Gas shortage to force the GCC to do away with subsidies

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Despite significant growth in natural gas production over the past decade, The US Energy Information Administration (EIA) said several countries in the Middle East still experience domestic supply shortfalls due to growing demand in the electric power and industrial sectors.

To address this, the Middle East and North African region is now developing various approaches to phasing out price subsidies to align domestic natural gas prices with export prices, the agency in its International Energy Outlook 2010 (IEO), said.

The 330-page book sent to Emirates 24l7 says natural gas consumption in the region was stimulated by increased economic activity, large investments in new infrastructure and domestic price subsidies.

Several countries in the region have already opted to import natural gas in the form of LNG. Kuwait started importing LNG In 2009 while Dubai plans to begin in 2010, the report said.

This is four times the OECD countries' growth rate of .6 per cent per year and 26 per cent higher than its fellow non-OECD countries growth rate of 1.9 per cent.

Booz & Company projects this demand growth will exacerbate the gas shortage.

The consulting firm envisages that over the next five years, the shortage will become "more acute". In a prolonged recession scenario, it said gas shortage is expected to increase from about 19 billion cubic metres in 2009 to about 31 bcm in 2015.

The gas shortage is further compounded by the increasing economic emphasis on the steel, aluminium and petrochemical sectors.

Low gas prices provide a competitive edge for GCC businesses to increase investment and add significant new capacity within the next few years.

As a result, production of polyethylene and polypropylene in the Middle East will more than double between 2008 and 2012 and steel and aluminium production may increase as much as six-fold in the same period, Booz & Company, said.

"In the longer term, utility firms have to increase the tariff because the fuel price will not be cheap anymore," a Dubai-based gas operations manager, said.

"The gas price will not be cheap for sure and besides, this is also an environmental concern. People should start paying more than what they are paying now."

He said subsidy for residences is somewhat acceptable but subsidy for the industrial sector is not.

"Because gas prices are subsidised for aluminium companies, for example, they are able to offer their products at far lower prices compared to international peers," he said.

"This not only creates uneven competition, these companies would have been running at a loss if the energy prices were not subsidised. I don't think this is sustainable."

The EIA says the region's industrial and electric power sectors remain the most important natural gas consumers, with shares of about 50 per cent and 40 per cent of total use, respectively in 2035.

Growth in industrial consumption is driven by the petrochemical industry, primarily in Saudi Arabia, Iran, Qatar, and the UAE.

Natural gas use in the region's electric power sector is set to nearly double from 2007 to 2035 with an overall increase of 3.9 trillion cubic feet, the report said.

Natural gas remains a key energy source for industrial uses and for electricity generation because natural gas produces less carbon dioxide when it is burned than does either coal or petroleum.

In the electric power sector, natural gas is often an attractive choice for the new generating plants because of its relative fuel efficiency, low emissions, quick construction timelines and low capital costs.

Imbalance equation

To meet the demand growth projected in the IEO 2010 reference case, the world's natural gas production will need to increase supplies by almost 50 trillion cubic feet between 2007 and 2035.

The EIA forecasts that the major projected increase in natural has production will come from the non-OECD countries (89 per cent of the total increments), with the largest increments coming from the Middle East - an increase of 16 trillion cubic feet between 2007 and 2035.

Africa follows with an increment of 7 trillion cubic feet and Russia/Eurasia with a 6 trillion cubic feet increment.

Over the projection period, Iran and Qatar alone will increase their natural gas production by a combined 12 trillion cubic feet, nearly one-fourth of the total increment in world gas production.

A significant share in the increase is expected to come from a single offshore field, which is called North Field on the Qatari side and South Pars on the Iranian side.

The EIA report said the strongest growth among Middle East producers comes from Qatar, where natural gas production increases by 7.2 trillion cubic feet followed by Iran (4.8 trillion cubic feet) and Saudi Arabia (2.2 trillion cubic feet).

Although Iraq is the region's fastest growing supplier of natural gas, at 11.6 per cent per year over the projection, it is a relatively minor contributor to regional gas supplies. In 2035, Iraq's natural gas production totals only 1.1 trillion cubic feet, or about 4 per cent of the Middle East's total.

Qatar is slated to be the only one unaffected with the supply-demand imbalance but the state is bound by its moratorium to sell more long-term gas deals.

Although Iran has the world's second-largest natural gas after Russia and is currently the Middle East's largest natural gas producer, the Islamic republic is also the region's largest user of re-injected natural gas for enhanced oil recovery operations.

In 2007, Iran re-injected more than 1 trillion cubic feet of natural gas, or 16 per cent of its gross production. In 2009, it began enhanced oil recovery operations at the Agha-Jari oil field, where it plans to raise oil production by 60,000 barrels per day by injecting 1.3 trillion cubic feet of natural gas annually, more than doubling the 2007 re-injected volumes.

In 2020, Iran is estimated to need between 3.7 trillion and 7.3 trillion cubic feet of natural gas per year for re-injection.

The higher estimate is close the projected total for Iran's marketed natural gas production in 2020. The actual use for re-injection use, whatever it turns out to be, will have a significant impact on Iran's future and marketed natural gas production.

Saudi Arabia's natural gas output is slated to grow an annual rate of 2.2 per cent from 2.6 trillion cubic feet in 2007 and 4.8 trillion in 2035.

It has made a couple of new gas finds but most of them such as Arabiyah and Hasbah are sour gas fields, making them relatively expensive to produce, with an estimated cost of $3.50 and $5.50 per million Btu.

The IEO2010 reference case assumes that Saudi Arabia's policy of reserving natural gas production for domestic use persists and that no natural gas is exported until 2035.

By Karen Hart

© Emirates 24|7 2010