Natural gas has long been in the shadow of oil in the Middle East, but it still has an important role in the energy mix, particularly for the power, desalination and petrochemical sectors. Many governments across the region are keen to increase the role of gas amid rising energy demand. Improvement in living standards, demographic changes and low renewable adoption all point towards strong electricity demand growth and hence gas strong gas demand growth for the next decade. Power plants are also competing with the petrochemical sector for limited gas supplies. As regional gas demand continues to outpace supply growth, the Middle East is increasingly turning to LNG imports, in a shift from its previous role as an exporter.
The last holdout for liquid-fired power
One of the main drivers behind increasing domestic gas consumption is a growing concern about the amount of liquids being consumed to generate electricity. The Middle East is one of the few places where liquid-fired plants still provide a substantial share of overall power generation. Middle Eastern producers have traditionally provided domestic crude and oil products at cheap prices, including for the power sector, which has encouraged rapid consumption growth and created little incentive to explore alternatives such as renewable generation. Reducing this consumption, so oil exports can be maximized, has been a policy goal in countries such as Kuwait and Saudi Arabia for several years. The regional power sector consumes a mixture of crude and oil products and the demand profile is highly seasonal, with power demand for air-cooling peaking during the summer. The role of liquids in the power sector varies by country, from around over 60 percent in Kuwait and 57 percent in Saudi Arabia, to zero in Qatar and Oman. According to JODI data, Middle East direct crude burn averaged 0.77 mb/d across 2015, with peak demand of 1.20 mb/d in July. Saudi Arabia accounts for almost three-quarters of the total regional crude burn, but the fastest growth over that period came from Iraq, which faces huge power supply issues that result in frequent blackouts. Rapid growth in electricity demand has been one of the drivers of this liquids consumption. Regional power demand has grown by around 6 percent each year on average over the last decade - while political instability has weighed in certain countries, demand in many of the larger markets has grown more rapidly, with Saudi demand growth averaging around 8 percent per year. Notwithstanding the lower electricity demand growth this year brought on by slower economic growth and reductions in subsidies on electricity prices in some countries, the pace of power demand growth is expected to pick up again once oil prices rise and economic activity rebounds. Growth will be supported by underlying demographic trends and various countries adding new generating capacity. Great adoption of renewables has the potential to dampen growth in thermal power generation, but with the exception of the UAE, where several high profile solar projects are located, Middle Eastern government ambitions remain modest. Renewables may start to make larger inroads towards 2030 and beyond, but for the next decade most of the incremental power demand is to be met by burning fossil fuels.
The advance of gas in Iran and Saudi Arabia
Recently, several countries have broken the trend of steadily rising power sector liquids consumption, but it is a very varied picture across the region. Leading the pack are Saudi Arabia and Iran, with recent increases in gas production in both countries displacing significant amounts of oil-fired power generation. In the Kingdom, the 2.5 bcf/d Wasit gas plant was commissioned in Q1 16 to process gas from the 1.3 bcf/d Hasbah and 1.2 bcf/d Arabiyah fields. A significant share of Wasit output is going into the power sector, with the result that direct crude burn was lower y/y by 0.17 mb/d on average across June and July 2016 - although power demand has declined this year, due to the removal of electricity subsidies in late 2015 and the weak state of the economy, which will be exaggerating the effect. However, examining the Saudi power projects due to start-up between now and 2019 suggests this will not be a durable reduction. A number of gas-fired power stations are due online in 2017, but 7.3 GW of crude-fired and fuel-oil fired plants also start-up in 2017 and 2018. Iranian gas production has also risen rapidly since the start of last year as more phases of the South Pars field are brought online. Over the last Persian calendar year (21 March 2015 – 19 March 2016), power sector consumption of diesel and fuel oil both fell by over 30 percent. But not all Middle Eastern countries are making the same kind of gains in displacing liquid fuel. Iraqi crude burn, for example, has stepped up markedly since 2014, averaging a record 0.17 mb/d in 2015, and on track to remain at similar levels this year. This comes despite the Basra Gas Company nearly doubling the amount of gas it captures from southern oil fields since 2014. Meanwhile, in Egypt, gas production has been gradually declining from a high point of 6 bcf/d in 2009, falling below 3.9 bcf/d in Q2 16. Against this backdrop, rapidly rising power demand has caused Egypt to switch from being an LNG exporter to an importer, and to use more diesel and fuel oil.
A constant rise in demand since 2000
Overall, the Middle East consumed 2.5 times more gas in 2015 than it did in 2000 - 150 percent demand growth - compared to global demand growth of 44 percent over the same period according to the BP Statistical Review 2016. Iranian demand has tripled to 18.5 bcf/d in 2015, the highest in the region, as gas is heavily used in the power, petrochemical, and transport sectors. Low domestic prices have encouraged this rapid growth, with Iranian per capita gas consumption the highest in the world, with price reform a politically sensitive topic. Elsewhere, Saudi demand passed 10 bcf/d for the first time last year, rising to 10.3 bcf/d, while Qatari consumption has risen fourfold since 2000, to 4.4 bcf/d, despite its small population. Across the region, there is scope for demand to continue rising fast in the coming years. Part of this growth has also been driven by the expansion of the petrochemical sector in the region as various countries are investing heavily in crackers and other facilities as a way to extend their involvement down the value chain. Meeting all of the demand growth from different sectors will prove challenging, even though there have been several recent positive developments in the gas upstream story across the region. In 2015 for instance, demand grew y/y by 5.6 percent according to the BP Statistical Review, while production rose by only 2.4 percent. As a whole, the region still produced 12.1 bcf/d more gas than it consumed, but this masks an uneven picture - Qatar alone produced 17.6 bcf/d, but this is mostly exported to buyers outside the region, which means the rest of the region actually had a net shortfall of 1.1 bcf/d of natural gas last year. While Saudi and Iranian gas production is growing, perhaps the most striking example of domestic production failing to keep pace with demand growth is in Egypt, where gas production has been in decline since 2009. This trend looked set to continue until the discovery of the giant 25 tcf Zohr gas field in August 2015. The operator, Eni, and the government hope production from the $16 billion field will begin as soon as end-2017, although the full capacity will not be reached before 2019. While Zohr is central to a reversal of fortunes for Egypt’s upstream, the government has also persuaded international operators to resume work on several stalled projects by reducing payment arrears - although they remain substantial at around $4.5 billion - and improving the contract prices for gas. BP’s West Nile Delta (WND) project is also scheduled to start in late 2017 and reach 1.3 bcf/d capacity in 2019. These two massive projects, along with several other additions, should be enough to offset output declines and return Egyptian gas production to growth by the end of the decade. But all new projects are contractually required to direct output towards the expanding domestic market first, so Egyptian production will still be locked in a race against rising domestic demand and during the period up to 2019 a substantial domestic supply deficit will persist, which has left Egypt importing significant volumes of LNG. Egypt hopes the turnaround in its upstream fortunes will eventually allow it to resume its role as a net exporter, although many remain unconvinced.
Many governments across the region are keen to increase the role of gas amid rising energy demand for the improvement in living standards, the demographic changes and the low renewable adoption
New key players enter the LNG market
In southern Iraq, after some further gains in gas capture by year-end, there is little prospect of gas production increasing in the next few years. Kuwait has also struggled to achieve any growth in gas output, despite rising demand, due to unattractive terms and the complex geology of new gas discoveries. The Kuwaiti government is optimistic that the Jurassic gas project will add 1.2 bcf/d of supplies, but this is unlikely to materialise before 2022. Kuwaiti gas demand continues to rise to meet power generation and desalination needs, forcing the country to import LNG via an FSRU and plans to build a permanent import terminal. If domestic supplies disappoint, this will increase the gas deficit that needs to be met by imports. Qatari production grew recently despite the government announcing a moratorium on further development of the North Field in 2005 that remains in force, as production was increased at other fields. However, Qatar’s LNG exports have remained in a narrow 76-78 Mtpy range since 2011 and will struggle to maintain this market share in the face of rising U.S. and Australian exports. Production will receive a boost from the start-up of the 2 bcf/d Barzan project in November, with the output ear-marked for domestic power generation and desalination. Work is also underway to develop the Khuff reservoir in Block 4N, with the hope it could provide feedstock for the petrochemicals sector, but initial results have not been promising. So after Barzan ramps up, the Qatari production is expected to stabilise for the rest of the decade. There is a similar situation in Oman, where the 1 bcf/d of gas expected from Phase 1 of BP’s Khazzan project, which is due to start production in late 2017, will be allocated to the domestic market rather than to boost LNG exports. Oman has large untapped gas reserves but these consist mostly of tight gas, which is costly and technically challenging to produce and requires massive investment. Indeed, Omani LNG exports are declining, and the country is having to import more gas from Qatar via the Dolphin pipeline to prevent domestic demand from taking a larger bite out of exports. The UAE is also finding itself having to import increasing volumes of gas to cope with rising domestic demand and falling production without breaching contractual commitments for LNG exports.
A change in the region's position
The combined effects of rapid demand growth and the patchy domestic supply picture have started to significantly alter the role of the Middle East in the global LNG market in recent years. The region has shifted from almost exclusively exporting LNG to becoming a growing demand centre. In 2011, only Kuwait and the UAE (Dubai) imported a combined 2.4 Mt, while the region exported 102 Mt in 2011. By last year, imports into the region had almost tripled, to 9.8 Mt, while exports had fallen sharply while other sources of supply flourished, most notably from Australia. Both of these trends look set to continue in the coming years.
The more recent growth in LNG imports is down due to both existing importers ramping up volumes and new buyers Jordan and Egypt entering the LNG market. After exports from Egypt were halted by frequent attacks on the Arab Gas pipeline, Jordan began importing LNG via the Golar Eskimo FSRU in May 2015. In 2012, the Egyptian government launched a project to install a floating LNG import terminal. But confusion over the terms and which state agency was responsible led to the cancellation of several tenders. Eventually, Hoegh LNG of Norway was awarded the contract for the first FSRU. LNG shipments began arriving in Ain Sukhna in April 2015. Egypt also installed a second 0.75 bcf/d FSRU in Ain Sukhna in September 2015. The established importers, Kuwait and UAE, have not been standing still either. Kuwaiti gas demand has been growing while Dubai imports are on the rise and Abu Dhabi has installed a new FSRU in August 2016 to meet a domestic deficit while maintaining contracted LNG export volumes. Other Middle Eastern countries could well start importing LNG in the coming years, attracted by low global LNG prices and as they struggle to meet domestic demand. Bahrain’s NOGA has contracted for an FSRU to be delivered by July 2018. Saudi Arabia has previously been unwilling to consider importing gas given its large domestic reserves, but comments made by the energy minister in June suggest that it is at least open to exploring LNG imports as a way to address the domestic supply deficit. Lebanon has issued several tenders for an FSRU over recent years, but the project appears to be stalled by political issues. Oman is said to be looking at importing LNG via the Sohar terminal to meet rising domestic demand without reducing contracted LNG exports to Asia. While not all of these countries will end up becoming LNG importers, the number of importers looks set to continue growing.
Limited prospects for regional trade and export
Given that the Middle East contains several countries with a gas surplus and a growing number with a supply deficit, greater trade within the region by pipeline would appear at first glance to be an attractive alternative to costly LNG facilities. But several existing and proposed pipelines have fallen foul of political and security issues. Egypt used to export gas to Jordan and Israel via the Arab Gas Pipeline, but flows were halted in early 2012 due to a combination of militant attacks, pricing disputes and declining Egyptian supplies. Qatar’s Dolphin pipeline is still operational, supplying around 1.65 bcf/d and 0.25 bcf/d to the UAE and Oman respectively. The route to Abu Dhabi has capacity to handle more gas, but the price Qatar receives for pipeline volumes is well below current LNG prices, creating little incentive for diverting gas onto the pipeline. Iran also has some limited pipeline trade with its neighbors, primarily imports from Turkmenistan and exports to Turkey. Iranian officials have also stated that exports to Iraq will start this year, although there have been a number of delays and of the two proposed routes - into Basra and Baghdad - the latter looks unlikely to proceed due to security issues. Tehran has ambitions to export gas by pipeline to various other countries in the region, including Kuwait, UAE and Oman, but the long-standing political hostility between Iran and the GCC States will block most of these options. The proposed 1-2 bcf/d pipeline to Oman has a better chance, as Oman is keen to source Iranian gas as feedstock for its LNG export plant, but even this project faces challenges. Iran is also looking at more ambitious projects to export gas to Europe by pipeline or in the form LNG, but given the outlook for global gas prices and the fact that Iran will struggle to develop sufficient gas supplies to allow significant exports.
A horizon that continues to evolve
The role of the region in global gas markets is shifting, from almost exclusively exporting LNG to becoming a center for rapid demand growth and LNG imports. The emergence of the Middle East as a source of substantial LNG demand growth illustrates a key trend: despite the region’s massive gas reserves, the slow development of domestic gas assets has left a supply deficit that will not easily be eradicated, even with the recent production growth in Saudi Arabia and Iran, and the improved outlook for Egypt. Regional gas supplies are not managing to keep up with the pace of demand growth from the power and petrochemical sectors. The take-off in LNG demand also underlines the attractiveness of low LNG prices and the flexibility offered by FSRUs in allowing new buyers to gain access to the market relatively quickly, even for a period of just a few years to bridge the gap until domestic supplies come online.
* Richard Mallinson: Geopolitics analyst, member of the Royal Institute of International Affairs (Chatham House)