The Middle East faces gas shortages that will result in ongoing power cuts if low price strategy is not ended.
Cut gas subsidies or face shortages, says IEA
Fuel subsidies, a policy fixture in most Middle Eastern and North African (Mena) countries, have long been justified by the region's governments as a form of social security. Yet they are increasingly wreaking economic havoc within the very societies they were meant to protect. In a major review of gas markets this month, the International Energy Agency (IEA), the Paris-based energy adviser to 27 industrialised nations, warned that the Mena region faced gas shortages, which had intensified during the year and were likely to extend "well into the next decade". Symptoms have included frequent summer power cuts, as well as delays to major industrial and commercial developments and even some project cancellations. The region is not short of gas reserves, but production this year in most Mena countries has been inadequate to meet domestic requirements. According to the IEA, low domestic gas prices top the several factors that are holding back regional gas development, contributing to a widening gap between the supply and demand. "There are a number of reasons to be pessimistic about the situation of Mena gas production in the medium-term horizon, despite the resource wealth of a number of states in both the Gulf and North Africa," the IEA said. "Pricing remains one key constraint to new development, limiting investment incentives for foreign partners and often indirectly restricting the funds available to state-owned companies because of subsidy costs." In the UAE, Crescent Petroleum's empty natural gas import line confirms the sluggish development response to the Gulf region's soaring demand for gas. The undersea pipeline linking Iran's offshore Salman gas field to a gas-receiving terminal on Sharjah's Gulf coast was completed more than two years ago. But it has not moved any gas because the National Iranian Oil Company (Nioc) has yet to complete the commissioning of gas production facilities that it finished building this spring - about 18 months behind schedule. At the same time, Crescent, a privately held Sharjah oil and gas company, has been mired in protracted negotiations with Nioc over the price and volume of the proposed Iranian gas exports. Current UAE prices for gas produced domestically are about US$1 (Dh3.7) per million British thermal units (Btu) and $1.30 per million Btu for gas imports from Qatar. However, analysts say the Sharjah-based customers of Dana Gas, a Crescent affiliate that would distribute and market the Iranian gas, are unwilling to pay much more, leaving Crescent with little leeway to negotiate a commercially viable deal. For its part, Tehran has strongly indicated it is seeking international pricing for gas exports. Nioc officials argue that Iran's parliament will block any low-priced export contracts. Gas prices in most international markets have roughly quadrupled over the time that the Crescent pipeline has sat empty, so Nioc's asking price is now significantly higher than parties to the project originally anticipated. Iran's existing international options for selling gas are limited. Currently, it exports only to Turkey in what amounts to the transfer of gas imported from Turkmenistan. Still, Iran could in time use its Salman gas domestically, as it has repeatedly threatened to do. Earlier this year, Nioc started building a pipeline from the mid-Gulf gas field to the Iranian mainland. The reason Iran's threat to redirect Salman gas to domestic use is credible has much to do with the Islamic republic's own fuel subsidies, which are among the Middle East's most generous. Iran's low domestic gas price has been a major driver of soaring domestic consumption that has matched and even exceeded the state's recent increases in gas output, making it the world's third-largest gas user. As a result, Iran suffers chronically from power cuts. Like the UAE and some other Gulf oil producers, it sometimes diverts gas to its power sector from oilfield re-injection programmes, thereby restricting crude production. US-led sanctions against Iran over its nuclear programme, which had slowed the country's oil and gas development efforts, have merely exacerbated such underlying problems, analysts said. So far in the Mena region, Egypt and Libya were the first to try to stimulate gas development by offering improved incentives to foreign investors, the IEA reported. Both countries' governments have substantially raised purchase prices for offshore gas pumped by foreign companies under production sharing contracts. To soften the impact on its state budget, Egypt is considering a staged reduction in gas subsidies to its most energy-intensive industries. Some "marginal" Middle Eastern gas producers such as Syria and Bahrain have also started to reform domestic gas pricing in order to reduce subsidies, according to the IEA. But other Mena region governments are showing few, if any, signs of following suit. Another unintended consequence of the insufficient investment in gas development is that an estimated 1.77 trillion cubic feet of gas is being flared across the region each year, at oilfields where it is pumped as a by-product of crude production. This burning off of "waste" gas, besides harming the environment, has an obvious economic cost that the gas-strapped region can ill afford. email@example.com