Surprisingly, the Middle East and North Africa (MENA), which has 47% of the world’s proven gas reserves, is struggling to cope with its own expected demands.
The MENA region’s demand for power generation, petrochemical projects and re-injection has far outpaced the region’s gas exploration and production. As a result, MENA countries find themselves in an almost contradictory position of having to import gas, when they have exported gas for decades. However, three countries that are untouched by this critical scenario are Qatar, Iran and Algeria.
The battle for gas is on
Despite its strong gas reserves base, the UAE became a net importer of natural gas in 2008 and started importing Qatari gas through the Dolphin Gas pipeline. This is due to rapidly expanding natural gas-fired facilities for power generation, and failure to develop sour gas reservoirs. Further, to improve oil extraction, the country re-injected around 27% of gross natural gas production in the last 10 years. To meet the rising gas demand, Al Hosn Gas (ADNOC) has developed sour gas reserves in the Shah Gas Field, which started production in 2015. However, multi-year low oil prices have hindered the prospects for other domestic gas developments; for instance, Shell withdrew from Abu Dhabi’s Bab sour-gas project in January 2016.
Dubai began importing LNG in 2014, with total imports of 3.1bcm in 2015, expected to reach 4bcm in 2016. The Dubai Supply Authority (DUSUP) is expected to keep its older floating storage and regasification unit (FSRU), the Golar Freeze, and wants to build a new jetty to accommodate two FSRUs in Jebel Ali. Abu Dhabi (ADNOC), following Dubai, commissioned its 1.4 billion cubic metres annually (bcma) capacity FSRU in July 2016. Additionally, the UAE’s RAK Gas has also begun early-stage exploration in various Sub-Saharan states, including Somalia, offshore Zanzibar and Lake Malawi, to expand the gas sourcing options.
Similarly, Kuwaiti gas production has largely failed to keep pace with demand growth. Unfavorable terms offered to IOCs have also resulted in sluggish development of sour gas and high-cost non-associated gas reserves in Kuwait. This has created a demand-supply imbalance and Kuwait joined the LNG importers’ club in 2009, using an FSRU. In 2014, state-owned KNPC signed a five-year contract with Golar LNG to charter an FSRU with an import capacity of 7.9bcma. Kuwaiti LNG import is up from 3bcm in 2014 to 3.8bcm in 2015, with a rise of 27%. In 2015, KPC signed four-year contracts with BP, Shell and Qatargas to purchase a combined volume of 3.4bcma of LNG from 2016, to satisfy the rising domestic gas demand. Recently, KNPC has awarded a contract of $3bn to South Korean Consortium to build a regasification import infrastructure, which is scheduled to be completed in 2020.
Bahrain produced 15.5bcm of gas in 2015, which seems insufficient as the kingdom’s domestic gas demand is looking robust. Energy-intensive companies such as Aluminum Bahrain (Alba) are planning capacity expansions, and the kingdom’s electricity consumption is already getting close to matching its 4GW of installed gas-fired generation capacity. This will require additional 3.3bcma of supply. Bahrain’s National Oil & Gas Company signed a $653mn deal with Teekay LNG, Samsung C&T and Gulf Investment Corp for the development of an LNG-regasification terminal, to be on-stream in 2018.
Oman has an annual capacity to produce 10.4mt of LNG. But Oman imports gas from Qatar through the Dolphin Gas pipeline to meet surging domestic gas demand. To improve the equilibrium in its gas market, Oman is developing unconventional gas reserves and has taken steps to reduce gas subsidies. Oman may start importing LNG, for obvious reasons, in the coming years.
Saudi Arabia has the world’s fifth-largest gas reserves, but natural gas production remains limited. The country does not import or export natural gas, so all consumption is met by domestic production. The majority of gas fields are associated with petroleum deposits and increase in gas production is inter-linked with oil production. Burgeoning gas demand in the industrial and residential sectors is a result of low gas price in Saudi Arabia, which is merely $0.75/mmbtu. Consequently, Saudi Arabia announced energy-pricing reforms in early 2016, and could consider importing LNG in the future, to reduce its dependence on oil for power generation. Similarly, Iraq produced 23.5bcm of natural gas, but flared around 62% of it due to lack of gas-recovery equipment. Gas demand is expected to upsurge sharply as Iraq is planning to install 7GW of gas-fired generation capacity in the near future. An FSRU could be a solution to meet demand shortfalls.
Jordan has no energy resources of its own and has relied on gas supplies from Qatar since 2015. Disruptions to Egypt and Iraqi supplies prompted Jordan to switch some power generation to diesel and fuel oil. At present, gas still accounts for 80% of Jordan’s power-generation mix and planned LNG imports should replace liquids in coming years. However, Jordan may restrict its LNG import capacity expansion due to the prospect of importing 2.2bcma of gas for 15 years from 2018 via the Israeli Gas pipeline.
Likewise, since 2010, LNG remains Lebanon’s only gas-import option since Egyptian gas imports via the Arab Gas Pipeline were terminated. Presently, the share of gas in the fuel mix of the power sector has fallen to zero. In 2013, the government issued a tender to charter a 7.7bcma FSRU, with imports in the region of 1.6bcm expected in 2016, rising to 4.8bcma by 2022. However the plans may be pushed towards the end of the decade, based on current progress.
North Africa: the natural gas crunch
Stagnated domestic output and political unrest after 2011 made Egypt a natural gas importer. Egypt relies, to a large extent, on LNG to generate electricity, and chartered its first FSRU from Norway’s Hoegh, and a second from BW Group, in 2015. To curb the LNG import, Egypt is trying to speed up production at recently discovered reserves (such as Al-Zohr gas field) to satisfy the energy requirement. However, if the production from new fields reaches full capacity, the expected domestic gas demand is to exceed supply by 2bcma by 2021. Egypt has initiated steps to lease a third FSRU with a capacity of 7.7bcma, which could take total FSRU capacity to 21bcma.
In 2008, Syria became a net importer of natural gas. The only source of natural gas imports to Syria, the Arab Gas Pipeline, became the target of ongoing conflict, forcing the pipeline to shut down. Syria’s plans to convert all existing thermal power generation facilities to natural gas-fired plants depends on the available import volumes, however this goal seems out of reach. Given this current state, it is not possible to predict the LNG market in the country.
Morocco produces marginal amounts of natural gas. Recently there has been increased interest in upstream activities to unlock the new gas reserves, but outcomes are unsatisfactory, with the exception of the commercial gas discovery at Tendrara. As a result, Morocco has been reforming its energy sector and slashed energy subsidies in 2015. According to Abdelkader Amara, the country’s Energy Minister, Morocco plans to import 2.7bcma of LNG from 2020 onwards, rising to 5bcma by 2023. Further, Morocco has launched a tender for the construction of an LNG import terminal as part of its LNG-to-power project, to import of 7bcma of gas by 2025. It has also started negotiations to secure its imports with gas-rich nations, including Qatar and Russia.
Algeria’s gas production has steadily declined in recent years thanks to slow governmental approval for projects, repeated delays, lack of investment partners, technical and infrastructure issues. Another concern, around 42% of the gross production in 2015 was re-injected to increase oil recovery. These circumstances might transform Algeria into an importer.
Tunisia faces a dilemma: whether to import more piped gas from Algeria, or LNG from the international market. The Tunisian government has recently drafted a hydrocarbons code in the hopes of revitalising the country’s ailing gas sector. Tunisia could increase its piped gas imports from Algeria. However, the LNG import option looks relatively bleak due to lack of infrastructure.
Sustaining growth
Rapid demand growth in the MENA region, driven by booming economies and energy-intensive industries has, led the region to the point at which dire low-priced supplies of gas are no longer possible. For the longer term, MENA countries urgently need to raise domestic gas prices to at least cost-based – and eventually to internationally traded – levels, to attract new investment. However, this task would be difficult due to recent political disruptions in the region.
For the shorter term, LNG remains the only option. Capital constraints and uncertainties in the LNG market mean many are opting for FSRUs as an interim option, seizing the benefit of low prices before considering more expensive long-term options.
New output from Australia and the US is adding to an LNG glut, and importers are feeding off the over-supply. Qatar is also looking to sign new agreements and is offering sweet teaser deals to buyers. Regional buyers should take this as an opportunity to develop import facilities and lock in the favourable LNG deals.
