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By Santhosh V. Perumal
The Gulf Cooperation Council (GCC) should establish a gas regulator to evolve a dynamic pricing mechanism that reflects the global and regional dynamics of supply and demand, as the present low and fixed prices is “unsustainable”, according to Strategy&, a global consultant.
“A regulator for gas should be established to govern the new gas-pricing regime and monitor its application. The time to act is now, while oil prices are low and reducing gas subsidies will have a less severe impact on the region’s economies,” the global consultant said in a report. The regulator’s oversight should cover well head gas and costs associated with the processing and transportation of the gas to its final destination.
It should also be able to set and control technical standards and guidelines pertaining to the gas industry, akin to what electricity regulators do for private investments in power generation, it said.
Gas supplies in each GCC country have been regulated by state monoliths with prices set considerably beneath comparable global prices, it said, adding for decades, this policy supported local economies by providing stability and competitive advantage to petrochemicals and energy-intensive industries, even though approaches to gas pricing vary across the region.
Stressing that despite an abundance of gas resources, the current position is “not sustainable”; it said production costs are set to rise steeply in coming years as output shifts from low-cost associated gas to increasingly challenging non-associated gas fields with greater technology requirements.
Factoring field-by-field variations, expected decline rates of existing production, and potential new developments, the future weighted average costs of gas production across the GCC is slated to rise by one-third to two-thirds between 2015 and 2030 – from $1.50 to $4.50 per thousand cubic feet in 2015, to $2 to $7 per thousand cubic feet in 2030.
Hence, “GCC governments will find it increasingly difficult to maintain current prices, which range from just $0.75 to $3 per thousand cubic feet, given the growing gap with production costs,” the report said.
“If the cost of gas does not start to reflect its true market value and appropriate investment in the oil and gas sector is not allocated soon, the GCC will be unable to meet demand for gas in the future,” George Sarraf, Partner with Strategy&, said.
Highlighting that without substantive gas pricing reforms, the gap between domestic production and future demand in the GCC is forecast to widen “significantly” by 2030; it said the best approach to setting gas prices – and incentivising investment in new production and demand management – is to use market mechanisms.
Although gas pricing in the Middle East is overwhelmingly regulated by national governments, elsewhere markets are increasingly liberalised and are gradually moving from oil indexation to gas hub pricing as the preferred pricing mechanism, it said, observing that in 2014, about 43% of all gas sold was subject to gas hub pricing, whereas only 17% was indexed to oil.
“Taking the global trends and the specifics of the GCC into account, the region should consider gradually moving toward pricing that more accurately reflects the cost of supply and value of the gas to consumers,” it said, adding the industry accounts for 55% of gas consumed in the GCC.
As an ambitious, longer-term option, GCC countries could consider establishing a dedicated GCC gas hub. Establishing such a hub would require investment in physical infrastructure at the national and regional levels, the implementation of a trading platform to set a benchmark price, and the establishment of a supra-national regulatory system.
“Given its infrastructure connections to Abu Dhabi and Qatar, as well as its liquefied natural gas import and gas storage facilities, Dubai could be an option for a future GCC gas hub, although export infrastructure is currently lacking,” it said.
© Gulf Times 2016
