Countries increasingly less reliant on MENA gas
The Middle East and North Africa is a gas-rich region, yet many countries there are becoming increasingly reliant on gas imports from elsewhere in the world. Robin Mills explains how this state of affairs has arisen and looks at what needs to be done, if the trend is to be reversed
In September 2009, the Express liquefied natural gas (LNG) carrier loaded a cargo at Australia's North-West Shelf plant. There was nothing unusual in that, except the destination, which was not Japan, South Korea or China. Instead, the tanker steamed northwest, passing other LNG carriers on their way from Qatar to east Asia, and delivered its shipment at Kuwait's Mina Al Ahmadi terminal.
The fact that Kuwait, one of the world's leading oil exporters, was importing gas was, in itself, interesting. Even more striking is that Kuwait is just 550km from Qatar, holder of the world's third-largest gas reserves, and even closer to Iran, with the world's largest reserves according to BP, yet it was unable to secure a pipeline from either. Kuwait's next cargo came from chilly Sakhalin in Russia's far east, another distant location.
The Express's voyage represented a dramatic turnaround for the Middle East and North Africa (MENA) region, which, since Qatar's first LNG exports in 1997, had emerged as the world's most important gas-exporting area after Russia. Algeria, long an important supplier to Europe, and Abu Dhabi, a long-standing LNG player, had been joined by Oman in 2000, Iran in 2001 (by pipeline to Turkey), Egypt in 2005, and Yemen in 2009, as significant gas exporters. But it was Qatar, expanding capacity to 77m tonnes per year (t/y) in late 2010, which was the leader.
It is now widely understood in the energy industry that most Middle Eastern countries are having trouble meeting growing gas demand at home while sustaining exports. More than a decade of oil boom, with growing economies and populations, subsidised domestic gas prices, and policies of energy-intensive industrialisation have accounted for most of the region's low-cost gas. The MENA countries, like Russia, have been slow to react to the dramatic shifts in the global gas market brought about by North American shale, the expansion of the LNG market elsewhere, and growing flexibility in commercial models. Unlike Russia, they do not yet seem to have formulated a strategy - either collectively or individually. Most are continuing to struggle with immediate demands and crises in their gas industry, attempting to solve tomorrow's problems with yesterday's methods.
State owned companies, with help from international companies in some places, have raised gas output significantly in Saudi Arabia, Abu Dhabi, Iran and Oman, but still not enough to keep up with demand. With gas prices fixed at low levels - notably $0.75/m British thermal units (Btu) in Saudi Arabia - there is no mechanism to match supply to demand. And, with the partial exception of Abu Dhabi and Oman, development of the region's large resources of sour, tight and shale gas is in its very early stages. All of Saudi Arabia's gas output - planned to reach 160bn cubic metres a year (cm/y) by 2020 - is consumed domestically, but the kingdom still has to run half its power sector on oil.
There is little new LNG coming out of the Middle East; indeed, exports are likely to shrink. The 6.7m t/y Yemen LNG plant has been closed down by the fighting in the country, while the sales contracts of the 5.6mn t/y ADGAS plant in Abu Dhabi look doubtful to be renewed after expiry in 2019.
Oman LNG is running below capacity but the sultanate might be able to sustain exports by developing unconventional gas or importing Iranian gas. Egyptian LNG exports have rapidly declined to zero following the 2011 revolution, as a lack of new gas developments has collided with declines in key fields and fast-rising local consumption. Even gas from the recent deal with BP to develop its West Nile Delta project will probably be entirely consumed at home, and indeed Egypt will soon start importing LNG via a floating regasification unit.
The only countries capable of developing further large-scale LNG exports are Iran and Qatar. But even after sanctions are lifted, it seems unlikely that Iran will build more than one LNG plant in the medium-term. Qatar shows no signs of lifting its self-imposed moratorium on further development of the North Field, nor would it make much sense to do so at a time of growing market oversupply. However, the Qataris could possibly add another 10m t/y by debottlenecking existing facilities, and might do so in the early 2020s to respond to growing Iranian output from their shared field, or to deter higher-cost competition elsewhere.
Meanwhile, the United Arab Emirates (UAE) and Kuwait are looking to expand LNG import capacity by 13m t/y and Bahrain may build a 3m t/y facility. So even expansions in Qatar and Iran would not offset increased imports and reduced production elsewhere in MENA.
Pipeline gas could be a different matter. The development of intra-regional trade of gas seems cursed. The Dolphin pipeline from Qatar to the UAE and Oman has been the great success, but even its expansion has been held up by politics. Qatar's planned pipelines to Kuwait and Bahrain were blocked by Saudi Arabia and commercial factors. Apart from supply to Turkey, none of Iran's major pipeline plans advanced. The Egyptian pipelines to Israel and Jordan were disrupted by insurgent attacks in Sinai, then by Egypt's own lack of gas. Planned pipelines from Israel's major offshore gas finds to Jordan, Turkey or Egypt have been held up by regulatory indecision, anti-cartel actions, changes of course on taxation and gas export quotas.
North Africa, the major established MENA pipeline supplier, has also been struggling. Despite its strategic importance as the main alternative to Russian gas during the continuing Ukraine crisis, neither Libya nor Algeria has been able to capitalise. Libya's Greenstream pipeline to Italy, operated by Eni, has fared better than might be expected in the country's chaotic civil wars, but was still shut down several times in 2013.
Meanwhile, Algeria, which exported 65bn cm in 2005, its best year, has been sliding down the rankings, managing just 43bn cm in 2013 (15bn cm as LNG and the rest by pipeline to southern Europe and its North African neighbours). It is the familiar story of declining production meeting runaway demand. Algeria has huge shale gas resources - estimated at 20 trillion cm of recoverable gas by the US Energy Information Administration - but has made little progress developing them, hampered by unfavourable fiscal terms, low domestic gas prices, and corruption scandals that have slowed activity at state company Sonatrach. Meanwhile, manoeuvring for position among the political class under the ailing president, Abdelaziz Bouteflika, suggests little chance for a change of course.
But some of the clouds over MENA pipeline gas exports may now be lifting. The key factor is Iran, where the lifting of sanctions following a possible nuclear deal in June could open up pipeline routes in many directions.
Iran's export potential depends, critically, on the pace of development of its gas reserves, and on domestic demand. Remarkably, Iran is the world's fourth-largest gas market, consuming almost as much as the whole of Latin America. Getting a grip on soaring domestic consumption depends on progress in reducing subsidies, but, after a promising start, with the late-2010 increases in electricity, fuel and gas prices, reforms were derailed by budget shortages, sanctions and the collapse of the Iranian rial. Iran's ageing oilfields also require large amounts of gas reinjection for enhanced oil recovery, leading to tricky trade-offs between oil production, domestic consumers, industry and exports.
Phase 16 of the development of the giant South Pars field, the Iranian section of Qatar's North Dome, came on stream in late 2014, and Phase 12 in March 2015, adding between them some 50bn cm/y of gas to Iran's output, which was about 187bn cm/y in 2014. This may make persistent winter shortages a thing of the past.
If Iran can produce gas beyond domestic demand, it has no shortage of export options. The new Chinese-led Asian Infrastructure Investment Bank is reportedly ready to finance the Pakistani leg of the long-planned Iran-Pakistan pipeline. Iran should start sending gas to Iraq in May, and, within a few years, could also export to Oman, with whom it has signed a preliminary agreement. It could also expand sales to Turkey from current levels of 8.7bn cm/y, or, if political issues can be resolved, export more to some of its Gulf neighbours.
Next door, the autonomous Kurdish region of Iraq also hopes to export gas to Turkey from several large recent discoveries - 10bn cm/y, rising to 20bn cm/y eventually, compared to current Turkish consumption of around 46bn cm/y. Turkey is keen to diversify its imports from Russia and Iran, and Kurdish gas could be attractively priced. But interruptions to the Kurdish budget, late payments to oil companies, and uncertainty and insecurity amid the continuing fight against ISIS, have slowed progress.
The political factor
The direction of MENA gas exports is subject not only to commercial and geographic factors, but also political ones. The EU's proposed energy union may, at last, put some life into efforts to attract more Middle Eastern and Caspian gas to diversify from Russia.
That gas would almost certainly have to flow via Turkey, which has ambitions of its own to become an energy hub, as well as meeting its own swelling energy demand - it is already the fourth-largest gas market in Europe - and easing its own dependence on Russia and Iran. But at the same time, Ankara is being wooed by Moscow to be a route for Turk Stream, the hastily-conceived replacement for Russia's South Stream pipeline, itself an attempt to bypass Ukraine.
Meanwhile, China's new "one belt, one road" strategy foresees a band of energy and transport connectivity through central Asia and across the Indian Ocean. As with the Iran-Pakistan pipeline, it could mean new financing for gas projects. Russia is also quite happy for Iranian gas to be diverted into south Asia, rather than competing with its own exports to Europe.
But the MENA region will not be able to play the major role in the future gas economy or political landscape, if it cannot solve five major problems.
Firstly, the major current or potential gas exporters - mainly Qatar, Iran and Algeria, plus Kurdistan and possibly Israel - need to formulate a strategy to deal with the emerging new gas landscape, and particularly the challenge of shale. With US LNG exports just beginning, the prospect of large-scale shale gas production in China or elsewhere could further upset their demand calculations. They need to consider export methods (LNG versus pipeline), target markets and pricing aspirations.
Secondly, major gas resource holders need to formulate a strategy to develop effectively their large, under-utilised gas resources, both conventional and unconventional. That requires involvement by international oil companies (IOCs), or, at least, that the region's national oil companies significantly raise their gas game. If IOCs are required, they need the right gas prices, fiscal terms and incentives to operate efficiently and bring the best technology. For unconventional gas in particular, a robust, low-cost local service sector needs to emerge.
Thirdly, political barriers, both domestic and international, to gas exports need to be overcome - which applies in different ways to Kurdistan, Iran and the east Mediterranean. At the same time, MENA countries need to reduce the political barriers to gas trade between them.
Fourthly, MENA countries need to get a grip on soaring domestic consumption. Gas-based industrialisation has a strong logic, but should not be justified only by absurdly low regulated feedstock prices. Energy efficiency - including electricity, and water, which in the Gulf comes mostly from desalination - has to be encouraged by reforming prices to consumers, tightening building and appliance standards, and tackling a culture of waste.
Fifthly, the region needs to diversify its power generation sector, freeing up gas for export and - in particular - reducing reliance on expensive and dirty oil-based power plants. Some countries will expand the use of coal, which seems inevitable, but is carbon-intensive and a condemnation of failure to develop the gas sector effectively. Carbon dioxide injection, being implemented in Abu Dhabi, can enhance oil recovery, free up reinjected gas, and reduce greenhouse gas emissions.
Renewable energy - wind in some locations, but particularly solar power - is now finally starting to take off. But it will take a long time to make an impact. Dubai's 1 gigawatt (GW) solar target, now likely to be brought forward from 2030 given the emirate's impressive achievement in securing low-cost bids, will still only displace about 400m cm/y of gas. On the other hand, the UAE's 5.6 GW nuclear power programme will save around 10bn cm/y from some 68bn cm/y of national consumption.
There is no shortage of solutions. But if MENA is to realise most value from its huge, low-cost resources, and play a commensurate role in the emerging global age of gas, its constituent countries must tackle these five challenges. Then they can end the absurdity of LNG tankers sailing halfway round the globe to make deliveries to this gas-rich region.