Gulf countries urged to allow natural gas prices to rise
Arabian Gulf countries should take advantage of current market conditions and allow natural gas prices to rise to attract investment that will be needed to meet sharply rising demand over the next couple of decades, industry experts say.
Several countries, including the UAE, have already started to roll back long-standing energy and other utility subsidies, but they have yet to address the supply side, where price caps on the amount producers receive for natural gas output has discouraged private sector investment.
The Middle East and North Africa is growing faster than any other region apart from Asia in terms of natural gas demand, Patrick Allman-Ward, chief executive of Dana Gas, the region’s largest independent oil and gas company, based in Sharjah, told the Gas Arabia Summit in Dubai.
“Energy consumption in Mena is set to double by 2040 and natural gas’s share is up a third at half the total in the last 10 years and is set to increase further”, making the Mena natural gas market nearly on a par with Europe’s and growing nearly as fast as China’s gas demand, Mr Allman-Ward said.
The region has huge gas resources – about 80 trillion cubic metres of proved reserves – but much of that is in the form of “gas caps” associated with oil reserves and will not be recoverable until the oilfields are depleted. The recoverable gas reserves are mostly located in Qatar, Iraq and Iran, and “large parts of Mena gas reserves are not accessible to private capital”, Mr Allman-Ward said.
This is a particular concern for countries like the UAE, which face a short-term gas crunch as demand outstrips domestic supply. The limited number of projects, such as Dana Gas’s Zora development off the coast of the northern Emirates, will make only a small dent in the UAE’s growing gas needs and future private investment will not be forthcoming until price caps for producers – which are around US$4 per million btu – are allowed to rise toward the prices paid to import liquefied natural gas, which is between $11 and $14 per million btu.
“The current price structures cannot be durable,” said Robin Mills, the head of Dubai-based Manaar Energy Consulting. “Abu Dhabi [has] enormous gas resources but also gas demand, especially for reinjection into oilfields. So it is facing a crunch even with sour gas [from the Al Hosn Shah gasfield] ramping up.
“This is a feature we see in almost every country in the region over the next two decades,” Mr Mills said, “and many will do well to maintain their position as gas exporters as more and more is eaten up by domestic consumption.”
There is much that countries can do in terms of changing policy to reduce subsidies and encourage investment. Already there have been initiatives to take advantage of the current worldwide slump in oil and gas prices.
Abu Dhabi, for example, raised electricity prices for consumers from January 1 to help curb consumption, and Emiratis will pay for water for the first time. The UAE energy minister, Suhail Al Mazrouei, last week said subsidies were becoming unsustainable as the cost of extracting fossil fuels rises, and lifting fuel subsidies is “just a matter of time”.
Neighbouring Oman doubled the price businesses pay for natural gas starting this month, while Kuwait removed subsidies on diesel and kerosene, although it said it would keep the price of power and petrol unchanged for now. Other measures will be needed to encourage investment in exploration.
“The huge boom in the US natural gas market is a success story of entrepreneurship,” said Uwe Salge, regional general manager of the German oil and gas services company Wintershall. This was made possible by a whole range of favourable conditions, including land ownership laws and easy access to capital.
And while there may be compelling arguments on the demand side to lift subsidies, there may be just as persuasive arguments for keeping some in place, according to David Kirsch, head of consulting at Energy Intelligence.
“We can all say that natural gas prices are too low in the GCC … but sometimes you need to look wider at the economic purpose,” Mr Kirsch said. “In Saudi Arabia, for example, the fundamental calculation is not just about power generation but about cheap energy for the petrochemicals industry and supporting jobs. That’s why subsidies in some GCC countries have a lot more political durability than in other places, like India.”
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Updated: January 14, 2015 04:00 AM