INSIGHT: Middle East gas crunch bites

Author: Malini Hariharan


By Malini Hariharan

MUMBAI (ICIS news)--It is a problem that has so simple solution. The Middle East has abundant gas reserves but continues to run short of this vital resource.

The impact of the shortage, already evident in the feedstock slate for new petrochemical projects, is gradually being felt in markets.

The price rally in many products earlier this year was supported not only by robust demand and delays in new projects but also by lower operating rates at some Middle East plants due to reduced gas availability, points out one industry source.

The priority during the hot summer months was to supply gas for power production to avoid blackouts. This meant sacrificing gas supplies to the industrial sector in countries such as Kuwait.

In Saudi Arabia, lower oil production as a result of OPEC mandated cuts, is said to have curtailed availability of associated gas. There have been reports of reduced propane availability affecting operations at some plants.

The roots of the gas shortage lie in the oil price boom which spurred economic activity in the region. Supported by low prices, demand for gas, especially for power generation, has grown faster than supply.

On paper, Iran and Qatar, with the world’s second and third largest gas reserves respectively, are well placed to meet this spiralling demand. But both countries have their own problems and priorities.

Iran faces a shortage during the winter months and operating rates at its crackers were cut last December as gas had to be diverted for heating

One energy consultant thinks a shortfall during winter is likely for the next few years as many upstream projects have been delayed due to financial problems and contracting issues.

Iran has ambitious plans to develop the South Pars gas fields in 26 phases. But only seven phases have been completed while eight phases are under development.

Foreign investment is crucial to fully develop reserves. But western majors are hesitant given Iran’s uncertain political climate, its nuclear ambitions and sanctions by the US.

This has forced Iran to step up gas imports from neighbouring Turkmenistan. A new pipeline between the two countries is due to be completed by the end of the year, although this could be delayed given Iran’s track record in meeting project deadlines.

Qatar shares its gas fields with Iran and has progressed much faster in developing its reserves.

But Qatar is also seeing delays in completion of new gas projects. For instance, commissioning of the second phase of the Al Khaleej Gas project is now expected to be at end-2009 or early 2010, a delay of at least six months, says the consultant. This is likely to have implications for petrochemicals as the project is designed to produce 870,000 tonnes/year of ethane.

And while the rest of the GCC is keen to draw more gas from Qatar, the country recently extended a moratorium on development of new gas projects from 2012 to 2014 as it would like to study reservoir behaviour once all existing projects are completed.

Given this situation, questions have been raised on the future of the three cracker projects planned by Qatar Petroleum (QP) and its partners. Its joint-venture with Honam is on hold while another cracker with Shell Chemical is said to have been delayed to 2015. 

A third project with ExxonMobil is progressing slowly. “Various options are being discussed and a final decision has not yet been taken,” says a regional industry source. But he adds that Qatar has enough ethane for one more cracker of 1.3m tonnes/year capacity and this could be on-stream in 2013-14.

As the gas shortage intensifies, GCC governments are looking at alternatives, especially to meet requirements of the power sector. In the short term, fuel oil is increasingly being used for power generation.

Efforts are also underway across the GCC to develop non associated gas fields. But in many cases, as in the UAE, these fields have a high sulphur content of around 25-30%. This represents a huge technical challenge for production and processing, points out Justin Dargin, energy researcher, at the Dubai Initiative, Harvard University.

“The production cost of the sour and tight gas tends to hover at around $4-5/m Btu. However, gas is supplied to the internal market at minus $1.50/m Btu. This is the crux of the gas crisis in the Gulf,” he stresses.

Dargin suggests a GCC gas price in the $5-7/m Btu range which would not only make exploration and production attractive but also determine the ‘true’ demand for gas.

“When we look at Gulf gas pricing, there are two interrelated aspects. One is the price of gas as it is sold in the region by the two largest reserves holders, Qatar and Iran.

For instance, Qatar sold its gas through the Dolphin project for the phase one export at an extremely low price of minus $1.50/m Btu to Oman and the UAE.

These governments no longer except such an inexpensive price for their gas, and are refusing further sales until a satisfactory price has been met,” says Dargin. 

“The other is the price of gas supplied to the domestic market. If the UAE buys or produces gas at a $4-5/m Btu, and supplies its petrochemical industry for $1.50/m Btu, it is giving a fairly straightforward subsidy to the market. Of course, the gas price in the Gulf, even if liberalised, would likely be less than the price in the West. Even so, it may not be as competitive as before,” he explains.

A dramatic increase in GCC gas prices is unlikely as governments will be under pressure to protect the local industry. But consumers face an unpleasant reality – the cost of gas is rising.

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