ENERGY

Analysis: Is gas still a golden opportunity for Mideast suppliers?

A gas flame burns behind oil field workers in the desert oil fields of Sakhir, Bahrain. (AP)

Last Wednesday, the Asia Vision liquefied natural gas tanker carried the first cargo from a new plant.

Two things were remarkable about this. The new plant is not in a traditional gas-exporting region such as the Middle East or south-east Asia, but on the US Gulf Coast. And, despite its name, the tanker did not head for the traditional LNG markets of Japan, South Korea or China, but for Brazil.

The US’s transformation into a gas exporter – when a decade ago it was poised to be a major importer – is part of a tidal wave of supply hitting global markets. Amid a rout in oil prices, the equivalent slump in gas prices has attracted less attention, but is set to be longer-lasting. Yet the gas-rich Middle East is not well-placed to capitalise.

Gas will be in oversupply for years to come for three reasons. Firstly, high prices over recent years have encouraged a wave of new supply which will wash over markets this year and next. The development of North American shale resources has led to a glut of gas seeking outlets. Outside Alaska, Cheniere Energy is the first plant to export LNG from the US, but it will not be the last: five others are under construction.

Australia will in the next few years rival Qatar as the world’s largest LNG exporter. In the longer term, East Africa (Mozambique and Tanzania) and western Canada could join the party.

Weak demand

Secondly, gas demand has been quite weak. China’s slowdown, economic stagnation in Europe, and the availability of cheap coal in both Europe and Asia, have all dented rosy predictions for a “golden age of gas”.

The third reason is more speculative – but it is quite possible that Russia’s state giant Gazprom will choose to lower prices in Europe to keep its market share, similar to Saudi Arabia’s strategy for oil. That would send US LNG cargoes hunting for other homes.

The Middle East and North Africa region includes the world’s second-largest gas exporter, Qatar, and eighth-largest, Algeria. Both these countries are being hard-hit by lower gas prices, especially Algeria where declining exports compound the burden. Doha’s gas exports remain lucrative, but it is no longer the arbiter of global LNG trade that it was five years ago.

The Middle East and North Africa has almost half the world’s proved gas reserves, but only a fifth of production. With such a huge resource base, there is ample room to expand production, even without turning to shale gas as the US has done. Giant new gas fields have been found in recent years in the Eastern Mediterranean, including Egypt’s new Zohr field, off Mauritania, in the Kurdistan region of Iraq, and in Iran.

Yet the Middle East is not really a gas market at all – but a disparate assemblage of islands. Apart from limited connections from Algeria to Morocco and Tunisia, and from Qatar to the UAE and Oman, there are no pipeline links within the region.

The Egyptian pipelines to Israel and Jordan are disused because of persistent sabotage and Egypt’s own lack of gas for export. Iraq and Iran wastefully burn off huge quantities of unwanted gas next door to gas-short Kuwait.

Egypt, Dubai, Kuwait and Jordan have built LNG import terminals, with Abu Dhabi, Morocco and Bahrain set to join them. Saudi Arabia does not import or export gas, by choice, but it burns large amounts of oil to generate electricity.

Iran, with the world’s largest gas reserves ahead of Russia, exports some gas to Turkey but has fallen well short of its potential for political reasons, internal and international.

Flawed policies

Lower global gas prices do help Middle East importing countries. But they narrow the region’s advantage in low-cost petrochemical feedstock. And for such a gas-rich region to be contemplating LNG imports from the US – a major prospective customer just a decade ago – is a sign of failure.

Even the excellence of Middle East geology is not enough to compensate for flawed policies. Regulated gas prices have been too low – even after they were raised in Saudi Arabia, Egypt, Bahrain and Oman recently. International investment into gas is prohibited or severely restricted in almost every country, keeping out the best technology and innovative commercial models.

Subsidised prices have led to runaway, wasteful demand, eating into exports. Political discord has prevented many profitable cross-border projects and gas trades.

In the longer term, though, the region is surrounded by hungry gas consumers. Turkey is a large and fast-growing market in itself. Middle East gas exports can reach Europe via Turkey or across the Mediterranean.

Despite falling demand, EU is still keen to diversify away from Russian gas. And to the east are the expanding consumer markets of South and East Asia, looking for cleaner fuels to clear their cities’ smoggy skies. Iran is constructing a pipeline to Pakistan and contemplating another, undersea, to India.

The opportunities are there, both within Middle East and around it. At a time of low oil prices, the region needs to capitalise on every advantage it has, geological and geographic. Middle Eastern countries that can get the technology, economics and politics right can still turn their gas to gold.

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Last Update: Monday, 29 February 2016 KSA 22:54 - GMT 19:54
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Analysis: Is gas still a golden opportunity for Mideast suppliers?
The Middle East is not really a gas market at all – but a disparate assemblage of islands
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