The changing face of the GCC gas industry: New competencies and strategies are required to tap into fresh opportunities, says Leonie von Kluechtzner, Consultant, Business Advisory for Contax Partners
While the global gas market is struggling with low demand and staggering price drops, conditions in the regional gas market of the GCC look peculiarly different. The Gulf sits on 25% of the global gas reserves, yet these reserves are not evenly spread and exploration is hindered by the heavily subsidised regional gas pricing structure. Apart from Qatar, even countries with significant gas endowments are struggling to produce enough for domestic consumption. As a consequence demand threatens to outstrip supply in the course of 2010 in Dubai as well as Abu Dhabi and even a country like Saudi Arabia has begun importing fuel oil from India and China. With increasing intensity, GCC countries are recognising the need to find new sources of gas and are looking for ways out of the looming crisis.
Growth & development
Regional gas demand is expected to increase by c. 6.6 % per year by 2012. Two of the main factors responsible for this are: An exploding population growth in the region and the strategic imperative of industrial diversification into gas intensive industries such as petrochemicals and upstream metal production. Both developments go hand in hand with growing demands on the power and desalination sectors which aggravate the imminence of gas shortages even further. A final contribution to the problem of gas shortages is the fact that a considerable amount of the regional gas supply is tied up in long-term LNG export contracts, instead of satisfying domestic requirements.
Business opportunities
The supply side provides three key drivers for the looming gas crisis in the GCC and the largest potential for business opportunities that promote change. Firstly, the historical focus on the oil industry has supported traditional gas usage for enhanced oil recovery through re-injection. While this is clearly changing, it has in the past cannibalised long-term investment into gas infrastructure and the development of necessary technologies to capture or store it. For example, Abu Dhabi alone uses 2 billion cubic feet per day (bcf/d) for re-injection, a figure set to grow as it increases production from its Bab and Umm Shaif fields.
Secondly, more than 75% of the region’s gas reserves are associated with oil fields. While gas was therefore easy to find, every reduction in oil production to control the global oil price also implies a cut in associated gas production, thus endangering a reliable gas flow for the power, water and other gas intensive industries.
Thirdly, the gas pricing structure hinders much needed investment into new gas exploration and production initiatives by subsidising regional gas prices for residential and industrial users at an average of USD 1 a million BTUs (or 980 cubic feet) across the GCC. This price point is substantially lower than international market prices, while at the same time gas production and processing costs are increasing, as a large part of the gas reserves in the region are now considered to be “tight”, with extraction being complicated by difficult geology, and more than 50% of the Gulf’s natural gas are “sour”, with significant levels of toxic hydrogen sulfide. Thus any new supply will have to be justified by a higher return for both operators and investors.
Sour’s hour
Gulf States have responded with various measures to counteract the current gas situation and a shift to complex sour-gas projects is becoming evident. In view to a long-term solution for the problem of falling gas supplies, GCC countries have started to invest heavily into the gas sector. The most noteworthy change in this context is that many of them have turned to the development of sour-gas projects that were previously discouraged on the grounds of high production and also processing costs.
As a result, a large amount of the upcoming projects in the oil and gas production are now sour-gas related.
Abu Dhabi for example pioneers the review of the economic potential of processing its huge reserves of sour gas and has staked its reputation on completing the development of the Shah Field by 2015.
The Shah Gas scheme is a c. USD 10-12 billion mega-project that is 60% owned by Abu Dhabi National Oil Company (ADNOC) and 40% by US ConocoPhillips and once developed, will produce 1 bcf/d of sour raw gas. However, the scale and technical challenges of the project remain substantial. Further major fields in the UAE, which are rich in sour-gas, include the onshore BabThammam and the offshore Hail field, which are expected to produce up to 0.5 bcf/d of gas.
Saudi Arabia in turn has initiated several projects to tap into its more than 10 trillion cubic feet (Tcf) of non-associated gas. As the first non-associated gas field to be developed by Saudi Aramco, the company has awarded all four contract packages for the development of the offshore Karan gas field, which include the building of a sub-sea pipeline to transport the field’s sour-gas to the onshore Khursaniya facility for treatment. In addition, Saudi Aramco’s joint venture with Shell recently reported that a positive test drill in the Kidan field had yielded sour gas and expressed optimism about extracting it commercially.
Other GCC countries are equally turning their attention to sour gas developments. The Barzan gas development in Qatar for example, is part of the existing gas development scheme for the North Field and one of the country’s answers to satisfying its growing gas feedstock requirements for its domestic power and water sectors. Once all of the phases of the project are complete, the development is expected to provide the country with up to 6.2 bcf/d of sour gas. Oman has equally started to invest into challenging gas developments and plans to bring eleven fields on stream over the coming five years. This includes the Khazzan-Makarem field and deep gas fields in the south of the country, which contain very sour gas.
Opportunity knocks
The shift in the regional gas sector and related trends offer opportunities for savvy players.
Although the boom period and the times of “easy” gas in the region seem to be over, it is clear that developments can provide interesting opportunities.
Technically complex and more risky exploration projects like the recent sour-gas schemes can provide an opportunity for IOCs to leverage their strengths by providing access to much needed technologies, project management capabilities and human resources. Further, ambitious projects can provide learnings that could make the second or third generation of gas schemes more commercially viable and open new markets for sulfur or sulfur-based products. To be successful in these ventures IOCs need substantial regional market insight and deep-reaching networks to choose their contractors carefully, determine the right market entry point and evaluate projects according to strategic, commercial, technical and political considerations.
Alternatively, contractors, wishing to operate within this sour-gas environment but do not currently have the capabilities, should look to expand, build or acquire the specific know-how, technologies and sophisticated materials. Choosing the right acquisition target or the right partner is of key importance to ensure a competitive position in this market.
Reflections
In short, the sour-gas market looks as if it is here to stay for the foreseeable future. Positioning oneself today with the right partner(s) against the right opportunities and developing the right competencies is key to ensuring success.
About the Author: Leonie von Kluechtzner, Consultant, Business Advisory Practice, Contax Partners
With several years of corporate strategy and advisory experience in the private and public sectors of various industries – including energy, real estate and media – in both emerging and developed market environments, Leonie is a Consultant at Contax Partners. Before joining Contax she worked for Dubai Holding where she managed a diverse set of projects and advised on strategy development and implementation
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