Gas grouping unlikely to set prices in near future

A burgeoning grouping linking Qatar and other gas giants are not expected to reach any agreement in the near future to set prices given the complicated pricing mechanisms in gas contracts, according to an official Arab oil group.

Unlike the oil market where crude prices are determined on a daily basis, gas prices are subject to numerous considerations mostly under long-term supply contracts that could stretch up to a quarter a century, the Kuwaiti-based Organsiation of Arab Petroleum Exporting Countries (Oapec) said.

In a 30-page study on the gas market, the 11-nation Oapec said industry forces were split over whether pricing of gas could become more diverse and complicated or is heading for an oil-like price mechanism.

"It appears that the market is heading for more expanded and diversified pricing system for gas in a way that will allow sellers to achieve a balance between risks and expected return through their supply contracts. This will also allow them to diversify their customers and at the same time enable importers to diversify their supply sources within a strategy to reduce risks," said the Oapec study.

"Such developments coincide with the announcement of a new organisation grouping major gas producers similar to Opec. Despite their agreement to create this cartel, we believe that it is too early for these countries to reach an agreement on certain gas price levels or on a price system for their gas exports because of the complicated and special nature of the gas industry and market."

Qatar, Iran and Russia, which control more than 50 per cent of the world's proven gas resources, are pushing for the creation of a gas cartel, which met in Doha last month to discuss organisational issues.

Officials from Qatar and other producers have sought to reassure the market that the group would primarily aim to protect its interests rather than influence prices.

In recent press remarks, Qatar Energy Minister Abdullah Al Attiyah said the new group would not be concerned about prices on the grounds that gas is sold mostly under long-term contracts unlike oil, which is traded on the spot market.

The other participants in last month's meeting were Algeria, Libya, Nigeria, Venezuela, Equatorial Guinea, Trinidad and Tobago and Bolivia. Norway, another major gas power, attended as an observer while Saudi Arabia, which controls the world's fourth gas reserves, was absent.

According to Attiya, the UAE which controls the world's fifth gas wealth, has agreed to join the forum after attending the Doha meeting as a guest.

"Regarding the UAE joining the forum, the process is now underway. The UAE has participated in the meeting as a guest and they are planning to join as a full member of the forum," the minister said.

At their first meeting in Doha, the foreign ministers of the gas forum elected Attiyah as its chairman but they deferred the appointment of a secretary-general to their next meeting scheduled to be held in the Qatari capital in December.

Russia, Iran, Qatar, the UAE and Algeria sit atop nearly 110 trillion cubic meters of natural gas, accounting for nearly 58 per cent of the total global gas deposits of 188 trillion cubic metres, estimates by the Oapec showed.

Qatar is currently the world's leader in liquefied natural gas (LNG), with its output peaking at nearly 40 million tonnes in 2008. Production is projected to soar to nearly 77 million tonnes when mega gas projects are completed in 2012.

Prices in supply contracts by Qatar, the UAE and other LNG producers are based mainly on long-term agreements while they could also be subject to changes in short-term deals with minor gas importers.

According to the Oapec study, gas prices are determined during negotiations between producers and consumers, who take into considerations many factors including supply sources, proximity to the clients, price strategies by exporters, costs of production and transport, gas reserves, gas consumption in importers and its ratio to the total energy balance, the nature of the targeted market, the importer's policy towards diversification of energy sources and supply, the nature of the supply contract and the quality of gas – associated or non-associated.

"There are numerous pricing formulas in the gas industry. They include a fixed price through the supply contract, a price which is subject to change every year, a base price that could be agreed upon signing the contract, and a price formula, which is most common in long-term supply agreements. This type of pricing is characterised by high flexibility as it allows prices to move in line with market changes without the need for holding any periodical meetings," it said.

"Another system is based on indexation, allowing for modifying the base price in accordance with an index agreed on by the exporter and the importer.

"Theoretically, gas exporters take into account some key factors when setting prices for their gas, including the total costs of the project, profits, environmental considerations and the depletion premium, which is demanded by producers to compensate them for the depletion of their gas wealth," said the study.

The study said gas prices largely vary worldwide depending on the region, the size of reserves and other factors. But it noted that gas, like oil, is priced in US dollar.

The report said LNG projects are among the costliest ventures in the hydrocarbon industry given what it described as their complicated nature and technology.

It said the upstream stage involving extraction and production of gas accounts for 15-20 per cent of the total costs and liquefaction (downstream) for 30-45 per cent. Nearly 10-30 per cent is spent on transport and 15-25 per cent on re-converting gas to its gaseous state on delivery.

"The purpose of liquefaction is to largely reduce and compress the volume of natural gas to transport big quantities and cut shipping costs. Such a process could reduce the gas amount by 600 times and this allows for an economical transport of huge quantities of gas in one shipment," the study said.

Turning to Arab gas output, its figures showed total natural gas exports by pipelines from the region stood at nearly 50 billion cubic metres in 2007, most of which are exported by Algeria, standing at 34 billion cubic metres.

Exports by Libya were estimated at 9.2 billion while they stood at nearly 3.77 billion by Qatar, 2.35 billion by Egypt and 0.95 billion by Oman.

The figures showed Arab LNG exports totalled 150 billion cubic metres, including nearly 41 billion cubic metres by Qatar, which is pushing ahead with mega projects to nearly double those exports by 2012.

LNG exports were estimated at 24.6 billion cubic metres by Algeria, 13.6 billion by Egypt, 12.1 billion by Oman and around 7.5 billion by the UAE.

"Arab gas exports accounted for around 13.4 per cent of the total global gas supplies in 2007. This means the natural gas production by the Arab countries is still very low compared to their massive reserves," the Oapec study said.

It put the combined Arab gas reserves at 53.7 trillion cubic metres at the end of 2008, more than 30 per cent of the world's total gas wealth of 178 trillion.

Qatar controlled the largest gas resources in the Arab World and the world's biggest deposits, standing at 25.1 trillion cubic metres. It was followed by Saudi Arabia, with nearly 7.3 trillion cubic metres, the UAE with nearly 6.07 trillion cubic metres, and Algeria which has 4.5 trillion cubic metres.

The figures showed Arab gas consumption is growing fast as most regional nations are gradually switching to the cleaner source of energy in power generation and other uses as well as in setting up gas related industries.

From nearly 3.46 million barrels of oil equivalent (boe) in 2004, total Arab gas demand grew to 3.73 million boe in 2005 to 3.91 million boe in 2006, to nearly four million boe in 2007 and a record 4.3 million boe in 2008.

Saudi Arabia, the Arab World's largest economy, had the highest demand of 1.1 million boe last year while the UAE was the second largest gas consumer in the region, with around 650,000 boe. It was followed by Egypt, with a consumption of around 560,000 boe, Qatar with 510,000 boe and Algeria with 500,000 boe.

The report gave no figures on Arab gas revenue but it noted that gas prices are subject to changes in long term contracts. It showed gas prices averaged around $7.73 (Dh28.40) per one million British Thermal Unit (BTU) in Japan in 2007 while they were as high as $8.93 in the European Union. They averaged nearly $6.95 in the US, $6.17 in Canada and $6.01 in Britain.

Experts said that at an average price of $7, the price of one tonne of LNG could be around $357 since one tonne is equivalent to 51 million btu.

"At that price, Qatar could have earned in excess of $10 billion in 2007 as it produced around 30 million tonnes of LNG in 2007," an industry source said.

"By 2012, Qatar will be pumping nearly 77 million tonnes of LNG. If the average price structure in its supply contracts is $7, then it could earn more than $27 billion a year. This could exceed its oil export earnings at a crude price of $90 a barrel and production of around 800,000 bpd."


Qatar to supply 30% of global LNG in 2012

Qatar is pursuing mega gas ventures to attain its targeted output of 77 million tonnes within three years and supply 30 per cent of the world's LNG needs.

Production of LNG reached nearly 33 million tonnes in 2008 and is expected to surge to nearly 60 million tonnes in early 2010.

Heavy investments by the government-controlled Qatar Petroleum and its foreign partners in new production trains will boost output to a record 77 million tonnes by 2012 to maintain Qatar's status as the world's largest LNG supplier after overtaking Indonesia in 2007.

"This means that in 2012, we will be by far the largest LNG exporter in the world and will supply nearly 30 per cent of the global LNG needs," a Qatari official said.

Qatar embarked on one of the largest gas development projects in history in mid 1990s to tap its gigantic offshore North Field, which straddles nearly 6,000 square metres of the Qatar and Iranian waters.

The gas field is classified as the world's largest single reservoir of non-associated natural gas, with an estimated 900 trillion cubic feet at the end of 2008.

But according to Qatari Energy and Industry Minister Abdullah Al Attiya, upstream development of the field has been put on hold pending the completion of an assessment study, which industry sources believe could result in revising up the field's resources despite a massive production over the past decade.

The surge in LNG output has sharply boosted Qatar's income and allowed it to record high growth over the past few years, becoming one of the richest nations in the world.

The gas sector's share of the country's GDP also exceeded the oil sector in the third quarter of 2008 for the first time, standing at QR34.8 billion (Dh35.1bn). The oil sector was officially estimated at about QR30.6bn (Dh30.9bn).

The North Field was discovered in 1971. Its gas reserves are equivalent to nearly 162 billion barrels of oil, accounting for nearly 14 per cent of the total world reserves.

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