The debate over the implications of the North American shale boom on the Middle East’s energy industry continues to rage on.
Understanding the impact that production of shale oil and gas will play on global markets will become increasingly important as more countries tap into their domestic shale potential. In 2013, shale developments increased the world’s total reserve of technically recoverable oil by 11% and gas by 47%, according to the US EIA.
Middle Eastern energy players are yet to determine how such developments will affect their businesses. The most immediate concern being a reduction of LNG exports from the GCC to the US.
As the US looks to become increasingly energy independent, exports from Qatar’s gas field will increasingly sail eastwards.
However, the rapid production capacity expansions in the US have encouraged other countries to pursue their own shale production. Eastern demand for LNG may also contract as Japanese economic activity continues to struggle; meanwhile, the country is looking to develop its own methane hydrate extraction offshore. China on the other hand holds one of the largest shale reserves in the world and last year raised gas production to 200 million cubic meters. These factors will only likely erode demand for exports from this region.
“The point about this geopolitically is that if the US is absolutely determined to develop its indigenous resources to be energy self sufficient, then it is very likely that some other countries are likely to follow suit,” said Harry Bradbury, founder and chairman of Five Quarter Energy.
Bolder predictions have pointed to the US becoming self-sufficient or even a net exporter of natural gas, which would only serve to increase competition in this region’s export markets. According to a report by chemicals consultancy, A.T. Kearney, the US production of shale gas grew from two trillion cubic feet (Tcf) in 2008 to more than eight Tcf in 2012, accounting for more than a third of total domestic natural gas production. The report predicts that shale gas is projected to grow to 14 Tcf by 2030, representing almost half of US natural gas production.
“If the States carries on the way it’s going and if other countries also decide to go indigenous, and even become net exporters of energy, then you are respectively looking at a competing force against the continuance of oil and gas from the Middle East,” said Bradbury.
So the concern is that shale production will flood the natural gas markets that gas producers around the world are trying to stake out. Fortunately for the Middle East and North Africa’s producers (save for Qatar, and perhaps Libya and Algeria), natural gas markets are not an area currently worth fighting for.
The GCC has one of the highest rates of population growth around the world. According to the Economist Intelligence Unit’s report The GCC in 2020, the region’s headcount is forecast to increase by one-third, to 53 million people in the next six years. With as much as 47% of the region’s energy consumed by residential units and a rapidly expanding middle and upper class, the strain on domestic power supplies is only set to increase.
“One of the biggest problems in the Middle East is the shortage of gas, really with the exception of Algeria and Qatar, every country I deal with has problems with finding enough gas for its domestic market,” said Mounir Bouaziz, VP Upstream International MENA for Shell.
According to the US EIA’s International Energy Outlook 2013 report, natural gas is the world’s fastest-growing fossil fuel, with consumption increasing from 113.0 Tcf in 2010 to 185.0 Tcf in 2040.
“Many countries are filling that need by burning liquids, crude or expensive diesel,” said Bouaziz. “So the new era, the golden age of gas, is actually good news for the Middle East because it could be a solution to current issues.”
America’s growing gas production capacity would alleviate demand on regional gas exporters such as Qatar and Libya, which would allow for locally produced gas to reach the countries in the region that need it most.
“Libya’s proven conventional gas reserves are estimated at 43 Tcf, of which about 23% has been produced, but more than 300 Tcf of undeveloped shale gas resources are expected from the country’s world-class shale rocks,” said Bashir Garea, exploration manager for NOC Libya.
Before the Middle East considers competing in natural gas markets, there is an even more pressing need to tackle gas prices that currently deter production. Gas prices in the Middle East are set by governments and there is a general consensus that in nearly every country, prices are too low to make development attractive. Barring a few countries, this has left Middle Eastern and North African producers with relatively under-developed gas production infrastructures.
“The Middle East hasn’t got the commercial structure right, it’s not open to foreign investment, […] and also simply the gas price is wrong,” said Robin Mills, head of consulting at Manaar Energy. If gas prices were more attractive to investors, it is possible that the Middle East, as a growing producer of gas would not only meet local demand, but also become a larger exporter on the global gas market. Until the region confronts these two challenges, it will continue being short of gas.
But raising gas prices in the Middle East would threaten the growth of the region’s petrochemicals sector, in turn affecting the region’s ability to diversify its economy and add value to hydrocarbon reserves. As the US makes use of its cheap ethane, the feedstock cost advantage the Middle East currently holds will continue to shrink, and raising gas prices here would only accelerate the shrinkage of margins between the US and the GCC. With China’s growing coal-to-chemicals production ramping up, there is even less room for the GCC to increase gas pricing.
“The key question for the Middle East is not just to think about a silver bullet and joining a band wagon, but thinking about how to build an integrated strategy around all the levers that you can actually use,” said Eduardo van-Zeller Neto, principal at The Boston Consulting Group.
One such strategy would be to invest in US companies that are already capitalizing on the shale boom. Earlier this year, Saudi Basic Industries (Sabic) chief executive Mohamed al-Mady, revealed the company’s plans to invest in the US shale. “Sabic is looking to diversify, and the US market is exploding in terms of shale,” he told Reuters on the sidelines of the World Economic Forum in Davos. “We’re currently in talks with a few big names in the US for investment in shale gas. We expect to enter the market sometime this year.”
It would behove the region’s players to act quickly as shale production continues to spread across the world. “If first of all, we simply wait and see what is going to happen in America, it may be too late to do anything about it subsequently,” said Bradbury.
