Gas Shortage in the GCC - How to Bridge the Gap
Despite GCC countries holding roughly 23% of global gas reserves and exporting it for decades, the region may now have to import gas to meet its needs.
Bahrain, Kuwait, Oman, Saudi Arabia, and the United Arab Emirates are facing a reversal of a decades-old status quo: an increasing gas shortage in the region amid a significant supply overhang in the rest of the world. Although the global economic slump has reduced the need for gas in most regions, demand in the Gulf Cooperation Council (GCC) for power generation from some industrial sectors has far outpaced the region’s gas exploration and production. As a result, GCC countries find themselves in uncharted territory, an almost contradictory position of having to import gas, when they have exported gas for decades, according to a new report by Booz & Company.
An Unexpected Contradiction
Importing gas into the resource-rich countries of the GCC seems counterintuitive—the six member countries of the GCC collectively hold roughly 23 per cent of global gas reserves. “However, the extent of the gas supply–demand imbalance in the region has mandated that the countries of the GCC, with the exception of Qatar, at the very least consider importing gas to meet rapidly rising demand,” said George Sarraf a partner at Booz & Company.
Five factors have combined to shift the gas supply–demand balance in the GCC to the point where the region now faces a growing gas shortage:
1. Increasing power consumption and the share of gas in power generation: Between 1998 and 2008, GCC economies grew at a rate of about 7.6 per cent per year. Demand for both gas and electricity has kept pace with regional GDP growth and economic diversification, posting annual gains of 5.5 per cent and 6.1 per cent, respectively. Going forward, according to US Energy Information Administration (EIA) forecasts, the region’s power generation needs will grow by about 50 per cent—from approximately 710 terawatt hours (TWh) in 2010 to around 1100 TWh in 2030. The EIA also predicts that more than 90 per cent of this incremental power generation growth will be fulfilled by gas, significantly increasing the GCC power sector’s reliance on gas. Other power-sector alternatives, like liquid fuels, renewable fuels, coal, and nuclear energy will contribute, but only modestly compared with natural gas, according to the EIA’s 2009 outlook.
2. Depleting oil fields and the need for gas in enhanced oil recovery: Depleting oil fields, where natural gas is used for re-injection to maintain reservoir pressure and oil production capacity, are another major source of gas consumption in the GCC. GCC countries currently manage their gas shortage by reducing gas re-injection and directing gas to end consumers. That strategy, however, is not sustainable over the long term. “Although groundbreaking alternative technologies are currently being developed and deployed on a pilot basis, it is unlikely that they will significantly reduce the demand for gas,” explained Dr. Raed Kombargi, a partner at Booz & Company.
3. Increasing economic emphasis on the steel, aluminum, and petrochemicals sectors: The emergence of the gas-based petrochemical sector has been one of the great GCC success stories over the last three decades. Low gas prices provide a competitive edge for GCC businesses to increase investment and add significant new capacity within the next few years. As a result, production of polyethylene and polypropylene in the Middle East will more than double between 2008 and 2012 and steel and aluminum production may increase as much as six-fold in the same period.
4. Gas exploration and production challenges: The region faces extraordinary challenges in maintaining and increasing gas production at a level that would allow it to meet demand. Most of the region’s gas production is in the form of associated gas that is closely tied to OPEC oil production quotas. As OPEC oil production has waned, so has the region’s gas production, and new sources of non-associated gas are proving difficult to locate. Moreover, as the GCC gas markets are highly subsidised, some countries are finding it difficult to attract and retain IOCs for gas exploration and development activities.
5. Long-term gas export commitments limit local supply: Key gas-producing countries such as the UAE, Oman, and Qatar have committed significant portions of their current production to LNG exports through long-term contracts, mostly to Asia and Europe. “Those commitments will exacerbate gas supply shortages while demand continues to increase. Export commitments extend at least through the end of the next decade and sometimes even longer,” Dr. Kombargi said.
The Bad News: The Challenge Will Increase
Over the next five years, the shortage will become more acute irrespective of the forecast scenarios envisaged: in a prolonged recession scenario, gas shortage is expected to increase from about 19 billion cubic metres (bcm) in 2009 to about 31 bcm in 2015. In case of growth returning to pre-recessionary levels, the current shortage is expected to increase to more than 50 bcm in 2015.
The Good News: All Is Not Lost
GCC countries have a unique opportunity to address their gas shortage by taking advantage of the significant global supply overhang in the gas markets due to the global recession, which has reduced demand for gas in industrial economies, and due to growth in unconventional gas sources in North America, as well as a large increase in LNG supply. Booz & Company estimates the global gas markets will realise a five to fifteen per cent surplus until at least 2015.
“Considering this significant global oversupply, GCC countries have a unique opportunity,” explained Sarraf. “Countries such as Qatar, the UAE, and Oman could renegotiate some of their LNG export contracts, which typically include minimum off-take or take-or-pay conditions.” That could help those countries free up export gas for domestic use. Because a large portion of the LNG exports are slated to go to the Asian markets of Japan and South Korea—both of which were severely affected by the recession—the timing could be mutually advantageous to propose flexible contract arrangements and create a win-win scenario for both parties. Once NOCs are successful at minimising their LNG exposure to markets that are currently oversupplied, they can explore short- to mid-term gas import contracts because of the disparity between oil and gas prices, and employ fast-track LNG import terminals similar to those in Kuwait and Dubai to solve their gas shortage situation. “Fast-track LNG import terminals can be set up within a year to 18 months—a short enough period to tackle short- to mid-term gas problems,” added Sarraf.
Importing gas or LNG is the most economically and environmentally sound solution to the GCC’s problem, especially for the power sector. Furthermore, importing gas or LNG will enable GCC countries to continue their economic diversification efforts using local gas as well as allow them to continue to export crude oil, sending value-added refined products to foreign markets instead of burning them as fuel for their own power needs.
Beyond addressing the short-term gas shortage, GCC countries will need to address their gas challenges by reducing demand in the long term and increasing supply. The following are six areas in which NOCs, utilities, and regulators can focus their efforts:
1. Raise local gas prices gradually: GCC governments heavily subsidise gas prices and, as a result, related power prices. Increasing power prices in a gradual manner over several years would lead to lower power (and consequently gas) demand.
2. Improve energy efficiency through regulatory changes: Establishing energy-efficiency standards and building codes in the construction industry would reduce power consumption, especially for the air-conditioning units in the peak summer months when the demand for gas is greatest.
3. Boost penetration of alternative power sources in the energy mix: In the long term, the use of nuclear energy or renewable energy sources like solar will help reduce gas demand. The UAE has set an ambitious target of generating one-quarter of its power from nuclear sources over the next 15 to 20 years. To reach this target, Abu Dhabi plans to construct at least six nuclear plants at a cost of more than US$5 billion each. Given the challenges and hurdles to be overcome in constructing nuclear plants, it is unlikely that the first plant in the UAE will be operational before 2017. “Despite the global political sensitivities of using nuclear power in the region, it is these types of bold actions that GCC nations will need to take to diversify the fuel sources for their power generation over the long term,” noted Dr. Kombargi.
4. Invest in alternative methods for enhanced oil recovery: Some of the regions’ NOCs are pilot-testing groundbreaking new technology to produce and inject nitrogen or CO2 instead of natural gas for enhanced oil recovery. These types of state-of-the-art industry technologies across the GCC nations can help free up gas for end consumers.
5. Provide incentives for IOCs to participate in the upstream gas sector: Although GCC countries have slowly opened up the upstream gas sector to IOC participation, the subsidised price environment renders the terms and conditions for IOC investment unattractive. Moreover, future non-associated gas resources in the region are likely to be rife with significant technical challenges like sour gas and tight gas. Bringing technically challenging gas on stream not only takes more time, it also carries additional risk and requires greater investment. As a result, IOCs will require a higher financial incentive to justify their investments. Balancing the risk and reward for IOCs in joint venture contracts would increase their interest and commitment to the region to explore for non-associated gas.
6. Evaluate the export versus the domestic option for gas reserves: Qatar, the UAE, and Oman are locked into LNG exports until at least the end of the next decade. These countries can benefit now by undertaking a critical analysis of their domestic requirements and contingencies before they consider extending their export possibilities.
Now Is the Time to Act
“Although the gas shortage appears grim for the GCC, there are both short- and long-term opportunities that GCC countries can consider to ensure an ample gas supply for their own domestic needs as they fulfill export arrangements,” commented Sarraf. To do so, stakeholders need to prioritise the suggested solutions based on the magnitude of economic and social benefits that they provide, their environmental impact as well as security of supply considerations, and the availability of supporting infrastructure. “Various stakeholders in the GCC—NOCs, regulators, and utilities—have a unique opportunity to work together and develop an integrated, GCC-wide approach. These stakeholders will have different roles to play in this process,” explained Dr. Kombargi.
The GCC gas shortage is real and likely will worsen—but there are opportunities to face the challenge both in the short and long term. The current global supply overhang provides the GCC with a prized short-term opportunity. In the long-run, various stakeholders in the GCC countries will need to take coordinated action to ensure that they are able to keep the lights on in the most economically viable way for decades to come.