Gas grid remains off the agenda in the Gulf

05 January 2011

Despite the success of a unified electricity grid, there is little political will to implement plans for pan-GCC gas network

Key fact

GCC gas deficit will grow from 19 billion cubic metres in 2009 to 31 billion cubic metres by 2015

Source: Booz & Co

Building cross-border energy networks has long been an ambition for Gulf governments, and over the past year that dream has started to become a reality. The GCC unified electricity grid lent vital support to member states during peak demand periods in summer 2010.

The Qataris’ entire strategy has changed in the past several years. They are focused on LNG exports to Asia

Justin Dargin, Harvard University’s Belfer Center

Kuwait, Qatar, Bahrain and Saudi Arabia have now linked up their transmission networks and are capable of sharing electricity supplies. The UAE is set to join the network by mid-2011, once Saudi Arabia’s National Contracting Company completes construction of a 200kV line between Salwa in Saudi Arabia and Shuweihat in Abu Dhabi.

Work is also due to get under way in 2011 on the construction of 220kV lines to link the UAE and Oman power grids, finally bringing the sultanate within the GCC’s integrated electricity network.

Gas integration benefits for Gulf

The progress made by the GCC Interconnection Authority (GCCIA) in sending electricity across national borders has set regional minds thinking. If what once seemed a distant prospect is achievable, why then should the six member states not be able to create unified natural gas and even pan-GCC water distribution networks?

The benefits of a unified GCC gas grid are obvious. Member states, with one notable exception are chronically short of gas, which is having a detrimental impact on the region’s economic development.

Across the GCC, governments have been forced to ration gas supplies to industries. At the same time, utility providers short of regular gas feedstock  have been forced to burn increasing volumes of expensive fuel oil as an alternative.

The longer-term forecasts for the region’s gas supply/demand situation make for dispiriting reading. The UAE government forecasts that gas is only likely to be able to supply about half of the peak projected electricity demand of 40,000MW by 2020. 

A report, Gas Shortage in the GCC, published by consultancy Booz & Co in mid-2010, paints an equally bleak picture. It says the GCC gas deficit is on course to grow from 19 billion cubic metres in 2009 to 31 billion cubic metres by 2015. The report says the shortage could rise to more than 50 billion cubic metres by 2015 if regional growth returns to pre-economic crisis levels.

A GCC-wide gas grid to manage supply/demand imbalances would deliver enormous benefits for the Gulf states. The region is sitting on some of the most significant gas reserves in the world. Estimated at about 40 trillion cubic metres, this amounts to more than 20 per cent of the world’s total gas deposits.

Despite the advantages, the hurdles for developing a gas grid appear greater than those faced by the region’s electricity network. Enabling gas to be piped from resource-rich states such as Qatar, the UAE and Oman to those with less developed gas reserves will require a radical overhaul of the region’s entire energy sector.

The key issue is, there is little appetite from countries such as Qatar to reshape the way it develops and markets its enormous natural gas endowment.

The key gas-producing countries have committed significant portions of their current production to liquefied natural gas (LNG) exports through long-term contracts, mostly to Asia and Europe. Those commitments stand to exacerbate gas supply shortages, while demand continues to increase at home.

Little momentum for Gulf gas grid

The GCC heads of state meeting in Abu Dhabi in December 2010 heard a commitment to enhancing energy cooperation, but there is little concrete momentum to facilitate a formalised natural gas network.

“People are trying to think about ways of linking their energy strategies together. However, gas remains a valuable commodity and the creation of the gas grid entails a certain sophistication in trading and the flow and control of gas, which is lacking at this point,” says a UAE-based consultant.

A major stumbling block to an unified GCC grid is the way that Qatar sells and prices its gas. Unlike electricity, which is subsidised in GCC states, Doha insists on selling its gas at a premium.

“The Qataris are not interesting in engaging with their neighbours in any type of pipeline construction or supplying neighbours with gas via pipeline,” says Justin Dargin, a Gulf energy specialist at the US’ Harvard University’s Belfer Center. “The Qataris’ entire strategy has changed in the past several years. They are focused on LNG exports to Asian customers, and even their negotiations with Kuwait to ship LNG have fallen though.”

Even the plans to extend the GCC’s sole existing cross-border gas system, the Dolphin pipeline from Qatar’s North Field to Abu Dhabi, have come unstuck.

Although pipeline laying work has been completed on phase two of Dolphin, the proposed increase in capacity from 2 billion cubic feet a day (cf/d) – equivalent to about 20.6 billion cubic metres a year – to 3.2 billion cf/d has yet to materialise. It is not clear if Qatar will supply gas to this pipeline and, even if it does, the terms and conditions it would impose have not been defined, says Booz in its report. In any event Qatar’s LNG exports to Asia have produced much higher returns.

Market forces for gas in the Gulf

Any change in Qatar’s stance towards supplying gas to its neighbours would have to be driven by market forces. To some, the global gas oversupply has created conditions for the GCC states to address their gas shortage.

Having recently increased its export capacity to 77 million tonnes a year, Doha now has unsold and uncommitted volumes of LNG. A decade ago it was quickly able to offload unsold volumes via spot contracts.

“They can’t do that so easily any more given the rise of unconventional gas plays in the US. So any chance of Qatar doing some arbitrage in the US and European markets is dwindling as their supply has doubled,” says the consultant.

“Despite the fact that they have imposed a moratorium on developing more gas, they are going to have to quickly come to grips with the fact that they need to need to sell their gas.”

There may come a time when the GCC’s sellers will have to bite the bullet and sell to their neighbours. Compromise will be needed. “It certainly won’t be sold at Dolphin prices,” says the consultant.

“It won’t be at $1 a million BTU, but neither will it be $10 a million BTU as per the spot prices a couple of years ago, when the Qataris were sending LNG shipments to the US.”  

However, the fear among GCC authorities is that the window of opportunity for creating a formalised regional gas network may have already passed. The most opportune moment was in the late 1990s and early 2000s, before Qatar had got its major LNG capacity expansion under way.

Over the past few years, Doha’s strategy has been driven by the aim of avoiding being trapped again into long-term, low-priced contracts. The Dolphin experience has not endeared Qatar to becoming the regional front of gas supplies to its GCC partners.

Doha has absorbed a significant opportunity cost in supplying natural gas to the UAE. In effect, the Dolphin project saw Qatar subsidising industrialisation in Abu Dhabi and Dubai. 

Commercial focus for Gulf gas sector

“The UAE was using relatively inexpensive Qatari gas to subsidise power generation and petrochemicals projects, and were taking their own LNG and shipping it to the Japanese. The Qataris saw what going on and simply refused to continue this. Now Qatar’s gas sales are much more commercially driven and less to do with political concerns,” says Dargin.

Qatar has also invested heavily in LNG support infrastructure, with Qatar Gas Transport Company spending billions of dollar on buying giant LNG carriers. It makes little sense now to spend billions more on pipeline infrastructure, when piped gas to GCC neighbours offers no realistic prospect of delivering a competitive return, compared with shipments to Asia and Europe. 

Given these concerns, it is difficult to see a genuine GCC gas supply network evolving over the next decade.

Regional governments have yet to undertake the necessary reforms to domestic pricing structures to make such a project feasible. Most GCC states cap domestic sales priced at an uncommercial level of less than $1 a million BTU.   

If a pan-GCC gas network is off the agenda, policymakers will have to rethink the way they develop and use natural gas.

Governments will have to reach out to a wider array of import sources, and make the painful reforms to the gas pricing system to help pave the way towards a more coherent long-term strategy, in which local deposits will be able to meet rising domestic demand.

A GCC water network?

As the final links in the GCC unified power grid are completed, attention could turn again to a joint water grid.

A feasibility study undertaken by France’s Sogreah originally proposed the construction of three supranational desalination plants in Sohar in Oman, Sila in the western part of the UAE and Al-Khafji in the Divided Zone, between Saudi Arabia and Kuwait. The $3.86bn project, first outlined in 2006, involved the construction of a 1,324-kilometre water pipeline linking Sohar to Al-Khafji. In emergencies, it would allow national water authorities to obtain 25 per cent of their daily drinking water from the grid. The system proposed during the preliminary feasibility study would involve three dual purpose multi-stage flash desalination plants with a capacity of 630,000 cubic metres a day (cm/d) and combined-cycle gas turbine plants with a capacity of 1,400MW, located at Al-Khafji and Sila.

Sogreah proposed to set up a GCC water grid in two phases, with phase one due to begin around 2010 and phase two in 2025. For phase one, a desalination capacity of 820,000 cm/d and a power capacity of 900MW were planned.

However, the water grid project was shelved in 2007, with GCC governments deciding instead to prioritise the electricity connection project.

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