Focus: Middle East LNG imports take root

30 March 2012 19:15 Source:ICIS

A wave of projects in the Middle East underlines a strong case for more LNG imports into one of the world's most resource-rich regions.

The Kuwait Petroleum Company (KPC) entered its third import season this week with the arrival of the 150,900 cubic metre (m³) Exquisite floating storage and regasification unit (FSRU) at its Mina Al-Ahmadi GasPort on Tuesday immediately receiving a Qatargas-sourced cargo on the 137,568m³ Al Wakrah.

Since becoming the Middle East's first LNG importer, KPC has stretched its import season, bringing in a total of 38 cargoes from March to November last year, and has been joined by the Dubai Supply Authority (DUSUP) which brought its first commercial cargo into its 3 million tonne per annum (mtpa) FSRU in May 2011.

Last week's announcement by a state-backed Abu Dhabi joint venture that it was moving onto the preliminary engineering stage of an FSRU plan in the United Arab Emirate of Fujairah, thought to be of a similar calibre to the FSRU project in fellow emirate Dubai, marks the third project at the planning stages in the Gulf and the fifth in the wider Middle East.

It means the number of LNG importers among the Gulf Cooperation Council (GCC) states that include Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates, could match the number of exporters within the next five years.

With the notable exception of Qatar, the potential turn-around of the region from net LNG exporter to importer appears all the more striking with the Gulf's natural endowment of 22.7% of the world's total reserves - 42.57 trillion cubic metres of proved gas reserves - according to BP's 2011 Statistical Review.

But it is directly as a result of these vast reserves that governments have made access to cheap gas a cornerstone of their industrialisation and wider economic growth policies.

As natural gas has traditionally been a by-product of oil production, its marginal cost was perceived to justify an administered regional average price of around $1/MMBtu.

With heavily subsidised electricity prices, industries such as power generation, desalination, and petrochemicals have taken off, bringing gas demand up with it.

A fixation on low prices however has discouraged upstream investment in more technically challenging non-associated gas-fields and subsequently gas demand has already outstripped supply during the peak summer months with black-outs and brown-outs now a common feature across all GCC states apart from Qatar, according to Justin Dargin, GCC energy relations research fellow at the Dubai Initiative, Harvard University.

Kuwait looks to land-based LNG

Although gas buyers in most parts of the world would baulk at importing LNG at around $13.50/MMbtu to sell onto the local market for $1/MMbtu, state-backed LNG buyers in Kuwait and Dubai have been prepared to absorb these losses in the face of even costlier alternatives.

Growing uncertainties as to the availability of additional pipeline gas from Qatar and political problems preventing imports from Iran, has left a number of the countries in the region with two options in the short-term: LNG imports or burning more oil, according to George Sarraf, partner at the Middle East office of consultancy Booz & Co.

"But LNG is competitive with crude down to $70/bbl" Sarraf said.

With the increase in the minimum crude price that Saudi Arabia - the only swing producer on global oil markets - can accept in order to fund its state-sponsored industrialisation and welfare programmes to $80/bbl in 2011 according to the International Monetary Fund, the competitiveness of LNG in this regard is well supported.

Furthermore, the scale of Saudi Arabia's expenditure to dispel regional economic inequalities that were at the heart of last year's Arab Spring uprising, necessitates a shift in Saudi strategy to become an oil price hawk from now on, according to Dargin.

Given the recovery and steady rise of Brent crude, a source close to the land-based 7.5mtpa Kuwaiti LNG project which may replace the country's FSRU in 2017 or 2018 said "the most important thing for us is to eliminate costly diesel/gas-oil firing power plants."

The country produces about 3m bbl/day of crude, a large proportion of which it exports. But it is the opportunity cost of using on average 26,000-30,000 bbl/day of diesel for power generation, that it could have exported that is driving Kuwait's push for more LNG, according to the source.

The country currently generates 60TWh of power - with around half being gas and half being oil - and has plans to install 5GW of additional gas fired plants by 2020, according to consultants Wood Mackenzie.

Jordan, a net oil importer, mirrors Kuwait's desire to increase the share of natural gas in its power-generation mix, but in order to reduce a growing dependency on oil in the face of increasingly unreliable gas supply from Egypt.

Long-running plans for a 1m tonne per annum (mtpa) capacity FSRU at Jordan's port of Aqaba in the Red Sea have recently been fast-tracked in light of the repeated disruptions to the 6.8 million cubic metres (Mm³)/day contractual pipeline supply from Egypt due to political instability in the country since it ousted former president Hosni Mubarak last February.

Jordan has been forced to plug the gap by turning to crude, which resulted in a doubling of the import bill in January to 488m Jordanian dinar ($689m) according to Jordan's Ministry of Statistics.

A consortium of advisors to the Jordanian LNG project is submitting an LNG procurement strategy to Jordan's Ministry of Energy and Mineral Resources .

Long-term dependence or stop-gap?

The biggest challenger to the longevity of LNG imports in the region is the interplay of LNG economics with the forthcoming improving economics behind the development of "the hard to get" and unconventional gas reserves locked in various countries in the Gulf, according to Sharraf.

With more LNG into the region being the only reasonable solution to the gas shortage over the next three to four years, the inherent pressure on authorities to gradually bring local gas prices more in line with LNG import prices, will increasingly incentivise previously uneconomic exploration and production of domestic unconventional and non-associated gas reserves.

Production from various currently untapped resources could be sufficient to replace a need for LNG in certain countries, according to Sharraf.

It is this supply uncertainty that makes planning and assessing the feasibility of LNG projects in the Gulf difficult, according to a senior executive at Hess LNG that completed a pre-feasibility study for the Bahrain government in 2010 before pulling out of the Bahraini tender for a 3mtpa LNG terminal last year.

"Our feasibility concluded conditions were conducive to an LNG terminal but that flexibility was needed," the source said, adding that "flexibility comes at a price".

Bahrain appears to be delaying the award of its LNG tender which had been expected in the first quarter of this year until it decides the projected demand of its aluminium smelter which in 2007 consumed 25% of the nation's daily gas consumption,

Government plans to double the capacity of the world's largest aluminium smelter to receive 14Mm³/day by 2020 are encountering political opposition, given that the government would incur heavy losses in supplying its subsidised feedgas through LNG imports.

Bahrain's move to lift the industrial price of gas from $0.75/MMbtu to $2.25/MMbtu at the start of this year is perhaps a first step to reconcile price differentials, but until it decides on the future of its aluminium industry, the uncertainty in the demand projections for the country will temper the country's move towards LNG.

However, even under the assumption of gas consumption remaining flat, Dargin estimates that Bahrain would need to import 1 billion cubic metres (Gm³)/year from 2015.

Given the supply-and-demand uncertainties in Bahrain, the likelihood is that the government will opt for a scalable LNG terminal but with gas production thought to have peaked, the expectation is that Bahrain's dependency on imports will grow.

Nevertheless, the example of Kuwait - which initially considered LNG as a stop-gap solution until it could develop more of its own non-associated gas reserves, but is now planning to construct a land-based terminal - shows that LNG imports will remain a long-term feature in the region's energy mix.

Even though delays to upstream developments such as Kuwait's plan to bring around 10.33Gm³/year of non-associated tight gas on stream by 2015 has only pushed back a potential competitor to LNG volumes in the country, the added security of supply that LNG capacity provides allows time for upstream technical difficulties to be overcome.

However over the long term, Sharaff said that security of supply would be better served by continuing to develop non-associated gas reserves.

By Ludovic Aldersley