Saudi gas shortage and Iran gas price hikes

By Malini Hariharan

The gas shortage in the Middle East, especially Saudi Arabia, has been well documented with the situation expected to ease in the longer term once investments in new processing plants have been completed.

But in a recent report on the emerging market for LNG, Facts Global Energy (FGE) points out that more countries in this region are likely to start imports in the future. Middle East LNG imports are forecast to rise from less than 2.2m tonnes in 2010 to 15m tonnes in 2020 with Kuwait, Dubai, the Northern Emirates, Bahrain and Saudi Arabia emerging as the key importers.

Gas production in Saudi Arabia is growing with Saudi Aramco making heavy investments. However, this is unlikely to be sufficient to prevent a shortage by 2017-18. Saudi Arabia, says FGE, has the potential to emerge as the largest importer in the region – up to 4m tonnes/year by the end of this decade.

And if Saudi Arabia does not import LNG then it would need to burn at least 750 000 bbls/day of crude oil by 2020 for power generation on top of significant volumes of fuel oil.

As reported by the blog earlier, the Kingdom’s booming oil demand, especially from the power sector where consumption is forecast to rise 7-8% annually for the next ten years, has become a matter of concern for planners.

A critical issue for Saudi Arabia and also for other countries in the region is the low price of gas which has been partly responsible for spiraling demand and the current crisis. But a revision in prices, especially for industrial consumers, is inevitable. LNG imports will have to take place at market prices. Plus new gas production, especially sour gas projects, will need higher prices to justify the investment.

Iran has taken the lead in revising prices upwards as part of a new reform plan approved by the parliament in October 2009.

Starting from December 2010, industrial projects including the petrochemical projects have to pay around $2.0/mmbtu for natural gas for the first year of the reform plan, compared with $0.53/mmbtu in early 2010, says FGE.

The ethane price has been set at US$145.1/tonne for the first year of the reform plan. Previously cracker operators paid less than $75/tonne.

Over the next 10 years Iran plans to increase gas prices for industrial projects to 65% of the average of export gas prices.

Saudi Arabia is also due to revise prices next year with some analysts expecting ethane prices to be raised to around $2/mmbtu from $0.75/mmbtu. But given current international price levels a more aggressive approach will probably be needed if the government is keen to curb demand growth.

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