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Apr 29 2008

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Middle East economy: Gulf gas gap

The recently announced plan for Qatar to supply liquefied natural gas (LNG) to Dubai from summer 2010 is among a growing number of intraregional tie-ups aimed at addressing the increasingly acute gas shortages affecting the booming Gulf Arab states.

In late April, Qatar Petroleum and the Royal Dutch/Shell Group signed an agreement to supply Dubai with of 1.5m tonnes/year (t/y) of LNG starting in 2010, as the emirate wrestles with annual gas demand growth running at a staggering 20%. Qatar inked a similar deal with Kuwait earlier in the year for the sale of 1.4m-1.7m t/y of LNG from 2009, to be delivered, as in the case of Dubai, during the peak summer period. The deals form part of a wider picture of the Gulf gas market, where non-associated gas reserves are concentrated in just two states—Qatar and Iran—while the rest of the region is struggling to secure sufficient supplies to meet the domestic needs of fast-expanding economies and ballooning populations, and looking to better endowed neighbours to plug the gap.

Anything but gas

Evidence of the shortages is plentiful. In summer 2007, Abu Dhabi was forced to divert gas away from oilfield re-injection towards power generation to avoid a repeat of the previous year’s situation whereby power stations had to switch to burning fuel oil during the hottest months—the former a necessarily short-term remedy if long-term damage to crude reservoirs is to be avoided. Saudi Arabia has decreed that all new coastal electricity and desalination capacity will be oil-fired, while across the Gulf alternatives to hydrocarbons feedstock such as coal and nuclear energy are being considered with fresh seriousness.

The Omani government has approved plans for the sultanate’s first coal-fired independent water and power project at Duqm in the south, due on stream in 2012 with generation capacity of 1,000-1,200 mw. France has signed deals with the UAE and Qatar, and the US with the UAE and Bahrain, which would allow companies from the two Western powers to export nuclear technology to the relevant Gulf Co-operation Council (GCC) states. In January, the French trio of Areva , Suez and Total announced plans for two nuclear plants in Abu Dhabi.

The search for alternative feedstocks is understandable, in spite of recent progress in pooling regional gas resources signalled by the Qatari LNG agreements and by the start-up in July 2007 of supplies through the Dolphin Energy pipeline from Qatar to the UAE, eventually to be extended to Oman: full first-phase capacity of 2bn cu ft/day was reached in March, 700m cu ft/d of which is accounted for by Dubai and will avoid a shortfall in 2008. But the second phase of the project, which would see exports increased to 3.2bn cu ft/d, is set to be delayed at best due to the moratorium until 2011 on new developments of North field reservoirs while detailed studies are carried out on the condition of the reservoir. Should the expansion proceed, the original 2012 commissioning date is expected to be put back by up to five years.

Unreliable Iran

Gas import agreements with Iran, owner of the world’s second-largest reserves, are developing a poor track record. In mid-April, Iranian oil minister Gholamhossein Nozari issued the latest in a series of ultimatums to Crescent Petroleum over its 2001 deal to import 550m-600m cu ft/d from the offshore Salman field, warning the Sharjah-based firm that unless an agreement was reached soon on an adjustment to the gas price—which the Islamic republic claims is unreasonably low under current global market conditions—the gas would be sold to alternative customers. The prospects for co-operation between Iran and the increasingly gas-strapped Oman appear brighter: on April 21st the two announced plans to invest US$7bn in the development of the Kish field to the south of Iran, with Oman receiving about half of the projected 2bn cu ft/d output. But a degree of scepticism will only be dissipated by concrete progress, which has been lacking on plans trumpeted last year for the two countries to develop the jointly-owned Hengam/West Bukha field.

Aware of the political difficulties inherent in relying on Iran and the improbability of Qatar entering new supply deals in the short-to-medium term, the other Gulf states are ploughing their efforts into achieving self-sufficiency. Abu Dhabi National Oil Company (ADNOC) is close to signing up an international partner—believed to be ConocoPhillips of the US—to develop sour gas reserves at the onshore Shah field, with output of 1bn cu ft/d targeted, while offshore, an integrated gas development at the Umm Shaif field is due to produce more than 700m cu ft/d. The northern emirates, where the slate of real estate and industrial projects is expanding rapidly, are also working to increase stretched supplies: Ras al-Khaimah has an agreement take 50m-150m cu ft/d of Oman’s Dolphin allocation during the winter and the emirate is due to receive 100m cu ft/d of Crescent ’s Iranian gas should the scheme ever see the light of day. Meanwhile, bids were submitted in February for the extension of the Dolphin pipeline from Abu Dhabi to Fujairah.

Oman’s domestic hopes are pinned on the project being executed by the UK’s BP to exploit tight gas reserves in the central Khazzan and Makarem fields, which contain an estimated 20trn cu ft (tcf)—compared with total current proven reserves of 35 tcf. Kuwait is aiming for self-sufficiency in gas by 2015 through the phased development of the 35 tcf of non-associated reserves discovered in the northern fields in early 2006, with first production of 175m cu ft/d brought on stream in March. Saudi Arabia is accelerating both its gas exploration programme and development of the kingdom’s first non-associated offshore field, Karan, which contains an estimated 9 tcf and is expected to deliver about 1.5bn cu ft/d to the national grid by 2011. King Abdullah and oil minister Ali Naimi sent shivers down the spines of world oil consumers in mid-April by disavowing any plans to raise crude capacity beyond the 12.5m barrels/day slated for 2009; raising gas output, however, is becoming an ever more pressing priority.

SOURCE: ViewsWire