Region fails to reach gas potential

20 March 2009

Gas-rich states are struggling to raise production to meet domestic demand and supply export markets.

Despite its impressive reserves, the Middle East’s share of global gas production remains a fraction of its potential. But gas will play an increasingly important role in the region in the coming years, as domestic demand grows and the region attempts to significantly raise its liquefied natural gas (LNG) exports.

Saudi Arabia, in particular, may dominate the oil sector, but it is lagging behind in the gas sector. Allocations of gas feedstock are increasingly hard to come by for local firms.

In terms of developing new sources of gas, Saudi Arabia has been disappointing, with hopes of new commercial finds being made in the Rub al-Khali (Empty Quarter) fading.

“Drilling will continue, but everyone is quite downbeat about the prospects of new finds in the kingdom,” says Samuel Ciszuk, an analyst at US energy consultant IHS Insight.

Gas shortages

Analysts do not expect any large quantities of additional gas to come on stream until about 2012, when the Karan field is due to begin operating. Most of the kingdom’s gas comes from associated fields, which provided sufficient supplies during the rapid expansion of oil production in 2007 and 2008. However, as oil production rates have been cut back, so have supplies of gas.

This will be a bigger problem in the years ahead as Opec comes to terms with lower global demand for oil. Some analysts suggest Saudi Arabia’s oil production could soon drop to 8 million barrels a day (b/d) from last year’s highs of almost 10 million b/d.

Any production below this level would result in too little gas being extracted to meet domestic demand.

“They really are stuck between a rock and a hard place,” says Ciszuk. “But one factor that will alleviate Saudi Arabia’s problems slightly in the medium term is a cooling of the economic growth, which will ease the considerable burden on feedstock allocations, lowering the call on gas.”

But for Kuwait, Oman and the UAE, the situation is more urgent. The extent of their gas shortages is most apparent in the summer, when power demand is at its peak. These countries have become more reliant on Qatar for gas supplies, both through the Dolphin pipeline, which exports gas to the UAE and Oman, and through shipments of LNG.

In March 2005, Doha imposed a moratorium on further projects on its giant offshore North field while it conducts further studies on the reservoir. In January, Qatar’s Energy Minister and Deputy Prime Minister Abdullah bin Hamad al-Attiyah said it would be extended to 2013.

Currently, the UAE and Oman receive about 400 million cubic feet a day (cf/d) of natural gas from Qatar via the Dolphin pipeline. The UAE has expressed interest in a second phase of the project. Qatar has indicted that domestic demand will take increasing precedence in any future gas allocation.

The next obvious option for supplies from within the region is Iran. Sharjah-based Dana Gas plans to supply Iranian gas to utilities and industrial customers in the UAE, but negotiations between Dana and Tehran over the pricing of the gas have been under discussion for more than two years.

Under the proposals, 600 million cf/d of gas will be supplied from Iran’s Salman field.

According to the EIA, in 2007 Iran had 974 trillion cubic feet of gas reserves.

Iran is hopeful of building up its capacity further, but in the medium term it is unlikely to have any spare gas for export. Domestic consumption is increasing rapidly, at an average rate of 8 per cent a year since 2000, according to Tim Gould, programme manager for the Caspian, Caucasus and southeast Europe regions at the IEA. Production is only just keeping pace, growing at 9 per cent a year.

One of the main reasons expanding production has been so slow is the burden of international sanctions. While the wider Iranian economy is able to cope, the hydrocarbons industry is running into problems as international partners back out of the country.

In 2008, France’s Total, Norway’s Statoil Hydro, the UK/Dutch Shell Group and Spain’s Repsol, which had all been engaged in the development of South Pars, said they would no longer invest in the country as the political risks continue to mount. “Western IOCs [international oil companies] have been reluctant to invest in Iran, but Eastern IOCs and regional players have been more open and pragmatic,” says Justin Dargin, research fellow at the Dubai Initiative at the US’ Harvard University.

Western co-operation is critical to Iran’s gas development, however. “Gas is the last frontier where Western IOCs have the edge in terms of experience and technical know-how,” says Dargin.

Without this, Tehran’s ambition of matching Qatar as a gas exporter will remain on hold.

Existing production is also extremely wasteful, partly because of the lack of the latest technology. About 18 per cent of gas produced is used for enhanced oil recovery. “With better technology, they could use less gas to get the same amount of oil,” says Ciszuk.

More alarmingly, about 15 per cent of total gas production a year is still lost to flaring.

Iran has had some successes. In September 2008, it signed a $60m-plus contract with Oman for the supply of 350 billion cubic feet a year (cf/y) of gas by pipeline, with Doha funding the project.

Nonetheless, Iran looks set to remain predominately an oil exporter, with gas used to satisfy domestic demand, rather than for the export-oriented LNG market. Its current five-year plan for gas, which aims to raise production to about 35 trillion cf/y by 2010, now looks unrealistic.

Unrealistic goals

“The continuous delays in the development projects undertaken, and the weight of international financial sanctions, raise doubts about whether the country will be able to reach these goals,” says Gould.

“The target for peak gas production in 2017 is 500 billion cm/y [17.6 trillion cf/y], although this would require nearly a doubling of average growth, which would be very optimistic.”

Gulf states are not the only ones in the region looking to exploit their reserves of gas. North Africa is also emerging as an important source of gas for Europe, partly as a result of the disputes between Russia and some Eastern European countries.

In December 2008, Russia’s Gazprom announced it was halting gas supplies to the Ukraine’s Naftogaz because of an ongoing dispute over prices and debt, sparking fears over gas supplies to the rest of Europe.

Algeria is the world’s third biggest gas exporter, with reserves of 159.5 trillion cubic feet, and supplies both pipeline gas and LNG, mainly to European customers.

However, the country’s long-term plans could run into problems. The international industry has shown plenty of interest in Algeria, but the commercial response to the most recent licensing round shows how far Algiers needs to go to meet its potential.

Algeria offered a total of 16 licences in its seventh bid round in December 2008, but received a poor response from international oil companies, with bids submitted for only nine of the licences, worth a total of $272m, and awards made on just four. Algerian officials blame the global economic downturn for the poor outcome, but others point to domestic factors.

“You need to look at the investment laws and the terms offered in the licences,” says Ciszuk. “These have been tightened and, in a low-price environment, have become deeply unattractive to foreign companies.”

It is hard to see Algeria making headway on the outstanding licences before the presidential elections in April.

“By mid-year, we will perhaps be able to see which way the wind is blowing, but it might be at least five or six months before we see any changes in the terms being offered,” says one industry source based in the country.

The prospects of Algiers moving quickly to change its stance back to an open investment environment are uncertain.

All countries in the region are struggling with a similar dilemma: how to boost domestic production at a time of lower global energy prices, with IOCs wary of making large new investments.

The need to provide more supplies to domestic industries will also remain difficult to address while export deals are potentially so much more lucrative.

These factors could mean that the Middle East will continue to struggle to make the most of its potential in the gas sector.

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