Overview of changing gas markets in the Middle East

This article is the first in a series of articles MJM Energy will produce on the Middle Eastern Natural Gas Markets.

The Middle East is a region with vast gas reserves and currently contains 40 percent of the world’s proven gas reserves . However, these reserves have not always translated into economic success for the countries of the Middle East. This article considers some of the key issues in gas development in the Middle East.

BP Statistical Review, 2009

Despite having huge gas reserves, due to limited local demand and the region’s distance from major centres of consumption (Europe, North America and Asia) these reserves are yet to have been fully utilized. Indeed in 2008 the region only contributed 12.46 percent of the world’s total gas production . However, in spite of this the Middle East is increasingly being seen as a long-term supply solution for a number of countries around the world whose natural gas import demands are growing beyond their own means of supply.

The Middle East’s export potential is starting to be realised through countries such as Qatar whom have seen economic success through the export of LNG, whilst there are a number of plans across the Middle East to see long distance pipelines supply Europe, Pakistan and India – The Nabucco Pipeline from Turkey’s eastern border to Austria is one such high profile project.

These growing demands for gas imports from the Middle East have created somewhat of a conflict of interest within the region. With domestic demands increasing combined with increasing demand for foreign imports some countries are struggling to balance the needs of meeting their own domestic market, particularly for growing power generation and desalination demand, whilst also supplying foreign markets. Indeed, despite production within the region increasing at around 4% per year this is mainly attributed to Iran and Qatar.

Increasing Power Generation demands & Consumption within the ME

Natural Gas polices among Middle Eastern countries

BP Statistical Review, 2009
Stern, J. Natural Gas in Asia, 2008
WoodMackenzie “The Future for Gas in ME” March 2008

Governments across the Middle East are certainly not unanimous in their natural gas policy. Indeed, a number of differing polices have been adopted. For example, Saudi Arabia has no plans to export gas, and instead has used gas to meet domestic demands in order to free up oil for export, which contributes heavily to domestic revenue requirements. Conversely, Qatar has used its natural gas reserves to export LNG; this is a method the Qataris have become particularly proficient at and have resultantly seen economic success.

The region’s national polices will be largely influenced by the Middle Eastern oil market which the region holds an even more dominant share of world reserves in than gas, accounting for 62 percent of the total . As seen with the examples of Iran and Saudi Arabia where the oil industry is very much the dominant domestic industry, the gas policy will often revolve around the needs and requirements of oil. Iran similarly to Saudi Arabia has used gas to release oil for export, indeed this is more economically viable and something they are more proficient at than other means of hydrocarbon exportation such as LNG. Conversely at the other end of the spectrum, countries such as Qatar who have more gas reserves than oil have focused on the export of gas – in Qatar’s case LNG.

Iran’s focus on oil through their use of gas also takes a more literal focus than just using gas to meet domestic energy needs, whereby vast amounts of gas have been re-injected into oil fields in order to maintain reservoir pressure and improve oil well recovery rates maximising the output of Iran’s oil fields. Iran is but one country that uses gas re-injection, as the graph below shows gas re-injection is growing demand in the Middle East region.

BP Statistical Review, 2009

Politics have long been influential in the Middle Eastern region’s activity, with the affects of country relations, past conflicts, UN & US trade sanctions being among some of the key factors affecting the market within the Middle East region.

Qatar’s rise to prominence in the LNG market was partly driven over concerns of security of supply in relation to question marks over Russia’s reliability as a supplier. Qatar has now provided European countries with another supply avenue, which has helped the EU states to avoid increasing their dependence on Russian imports and improve their diversity of supply.

Geopolitical issues can often hinder such cross-border projects as seen with the planned long-distance Nabucco pipeline, which has been hit by a number of setbacks. Issues of supply have delayed the £7 Billion project agreed between Turkey and four EU member states. This project will again look to ease the concerns of reliance of supply from Russia, who currently supplies a quarter of European gas demand, with a number of EU states depending almost exclusively on Russian supplies.

Similarly one of Iran’s most advanced projects the Iran-Pakistan-Indian (IPI) pipeline, also known as the ‘Peace Pipeline’, has been delayed by a number of political issues. This has mainly been due to India and Pakistan failing to meet price demands from Iran, whilst recent strained relations between Pakistan and India and fierce opposition of the project from the US government have not helped negotiations. Interestingly the Asian Development Bank has stated they believe the deal to be feasible. Though this in contrast to many observers who have stated their belief that the project is at best optimistic.

Political issues can often interfere with supply of gas as well, famously Russia cut off supply to Ukraine over price and debt issues, whilst Iran also turned off supply pipelines to Turkey in order to meet increased domestic supply over a short periods.

As stated earlier the Middle Eastern Region makes up for 40% of the world’s proven gas reserves, this equates to 76.91 TCM of gas. These gas reserves are unevenly distributed across the Middle East, Iran and Qatar dominating the world standings with the 2nd and 3rd highest gas reserves and thus heavily contributing to the region’s vast reserves. The main reason behind this is due to the two countries sharing the single largest gas field in the world – referred to as North Field in Qatar and South Pars in Iran - which holds an estimated 40 TCM of gas, accounting for 55% of the region’s total reserves. Qatar has utilized North Field to export large amounts of LNG, whilst Iran has mainly used it to meet domestic consumption and oil re-injection requirements. However, they also plan to use it for the export of gas through pipeline and LNG.

Conversely, other countries such as Bahrain, Oman and Syria have much more limited gas reserves compared with others in the region due to increasing domestic demands, and will become increasingly reliant on imports in the future.

Source: Facts Global Energy

LNG Trade

The gas reserves within the Middle East have often in the past been described as ‘stranded‘, this was due to large quantities of gas reserves exceeding the requirements of domestic markets, and at that time the price of natural gas making development of long distance pipelines or LNG developments economical infeasible. Political insecurities and conflicts within the region further postponed planned developments; this instability within the region served as a reminder to potential investors and buyers of the security of supply issues associated with the purchase of commodities from the Middle East.

However, more recently these past issues have been put to one side, as global gas prices have risen and LNG production costs have fallen, and LNG has become a key means of targeting long distance markets such as US, Europe and Asia. Demand among these target markets has gradually grown, whilst their own indigenous reserves have become further depleted, creating a great demand for gas in particular as countries have looked to diversify away from dependence on imported oil. Countries such as Japan and Korea in particular fit this profile described above where by they have very limited natural reserves themselves and are too far from supply sources to be supplied through long distance pipelines and thus LNG becomes one of very few feasible fuel supplies.

This scenario has led to LNG being a price setter across these markets of high demand as they seek to secure a certain level of security supply, the Middle East is now has the opportunity to cash in on these demands.

One such country that has taken this opportunity is Qatar, one of the leading exponents of LNG technologies not just within the Middle East but also the world. Utilizing reserves from the North Field gas basin Qatar has become the world’s leading LNG exporter. In, 2005 Qatar exported 28 Bcm of LNG and currently has an annual liquefaction capacity of 30.7 mtpa (1.5 Tcf); this is the highest in the world. Qatar has taken an innovative approach to demand diversity, looking for markets all round the world, in some cases selling LNG below market prices to encourage market development as in India, and investing in downstream regasification capacity in the UK, Italy and the USA, to secure access to downstream gas markets. Besides Qatar, Oman and UAE contribute to LNG exports from the region but on a much smaller scale. Qatar is becoming a major player in world gas. It remains to be seen whether any of its neighbours will manage to emulate its success.

LNG Export Capacity in the Middle East

(Source: Flower, A. 2009: Natural Gas from the Middle East)