OPEC is discussing this week how to react to falling demand for its crude oil and – as Gerald Butt explains – MENA governments will soon have to react to declining appetite for the region’s natural gas exports.
MENA states with their own natural gas resources, on the face of it, are sitting pretty. The world’s demand for gas, as an environmentally friendlier substitute to oil, has been increasing for several years. But closer scrutiny reveals that the picture is not so rosy: significant new production is coming on-line elsewhere, pricing is becoming more competitive and a steady rise in MENA domestic demand is cutting the gas the volumes available for export.
Without the lifting of subsidies on utilities, natural gas demand in the region will keep on rising. Already, several MENA gas exporters are in the extraordinary position of having to import additional gas for domestic consumption. The only states exporting gas without needing to do this are Qatar, Algeria, Libya and Yemen. At least 14 MENA countries are either importing natural gas or seeking to do so.
Qatar, the third largest natural gas producer behind the US and Russia, remains the dominant MENA exporter, accounting for 87% share of the region’s output. The emirate also exports gas via a pipeline (the Dolphin project) to the UAE and Oman.
But overshadowing Qatar’s prospects is increasing competition for LNG export markets (particularly in Asia, which accounts for some 63% of Qatari LNG sales), and weakening demand in Europe. Australia is expecting to overtake Qatar in total LNG output by 2020, with Australian exporters seeking nearby Asian customers; and North American LNG production is also set to exceed Qatar’s – by 2030 at the latest. At the same time, Europe’s total LNG imports in 2013 declined by 27% over 2012 as a result of the recession.
Most of Qatar’s exports are tied into long-term fixed contracts which could become uncompetitive as increased volumes of LNG enter the market and delivery costs to Asia from Australia and the US fall. The trend is towards greater volumes being sold on the spot market, short-term contracts, reduced take-or-pay terms and a shift away from pure oil-indexed pricing. These trends are symptoms of a more competitive buyer’s market in which LNG producers, including Qatar, will struggle to secure their share.
Elsewhere, in Algeria, the second biggest MENA exporter, LNG production was less than half of capacity last year, reflecting both a decline in natural gas production and the European demand slump. Egypt, once a net gas exporter, is urgently seeking imports, with all its own gas today being diverted to meet domestic needs. Egypt’s two LNG export projects are closed, as is the Arab Gas Pipeline to Jordan and Syria. Libya’s sole LNG plant was shut during the 2011 uprising, and pipeline exports to Europe are down by about a half.
Oman’s LNG production has remained steady at around 80% of capacity. Oman faces similar challenges on domestic power and water demand growth as its Gulf neighbours but should continue to meet its LNG contracts over the medium term, while seeking to increase gas imports via the Dolphin pipeline from Qatar or through LNG imports.
The UAE, too, is both an exporter and importer of gas. Facing soaring demand for electricity and desalinated water, the Emirates are seeking additional imports to supplement domestic production and pipeline supplies from Qatar.
Iran shares the Gulf’s vast offshore North field (South Pars) with Qatar. But the development of this field and others has been delayed by sanctions and by the poor performance of Iranian contractors. So today Iran, too, both imports and exports gas. Iraq produces huge volumes of gas associated with oil production, but lacks the facilities to process more than a small part of it, leading to extensive flaring. Plans to develop export-focused gas fields have been delayed by Sunni unrest in the west of the country and the subsequent Islamic State surge.
In the meantime, Kuwait and Bahrain continue to seek gas supplies, as do most non-energy states like Jordan and Lebanon. Oil giant Saudi Arabia is self-sufficient in gas thus far, but largely reliant on associated gas from its oil output – forcing the kingdom to maintain relatively high oil production. So Saudi Arabia, too, may in the future have to import gas, to free up more oil for exports and reduce the burning of oil during peak summer demand periods.
All this means that when Middle East energy ministers return from OPEC it won’t just be the future prospects for oil that’s on their minds.
Gerald Butt, a former BBC Middle East correspondent, is an analyst and author on the region.