A common assumption today is that the Middle East has an abundance of natural gas supplies; however, the reality is quite different. Surprisingly, the Middle East, which has 40% of the world’s remaining gas reserves, is struggling to find enough gas to meet its own needed demands. In view of below-market pricing and muted incentives for gas sector investment, the evolution of the region’s gas industry has lagged behind that of the oil sector, despite significant gas deposits

Concern over security of gas supply has become so serious that some governments in the region are looking for solutions, including more oil-fired and coal-fired power plants in the short term in addition to nuclear and solar power over the long term.

Flourishing gas demand in the region has been fuelled by many factors; gas’ superior efficiency for power generation, the staggering pace of industrialization and economic diversification throughout the Cooperation Council for the Arab States of the Gulf, and Qatar’s rise as a global LNG supplier. Therefore, increased domestic gas demand, delayed supply response, limited regional pipeline cooperation, and below-market pricing are all threatening the long-term security of gas supply.

Notwithstanding the myth that the entire Middle East is gas rich, the region is not homogenous. While some countries (Qatar, Iran, Egypt and Saudi Arabia) have significant gas reserves, others (UAE, Kuwait, Bahrain, Jordan and Syria) are relatively gas poor. Still some countries like Oman and Yemen have elected to export gas that could otherwise satisfy their domestic demand for years.

Even the UAE (which owns the world’s fifth-largest gas field but primarily has sour gas that is more expensive to extract and process) is suffering from a gas supply shortage, which exceeds more than one billion cubic feet per day. The UAE (especially Dubai), a real estate and industrial powerhouse, has become increasingly dependent on natural gas to fuel new power and desalination plants and to provide feedstock for new industries. In an attempt to meet domestic demand, the UAE has expanded its gas production over the past 20 years and has been forced to turn to sour gas production for future supplies. Besides, the UAE is also dependent on the 2 billion cubic feet per day of Qatari gas it obtains through the Dolphin pipeline.

Similarly, Kuwait, despite its substantial gas reserves, expects to receive LNG through the use of a floating LNG terminal. And both the UAE and Kuwait have attempted to secure gas supplies from Iran; however, due to pricing issues and perhaps certain political opposition, these attempts have not been successful.

Due to the current gas situation, the countries in the region that have been developing their gas reserves successfully are now experiencing development issues. In fact, even Qatar (the only Arab country not dealing with security of supply issues and the world’s largest exporter of LNG) is so concerned with meeting domestic needs and ensuring that it does not damage reservoirs through over-production.

The region’s gas shortage is also affecting the aluminum and petrochemical industries, which rely on cheap feedstock derived from gas. Several large-scale projects, like the planned aluminum smelter of Rio Tinto in Abu Dhabi, have been put on hold due to the lack of gas, while other gas-intensive downstream projects have been shelved indefinitely. In Saudi Arabia, for example, dozens of petrochemical projects have been put on hold (or cancelled) over the past two years as a result of insufficient allocation of gas-based feedstock.

The Middle East supply shortage is not entirely due to a lack of resources, but is also a result of various other factors, including a lack of investment. Specifically, gas demand has not been met by sufficient investment in vital gas infrastructure.

According to the International Energy Agency, a significant amount of capital (more than is estimated to be spent from 2008 to 2030) must be invested in resource-rich regions such as the Middle East, where unit costs are low. However, due to subsidized prices, gas supplied to the Middle East is extremely inexpensive and is sometimes up to 10 times cheaper than in other regions. As a result of such artificially low pricing, companies are less willing to invest in exploration and production for non-LNG supplies and producers have little incentive to sell their gas in the domestic market. Qatar, for instance, has given priority in the past five years to supply gas to Europe, U.S and Asia, rather than to Middle Eastern countries.

In order to avoid critical shortages, gas prices must eventually rise towards global levels, which should in turn increase exploration and production activity.
The lack of gas exploration and development has been further compounded by many restrictions imposed by Middle Eastern countries on investment by international oil and gas companies. However, some countries are now encouraging foreign investment. For example, Saudi Arabia, traditionally off-limits to foreign investment in its exploration activities, invited foreign investors to help explore for non-associated gas in the Empty Quarter, although no commercial discoveries have yet been made. Other countries encouraging foreign investment include Abu Dhabi, which took the first step in signing the sour gas project with ConocoPhillips, and Bahrain, which announced a licensing round for international companies interested in further developing Bahrain’s onshore field.

The current economic downturn and lower oil price also affect gas sector investment, although it is not yet clear whether such effect will be negative or positive. The world financial turmoil has resulted in a visible government funding and overall credit squeeze on investments leading governments to reconsider additional energy infrastructure projects. Given sharply growing inherent gas demand, decisions not to invest in gas development in the Middle East due to economic uncertainty are likely to result in an even greater gas deficit and hinder economic progress. Nonetheless, some argue that a slowdown in global energy investment could create an opportunity for the Middle East to take advantage of lower overall development and construction costs (compared to 2005 to 2007), thereby allowing the region to make key infrastructure moves to at lest partially relieve its no longer hidden tight gas supply situation. Whether this opportunity is recognized or taken advantage of, or both, remains to be seen.

With much of the Middle East short on gas, countries in the region are pursuing short-term solutions to solve these issues. For example, some countries in the region, including Kuwait and Saudi Arabia, are consuming more oil for electricity generation. In fact, Saudi Arabia, home of the fourth largest gas reserves in the world, placed a moratorium on new gas-fired power plants and announced that any future demand will be met by oil-fired power plants instead. Additionally, many countries are exploring more coal-fired power projects; UAE and Oman are conducting studies for billion-dollar coal-fired power plants in the hope of addressing predicted severe electricity shortages. The growing energy demands of the region have also raised the prospect of nuclear or solar energy projects, as long-term solutions.

By Mostafa Mabrouk, Assistant Vice Chairman For Economic Affairs, Ganope

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