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Letter from the Middle East: Gas faces headwinds

The received wisdom that gas would be the region’s main growth fuel for generation is being challenged

The Middle East’s hydrocarbon-rich countries would build out gas-fired power plants to free up more oil for export. Those less endowed with energy reserves would construct LNG import terminals to facilitate their own ‘dash for gas’. That was the rosy picture for the region’s gas demand growth.

But that picture has clouded as Gulf states embrace other generation options. At the start of August, the Barakah nuclear plant in the western UAE began to split atoms—the culmination of a decade-long journey towards the Arab world’s first nuclear power generation. Aside from nuclear, solar, wind, coal and even hydrogen pose new challenges to gas in a region where hydrocarbons have traditionally reigned supreme.

Enter the challengers

When all four Barakah reactors are operational around 2024, its 5.6GW will be equivalent to about one-sixth of the UAE’s 2019 installed generation capacity. But, by then, the country should also have started up a 2.4GW coal-fired plant in Dubai, another Gulf first, as well as expanding its world-record low-cost solar PV installations. Compared to c.76bn m³ of consumption last year, those installations could either displace or retard demand growth of some 17.5bn m³ of gas.

The attractions of solar power have spread beyond the UAE, with major tenders awarded in Saudi Arabia, Qatar and Oman. Nuclear, given its high upfront costs, technical sophistication and geopolitical complications, is less advanced. But Saudi ambitions, which have gone through a number of iterations, have reportedly now stretched to constructing, with Chinese help, a facility to produce yellowcake from uranium ore mined near the northwestern town of Al Ula.

80tn ft3 – Gas in Dubai’s Jebel Ali

July’s signing of an agreement between a consortium of local private developer Acwa Power and international industrial gas heavyweight Air Products and the planned new city of Neom in northwestern Saudi Arabia to produce ‘green’ hydrogen has, potentially, even greater long-term significance. The site has exceptional wind and solar resources that should allow load factors of 70pc for the electrolysers used to split water into hydrogen. The $5bn project is slated to produce 1.2mn t of ammonia annually, which can be used directly or split back into hydrogen at the site of use.

These competitors come at a time when Gulf gas demand is already facing headwinds. Economic slowdown, subsidy reform and energy efficiency initiatives have slowed breakneck growth. Compound annual growth rates of 6.1pc/yr during 2000-15 slowed to 2.1pc/yr after 2015. The Covid-19 pandemic—hitting regional economies hard and leading to the departure of many expatriate workers—will probably reduce electricity and desalinated water demand further.

Staying positive

But there are still causes for optimism on Gulf gas. Saudi Arabia wants to move from its current generation mix of 42pc oil and 58pc gas to 70pc gas and 30pc renewables by 2030—although a future role for nuclear could disrupt this. Kuwait also has significant potential to replace heavy use of oil in power with gas, although it would have to do so via imports.

Further industrial plans in Abu Dhabi could also be a source of gas demand. And the region’s existing and potential gas production could also be tapped for ‘blue’ hydrogen, made from gas with carbon capture and storage.

There is certainly no shortage of reserves that could translate into new gas output in the Mid-East Gulf: unconventional resources in Saudi Arabia’s Jafurah basin, the offshore Khalij al- Bahrain area, onshore as well as massive sour fields offshore Abu Dhabi, a reported 80tn ft³ (2.27tn m3) of shallow gas in place in Dubai’s Jebel Ali find, and Oman’s tight gas.

Simply finding and developing gas reserves to displace oil, as feedstock for industrial development or to export to gas-hungry markets in eastern and southern Asia, is no longer a no-brainer

Qatar’s almost 50mn t/yr expansion of its LNG exports by 2027 will still likely be easily the world’s cheapest new LNG supply, even if the associated natural gas liquids that made the first stage of North Field exploitation so lucrative may be less abundant in phase two. But the other countries’ potential developments will have to prove their economics, particularly if intended for export or to supply industries that must be globally competitive.

Simply finding and developing gas reserves to displace oil, as feedstock for industrial development or to export to gas-hungry markets in eastern and southern Asia, is no longer a no-brainer. Particularly given increasing generation fuel competition, coupled with an economic downturn, more innovative commercial thinking on the region’s gas may need to emerge.

Robin M. Mills is CEO of Qamar Energy and author of The Myth of the Oil Crisis.

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