Can the Middle East realize its enormous gas market potential?

October 1, 2018

Edited and Published by LNG Industry magazine, October 2018

The Middle East has the largest discovered natural gas reserves in the world, but the region has not managed to fully exploit this valuable resource and market it internationally. With the exception of Qatar, exports via pipeline and LNG are minimal, and the rapid growth in indigenous gas demand means that any increase in production is easily absorbed within the region. Discovered resources total 35.8 trillion cubic meters (Tcm) or 28% of the world’s total, but to what extent the region will be able to take advantage of this going forward is far from certain.

Production growth is led by the current top producers

While Middle Eastern gas output has thus far failed to reach the potential offered by its massive reserves, production figures from the region have in fact shown steady growth in recent years – in spite of multiple hurdles in the form of sanctions, wars and general turbulence. Back in 2010, the marketed natural gas output in the region amounted to 472 Bcm, but by 2017 it had crept up to 609 Bcm. Going forward, Rystad Energy forecasts that Middle East production will increase to 898 Bcm by 2030, which will predominantly be driven by the three largest gas producers – Iran, Qatar and Saudi Arabia.

Although sanctions were imposed on Iran up until 2016, the country has been the main driver of regional gas growth. Between 2010 and 2017, Iran added 65 Bcm to its annual production, which comprised nearly half of the region’s total increase during this period. And, unlike the country’s oil production, the steady growth in gas production is not expected to be hampered by US President Trump’s decision to withdraw from the Joint Comprehensive Plan of Action (JCPOA). Given that nearly all gas fields in Iran are owned and operated by national companies and the gas is mostly consumed domestically, the reinstated sanctions will have a limited effect on total gas production. However, one exception is Total’s South Pars (Phase 11) project. Total has delayed the development of the field pending a sanctions waiver. If the company is not granted an exemption from the sanctions, it has stated that it will pull out of the project and sell its share to the co-owner, China National Petroleum Corporation (CNPC). The startup of the field is therefore expected to be delayed until 2024. Overall, Iranian gas production is forecasted to reach 363 Bcm in 2030.

In addition, Qatar and Saudi Arabia are expected to grow their collective gas production from 200 Bcm in 2010 to 349 Bcm in 2030, with 60% of this coming from Qatar. While the combined increase in gas production from these two countries is far below the forecasted Iranian growth, it is still a significant contribution to the overall tally for the Middle East. Most of the initial growth will come from Saudi Arabia, with the startup of the Hasbah and the Haradh-Hawiyah fields, but in the longer term we see growth ramping up in Qatar as well. This is mainly owing to the removal of the moratorium on the North Field in 2017, which allows for expansions of both the Barzan and Qatargas projects among others.

Gas output in the UAE and Oman is forecasted to remain relatively stable at around 55 Bcm and 30 Bcm per year, respectively, between 2010 and 2025. However, from the mid-2020s both countries face decreasing gas production as new discoveries and developments are unable to offset the countries’ mature field decline.

Growth in domestic demand will limit the region’s potential on LNG exports

Sustained growth in domestic demand and limitations on higher production are expected to limit exports from the Middle East going forward. Total demand in the region has grown by 141 Bcm since 2010, reaching a level of 556 Bcm last year. This increase has been practically in line with the increase in production seen during the same period. Growth has been driven mainly by Iran and Saudi Arabia, which are among the top 10 gas consumers in the world. However, the region has struggled to increase supplies to its full potential, meaning that demand has been capped by the available resources.

Iran is the fourth largest consumer of natural gas in the world after the US, Russia and China. From 2010 to 2017, demand in the country grew at an average annual rate of 4.6%, reaching a total of beyond 200 Bcm last year. The strong growth was fueled by a rapid expansion of the domestic natural gas distribution network, and growth in the power, residential, industrial and petrochemical sectors. Despite a slowdown due to lower economic performance at the start of the decade, the increase in demand accelerated again after 2014, driven by gas-for-power consumption that reached an all-time high of 66 Bcm in 2017.

The Iranian economy was forecasted to grow at a rate of 4% for the next couple of years, but this could now be closer to 2% due to the reinstatement of economic sanctions (the economy grew at an average yearly rate of 2% between 2005 and 2015 when the previous set of sanctions was in place). Despite an anticipated slowdown in the economy, gas demand is expected to continue growing in line with production and reach a level of 340 Bcm by 2030. The country has invested heavily in the petrochemical sector and has widely promoted the use of compressed natural gas vehicles that will contribute to further growth in gas demand. The government is also trying to increase the share of gas in the power mix to reduce its dependency on more expensive liquid fuels.  

Saudi Arabia will see a similar situation to Iran, whereby demand will be driven by the increase in domestic production. Gas demand in the kingdom has grown at the same rate as production, leaving no spare volumes for exports. And the lack of import infrastructure (both pipeline and regasification terminals) means that Saudi Arabia cannot increase its gas consumption further even if there is a need. Demand grew 32% between 2010 and 2017, driven by consumption from the petrochemical and power sectors. Total consumption in 2017 was 91 Bcm (excluding losses and the industry’s own use), in line with production. Nevertheless, the use of crude oil to generate power to cover peak demand during summer months, which is more expensive and generates more emissions, is evidence that gas supplies have not been able to keep up with demand.

There are no concrete plans to build gas import infrastructure in Saudi Arabia, meaning that demand will be capped by domestic production going forward, reaching a level of 130 Bcm by 2030 (an increase of 43% from 2017). However, earlier this year Russian gas producer Novatek expressed an interest in building a regasification terminal in Saudi Arabia that could help boost supplies. Although the government has not communicated a clear development strategy for natural gas, it is expected that the growth in demand will be driven by the power sector, with estimates that 25 GW of gas-fired power generation could be added in the near term. Gas-fired power generation will play a crucial role in backing up the planned deployment of renewable energy, with an aim to generate 9.5 GW from renewable sources by 2030.

The United Arab Emirates (UAE) is another country that has not been able to realize gas production to its full potential. The country has the second largest gas consumption per capita in the world and needs to import around one third of its supply in order to meet the demand of 75 Bcm per year. However, demand is forecasted to drop to around 70 Bcm towards 2030 as the country looks to diversify its energy consumption away from gas.

Turkey, the fourth largest consumer in the region, will continue to rely almost entirely on imports from Russia and other countries to meet its growing gas demand.

Despite the region’s vast efforts to deploy more renewable power capacity, led by Saudi Arabia, it is unlikely that this will have a major effect on gas demand between now and 2030. Given the region’s continued high consumption of liquid fuels, any additions in solar, wind or even nuclear power capacity should be directed towards reducing liquid fuel rather than gas consumption.

Qatar to continue driving exports from the region

In contrast to its neighbors, Qatar has the potential to increase production further and regain the crown as the largest LNG exporter in the world, which Australia is set to take later this year. The emirate, with a population of less than 3 million people, has the world’s third largest discovered gas reserves, with an estimated 12.7 Tcm, and produces more than 140 Bcm per year. As a result, even with a forecasted increase in demand of around 3% per year during the next few years, the country has sufficient resources to meet its own demand and continue being one of the main suppliers of LNG in the world.

Total consumption is expected to reach 49 Bcm in 2018 and 62 Bcm by 2030. However, lifting the North Field’s moratorium will allow Qatargas to increase production from the world’s largest gas field and reach a total output of more than 200 Bcm in 2030, enabling higher LNG exports. The company has plans to build three new liquefaction trains, with a total capacity of 23.4 million tons per annum (Mtpa). This would lift the country’s total export capacity to 100 Mtpa (+30%), which is far above Australia’s capacity of 87.7 Mtpa. Qatari LNG exports already represent 85% of the region’s total exports. Rystad Energy estimates that the breakeven price for the Qatari brownfield expansion would be around $5.60 per MMBtu (including transport to Asia), making these volumes very competitive in the international market.

Exports from Iran will likely remain minimal going forward. The potential for further increases in domestic demand, the inability of foreign firms to invest in the country, and the thorny relationship with its neighbors means that there will not be enough spare capacity or infrastructure to export higher volumes. There are currently two export pipelines delivering gas to Turkey and Iraq, and total exports last year were just above 10 Bcm (compared to the 22.8 Bcm contracted). Additionally, there were three LNG export projects being considered: Pars LNG, Persian LNG and Iran LNG. However, the main investors – Shell and Total – had to pull out after the sanctions were re-imposed.

Saudi Arabia, meanwhile, has not prioritized any export projects in its development plans. Given that the country can profit more from exporting crude oil while burning gas domestically, it is unlikely to see any LNG or export pipeline developments before the country manages to reduce its use of crude oil to generate power. As previously mentioned, the country is planning to add 25 GW of gas-fired capacity that could consume more than 30 Bcm of gas per year, close to the total forecasted increase in production.

In the meantime, exports from Oman, Yemen and the UAE, which all have existing liquefaction facilities, are expected to remain flat. Oman has had healthy LNG exports of 11 Bcm per year (9% of the region’s total exports) during the last two years, but currently there are only plans to build LNG bunkering infrastructure, with no new LNG exporting facilities on the cards. In Yemen, the LNG plant has been offline for more than three years due to ongoing political conflicts, and any development plans in the country are considered unlikely. Lastly, any increase in production in the UAE will be directed to reducing the country’s large gas deficit and its dependence on Qatari imports.

Overall, we do not expect a substantial rise in exports from the region going forward. Qatar, as the only major Middle Eastern gas exporter, will continue to increase the number of LNG cargoes leaving its shore. Besides that, the region’s additional gas volumes will likely be absorbed by a continued indigenous hunger for gas.

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