Overlooked resource: why the energy-rich Gulf faces a gas shortage

Overlooked resource: why the energy-rich Gulf faces a gas shortage

By Andrew England

Published: May 25 2008 19:27 | Last updated: May 25 2008 19:27

To one senior oil industry official, “it’s a fascinating and somewhat bizarre phenomenon”. To another it simply “looks a bit weird”. But for Middle East states, the dynamic the two are describing is deadly serious – the globe’s most hydrocarbon-rich region is facing the prospect of critical shortages of gas.

Some analysts estimate that the cumulative supply shortfall for the six countries of the Gulf Co-operation Council up to 2015 will reach at least 7,000bn cubic feet. To put the number into perspective, according to BP the UK’s entire remaining proven gas reserves total just under 17,000bn cu ft. “There is a Middle East regional gas crisis brewing,” says Rajnish Goswami at Wood Mackenzie, the Edinburgh-based energy consultancy.

Gas shortages in the Middle East could also have big implications globally, impacting future regional projects aiming to meet demand elsewhere. Countries increasing the amount of oil fuels they use for power generation could also affect future exports.

Of the GCC states – Saudi Arabia, Kuwait, Qatar, Bahrain, Oman and the United Arab Emirates – only Qatar, which has the world’s third largest gas reserves, can avoid a problem that will hamper the development of their economies and their ability to create jobs, experts say.

Gas is the main feedstock for petrochemicals and energy-intensive industries such as aluminium and fertilisers as well as its use in power generation – not least for the desalination plants that provide water in the desert. The GCC countries have some of the world’s fastest growth rates for electricity demand, estimated at 6-12 per cent annually, compared with demand increases in developed countries of only around 2-4 per cent a year.

With the region’s focus historically centred on oil production, gas has been seen there as financially less attractive. But today – driven by record oil prices – their economies are expanding rapidly and governments are seeking to use their petrodollars to upgrade infrastructure and boost industry. With gas a key ingredient in achieving those aims, countries are faced with trying to reverse decades of underinvestment in the sector.

Difficulties they have to overcome include extracting the various types of gas found in the region – some of it “sour” gas, which is both lethal and corrosive – and deciding which downstream industries get priority in how it is used.

Gulf gas chart

Saudi Arabia, home to the world’s largest proven oil reserves, is estimated to have about $30bn (£15bn, €19bn) of investment planned to develop energy- and gas-intensive industries over the next five years. But the Saudi petroleum ministry is adopting a policy of approving gas supplies to new petrochemical projects aimed at ensuring they either produce a product not already being manufactured in Saudi Arabia or increase added value by going further downstream than others.

It is examining planned energy-intensive projects “within the context of national and international economies taking into account the value-added they bring for Saudi Arabia,” says a Gulf official. “The reason is, of course, they want to take advantage. Everybody wants to come – and we told them, ‘no gas unless you give Saudi Arabia a really good product’.”

“There is enough gas but the problem is it’s cheap and everybody wants to use it. The petrochemicals people, the desalination people, everybody – and Saudi Arabia has to expand.”

Experts say Saudi Arabia already has a queue of projects that have been unable to secure gas resources, including aluminium and petrochemicals developments. This is in spite of what one Saudi economist estimates has been a doubling in volume production of Saudi gas since 1990.

The government has been encouraged by discoveries in the Karan field – its first offshore gas discovery – but the size of the reserves is not yet known. In an effort to get more gas on tap, the kingdom awarded international companies exploration blocs to explore for gas not associated with oil in the Empty Quarter in 2003 and 2004, outside the area reserved for Saudi Aramco, the national oil company. But, so far, no discoveries have been made and this year Total of France pulled out of the project, selling its stake to Royal Dutch Shell and Aramco. Total had drilled three exploration wells but the results were disappointing, causing it to conclude the potential for commercial discoveries was low.

The Saudi economist says the kingdom may even have to think the unthinkable and consider importing gas in the future, even though it has the world’s fourth largest proven gas reserves. “In the long run we have to find more gas,” the economist says. “Unless the gas ventures in the Empty Quarter get some gas, then maybe supply might not come to satisfy growth in demand.”

The issue worries Mohamed al-Mady, chief executive officer of Sabic, the Saudi group that is one of the world’s largest petrochemicals companies. He says Sabic has gas for its current projects but “our concern is really the future”. When asked how far away that future is, he says: “Well, it’s now.”

“The Middle East has been relying too much on oil, and gas discovery has been ignored for a long time”, Mr Mady adds. “In my opinion, there is no balanced utilisation of gas. The gas can go either to smelting, to iron ore, to power, to water, to petrochemicals – and how do you allocate the gas to these various things? It can be very, very important down the road.”

Elsewhere in the region, Oman is “talking very seriously about building a coal-fired power plant”, one analyst says in illustrating the acute nature of the problem. The UAE already uses liquids for power generation at peak load times. Kuwait, meanwhile, is burning about 160,000 barrels of liquids – crude or diesel – a day for power generation, according to an international oil executive, and is looking to import from Qatar.

The impact of using fuel oils ranges from environmental consequences to an additional financial burden, largely due to the opportunity cost of not exporting oil products. Significant sources of gas could be available in both Qatar and Iran. But Qatar has put a moratorium on future projects for its North Field, the world’s largest reservoir of pure gas, until 2010 and observers expect any new projects to be delayed until at least 2012. Sanctions-bound Iran is an unlikely supplier in the immediate future because of global and regional politics.

“That’s why the situation in the rest of the region is pretty dire – ensuring adequate energy supplies for domestic growth is a top priority,” says Mr Goswami at Wood Mackenzie. “However, country-level challenges differ. For Kuwait, a near-term shortfall in power generation capacity could be likely. In Oman, proposed gas-based industrial expansion is likely to suffer. In the UAE, the gas supply situation is very serious; rapid growth in power demand means nuclear power is being looked at as an option.”

UAE authorities have concluded that national peak electricity demand will rise to more than 40,000MW by 2020. But they estimate that known volumes of natural gas that could be made available for electricity would provide adequate fuel for only 20,000-25,000MW by 2020. The government announced this year that it would embark on a civilian nuclear programme.

Gulf countries are exploring for more gas – particularly non-associated gas – but that is no easy process given current worldwide shortages of exploration equipment and engineers. They have the money to overcome this but, even so, the lead time from discovering a deposit to gas coming on line is at least five years, experts say.

Much of the region’s gas is also regarded as difficult to extract – either sour or “tight” gas with geological complications. This increases costs and ties up equipment. It is a factor that Abu Dhabi, which produces nearly all the UAE’s hydrocarbons, discovered as it sought to develop two sour gas fields in a project the federation hoped would allow large-scale investment in energy-intensive industries.

Officials had put the development of the Bab and Shah fields out to a joint tender but the technical challenges meant the authorities later decided to re-tender just for Shah, which is less complex and has higher liquid yields, analysts say. Abu Dhabi’s reserves include some of the sourest gas in the world, which requires the latest technology to handle.

In spite of having the world’s fifth largest proven gas reserves, the UAE is already importing from Qatar through the so-called Dolphin project, which went online last year. But the emirates’ government has still to reach an agreement with Qatar to boost supply by 60 per cent to reach the pipeline’s capacity. With the moratorium in place on its North Field, it is uncertain whether Qatar will agree to the increase.

In Kuwait, after the state oil company made its first discovery of non-associated gas, production will begin, says Jamal Alnouri, managing director of planning at Kuwait Petroleum Corporation. KPC intends output to reach 1bn cu ft a day by 2015. But as gas production is new to Kuwait, officials acknowledge that it will be difficult for KPC to reach its targets without help from international companies. Kuwait’s parliament has consistently opposed awarding foreign groups anything other than service contracts.

Initial output is to be barely one-sixth of the 2015 target. “For the scale that so far we are considering, we are not disturbing the reserves too much,” says Mr Alnouri. “It will help us plan our way forward – our current knowledge takes us this far.” He adds: “When you really get to large exploitation of the reserve, you have to be careful ... and of course if you do it alone you will take a longer time.”

KPC is hoping to bring international groups into the gas projects even though the political environment will restrict their level of involvement. Steve Peacock, president of BP Middle East and South Asia, says the entire region will require technical support of international oil companies if nations are to take advantage of potential resources. “There’s plenty of resources – that’s not the issue. The issue is technology challenges, cost challenges and geopolitical challenges,” Mr Peacock says.

BP looked at the Empty Quarter venture in Saudi Arabia and decided there was too much geological risk attached to that project. But it won a bid last year to develop tight gas in Oman and Mr Peacock says BP would be interested in opportunities in Saudi Arabia. But governments in the region would have to offer decent terms to convince majors to invest.

The key to a successful partnership between the government, its national oil company and international energy groups “is making sure that the relationship is tuned correctly”, Mr Peacock says. If the foreign partner is to “bring large amounts of capital, proprietary technology and expertise from other parts of world to address something like extremely sour gas, with long-lasting mutual benefits, then the reward should recognise the role [it] plays.”