in recent months, and in mid-October, Sonatrach, Algeria’s state oil company, invoked a ‘force majeure’ (freedom from liability) clause in its contracts after a cracked gas pipeline caused a further 20 per cent reduction in the terminal’s production capacity, forcing it to cut supply on all its long-term agreements.

Delays to the country’s plans to develop both its LNG and pipeline capacity have forced Algiers to push back its target date to increase gas exports to 85 billion cubic metres a year from 2010 to 2013. It currently produces about 60 billion cubic metres a year.

Further upstream, it has encountered problems at its largest dry gas field, In Salah, where for long periods, production has been substantially below its 9 billion cubic metres a year (cm/y) capacity, and there are questions over whether the country has the political will to continue to increase gas production in future.

The barriers to Qatar and Algeria continuing to ramp up gas production would not be such a concern were it not for the dearth of gas export developments elsewhere in the Middle East.

The UAE has the fourth-largest gas reserves in the world, but for the foreseeable future its resources are likely to be concentrated on addressing increasing domestic demand.

Saudi Arabia has gas reserves of 253 trillion cubic feet, but has decided to focus on oil development.

Iran and Egypt both have substantial plans to develop their gas production, but in each case there are obstacles to progress.

QUOTE 1: At this point in time, Iran is out of the question because of the uranium enrichment issue - Ferran Tarradellas, EU spokesman.

Unfulfilled potential

Egypt has installed LNG capacity of 16.6 billion cubic metres a year from terminals at Idku and Damietta, and there are plans to build additional trains at these locations.

But plans for the expansion of both terminals have suffered delays caused by difficulties in finding sufficient gas to satisfy the competing interests of international exports, rising domestic demand and industrial development.

Reacting to criticism that Cairo was failing to benefit from rising international gas prices, the government announced in early June that it would not sign any further gas export contracts until the end of 2010.

Improved terms for the sale of gas to Cairo by international oil companies (IOCs) developing acreage in the country mean that prospects for upstream development are improving.

Substantial new spending programmes have been announced this year by several international majors including BP, the UK/Dutch Shell Group and Germany’s RWE Dea. In January, BP made a major new discovery at the Satis field, amounting to an estimated 1.3 trillion cubic feet.

Cairo is also pushing ahead with its upstream licensing programme. Although remuneration levels have not yet been agreed, IOCs expect to earn $4-4.5 a million BTUs for any finds, which compares favourably with the $2.65 a million BTUs on offer in previous rounds.

At least a dozen IOCs have expressed interest in the latest bid round, launched by state-owned Egyptian Natural Gas Holding Company in September.

This contrasts starkly with the 2006 round, which was shunned by foreign oil majors on the grounds that the returns did not justify their investment.

But it will be years before these new exploration efforts have any impact on production.

Iran is the region’s starkest example of unfulfilled potential. Despite boasting gas reserves of 982 trillion cubic feet, it can barely cover its domestic gas requirements.

Iran’s international isolation over its planned uranium enrichment programme is a major factor in its failure to develop its gas export infrastructure.

US sanctions not only affect Tehran’s relationship with US companies, but also those from countries that want to do business with Washington.

Uncertain future

When France’s Total and the UK/Dutch Shell Group pulled out of agreements to develop LNG projects in the Islamic republic in May 2008, US sanctions were cited as the main cause.

While Tehran insists that it is happy to develop its resources without the help of Western companies, the reality is that in their absence, it is struggling to gain access to the necessary financing and technology.

The sanctions issue is also hampering Iran’s involvement in the Nabucco pipeline, a US-sponsored scheme to bring gas from the Caspian region to Europe.

Iran is a perfect candidate to supply gas to the scheme, and the pipeline is widely believed to be unviable without it. But the current political climate makes such an arrangement impossible.

“At this point in time, Iran is out of the question because of the uranium enrichment issue,” says Ferran Tarradellas, spokesman for the EU energy commissioner. “If the situation were resolved, we would be happy to receive gas from Iran.”

Iran is also struggling to come to an agreement on a major pipeline project to Pakistan and India, known as the ‘peace pipeline’.

The delicate political relationship between the countries was always likely to compromise the project’s chances of success.

Now, India has effectively withdrawn because of disagreements over the gas price and an alternative offer from the US to help it develop its nuclear power capacity.

There are also internal barriers to Iran’s infrastructure development. The contract model that Tehran has offered international companies for hydrocarbons development is considered to give them insufficient margins to make the projects worthwhile.

“Even if the international situation changes, Iran has been struggling to provide an attractive investment environment for foreign investors,” says Ciszuk.

“And it is very inflexible on cost reimbursement. As soon as there are overruns, you have to renegotiate the whole contract.”

While growth in the Middle East’s two major exporting markets will ensure that the region maintains a high profile in the global effort to meet increasing gas demand in the short term, the future looks far more uncertain.

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