INSIGHT: Gulf states push to the limit on natural gas

06 July 2010 17:19  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--In a curious reversal of fortunes, the Gulf Cooperation Council (GCC) countries of Bahrain, Kuwait, Oman, Saudi Arabia and the United Arab Emirates (UAE) are facing gas shortages that analysts believe are likely to worsen.

Gone are the days of ready, low-cost availability. Gas supply has become tight as countries have struggled to find more of valuable natural resources. Demand has risen sharply. The global downturn has exacerbated the situation but also presented some opportunities.

The impact on petrochemicals has been real as the supply of associated gas from reduced oil production has restrained ethane availability to cracker operators.

For some years now, chemical industry watchers have been quick to point out that the regional ethane advantage has dwindled, particularly for new participants.

New facilities will be liquids-based, perhaps with some feedstock flexibility. The cost advantage will be very different from that enjoyed by the current crop of crackers.

The GCC gas shortage, however, will have a much more profound effect on the Gulf states. This is an energy issue writ large in a world of changed gas dynamics.

The recession has eased the pain. Reduced global demand for gas, the growth of supply from shale deposits in North America and an increase in the number of liquefied natural gas (LNG) projects have produced a global surplus.

“That supply overhang provides the GCC with a prized short-term opportunity to ease what has become a major energy issue: a shortage of gas,” says management consulting firm Booz & Company.

The GCC gas shortage will worsen through 2015 as supply struggles to keep pace with demand, says Booz. Under a low-growth, continued-recession scenario, the gas shortage might increase from 19bn cubic metres in 2009 to some 31bn in 2015, the company says.

Under a scenario in which growth returns, the shortage that year could be as high as 50bn cubic metres.

“Bahrain, Kuwait, Oman, Saudi Arabia and the United Arab Emirates are facing a reversal of a decades old status quo” and find themselves in uncharted territory, Booz suggests.

Over the long-term, they can address the supply/demand imbalance by raising prices, developing energy efficiencies and energy alternatives, looking at different methods for advanced oil recovery and providing incentives for the international oil companies to participate in the upstream gas sector, it adds.

But those oil companies have not had much success in either Saudi Arabia or Kuwait. And while domestic demand has grown sharply to help develop gas-consuming industries, such as metals and chemicals, important producing countries – the UAE, Oman and Qatar – have struck long-term LNG supply contracts, mostly in Asia and Europe.

Renegotiating some of these deals, in the light of slower economic growth, could be a life-saver for some of the countries concerned.

“Through analysis, planning, and implementation, GCC countries and energy producers can take measured steps to ensure that they are able to keep the lights on in the most economically viable way for decades to come,” Booz points out.

But what about keeping the chemicals flowing?

Turning to liquids for chemicals production is a natural step for most GCC countries. But even in Qatar, which holds the world’s largest gas reserves – and, according to a recent International Monetary Fund (IMF) report, is going to push LNG production to 77m tonnes (equivalent to 108bn cubic metres of natural gas) annually by early 2011 –there are questions about what should be done with precious gas.

Qatar's gas will not alleviate the problems with the region's gas supply/demand. Its resources are directed toward more distant markets on lucrative supply contracts. An assessment of reserves in the hugely important North Field is not expected until 2012 and any new production plans are on hold until then.

The knock-on effect on chemicals is clear. Just this month press reports have suggested that ExxonMobil’s plans for a big cracker and polyethylene (PE) and monoethylene glycol (MEG) plants at Ras Laffan, Qatar, are on hold. ExxonMobil on Tuesday would not comment on that speculation.

If the ExxonMobil project founders, that might open up opportunities for Shell and Total, both of which have their own plans for local development.

So speculation, as might be expected, is rife. Finding the right feedstock for chemicals in the Gulf region currently is a tough call. That’s a far cry from the situation not so long ago.

Read John Richardson and Malini Hariharan’s Asian Chemical Connections blog
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By: Nigel Davis
+44 20 8652 3214

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