Global fiscal turmoil may trigger gas crisis

The global financial turbulence has sharply depressed gas prices and this could ally with lower investment and growing domestic consumption in key producers to trigger a gas supply crisis, a prominent Arab energy analyst has warned.

While the economic upheaval has not largely affected gas demand as it has done to oil consumption, it has already forced most producers to shelve major gas projects and prompted plans by others to meet growing local demand at the expense of exports, said Nicolas Sarkis, Director-General of the Paris-based Arab Petroleum Research Centre (APRC), an independent institution that acts as advisor to the Organisation of Arab Petroleum Exporting Countries.

In an article published in the August issue of the APRC's Arab Oil and Gas magazine, Sarkis cited a recent moratorium on gas development in Qatar, the world's third largest gas power, and its growing exports to neighbouring Oman and the UAE, which, he said, could affect its exports to global markets.

"The economic recession is in the process of reshaping the landscape of the world gas industry, and this has so far had significant consequences, some of which are very visible while others remain very uncertain," he said.

"Among the former, the sharp drop in prices and demand is particularly important, whereas the latter relate mainly to costs, investment and the medium and long-term balance between supply and demand… the extent of the changes that have taken place since the about-turn of the energy markets from July 2008 onwards is well illustrated by the sharp variations in prices."

Price crash

After reaching a high of more than $13 per million Btu (British thermal unit) in the United States in mid-2008, which was more than three times the average in 2003, the price of liquefied natural gas (LNG) plunged to $3.55 per million Btu in May this year, bringing it back to its level of 10 years ago, Sarkis said.

Comparable movements have taken place in European Union (EU) countries, where natural gas prices were at $3.95 per million Btu in mid-2009, only one-third of the peak reached a year earlier.

"As far as production and consumption needs are concerned, an analysis of available data only makes sense if it goes beyond annual averages," he said.

At first sight, he added, the latest figures published by Cedigaz and other groups might suggest that, in spite of the crisis, the gas industry developed in a very positive fashion in 2008, with world output and consumption having grown by four per cent to 3,055.2 billion cubic metres.

Falling exports

As for natural gas exports, they rose by around three per cent to 936.2 billion cubic metres last year, with a 4.2 per cent increase in exports by gasline more than offsetting a 0.5 per cent dip in exports of LNG.

"That decline, which was the first since 1981, was particularly notable insofar as world LNG exports had grown at a startling seven per cent annual rate during the previous 10 years. A more in-depth analysis of the data nevertheless indicates that the development of the gas industry has been more differentiated, since production grew by more than 10 per cent in some countries in the first half of 2008, and then slumped badly from mid-2008 onwards," Sarkis said.

"In the more or less foreseeable future, the development of world demand will depend on a number of unknowns, such as the timing and speed of the global economic recovery, the price of oil, and the shifts at work in the energy mix." Citing forecasts by the International Energy Agency (IEA), the International Monetary Fund (IMF) and other sources, he said global gas demand could decline by between two and eight per cent in 2009.

"The big spread between those two figures is on a par with the uncertainties that persist. Whatever reality the future has in store for us, it is clear on the face of it that for the time being the contraction in demand induced by the recession is calming the fears about the development of supply and the approach of peak gas," said Sarkis, a veteran Arab energy analyst.

"For that reason, one might be tempted to say that it is so much the better that the fall in prices and demand is having the effect of at last dampening the tensions in the gas market and easing the concerns about the security of supply… things are not that simple, however."

Investment cut

He said that while the downturn in prices and consumption is a "godsend" for importing countries, it nevertheless has a perverse effect in the medium and long term, since it has engendered a reduction in capital investment and the deferral or cancellation of many development projects.

"That is the case above all of the countries of the Middle East and North Africa (Mena) region, which would be expected to play a major role in meeting the world's needs in the future," he said.

Sarkis referred to a recent decision by Qatar to extend a moratorium imposed in 2005 on new projects for exporting gas from the giant North Field was imposed for an initial period of three years, and was subsequently extended to 2010.

"It now seems more than likely that the moratorium will be maintained until 2013 at least," he added, in a reference to recent comments by Qatar's Ministry of Energy and Industry Abdullah bin Hamad Al Attiyah.

In an interview with Oxford Business Group early this year, Attiyah said Qatar would maintain a temporary halt to major development projects at its mammoth North gas field pending the completion of assessment of the field's resources.

"To continue to ensure the long-term, sustainable development of the country's natural resources, we will proceed with the moratorium on further projects while we assess the reserves and structure of North Field," Attiyah said.

"While the moratorium remains in effect, no development agreements will be signed until completion of a full survey of the field, which is estimated to hold nearly 900 trillion cubic feet of natural gas."

Attiyah gave no estimates of the value of projects under moratorium but according to an official Arab report, they account for nearly 37 per cent of the country's energy investment requirements during 2009-2013.

The Arab Petroleum Investment Corporation estimated (Apicorp) estimated Qatar's investment requirements in the gas, oil and other energy sectors at around $76 billion (Dh279bn) during that period, among the highest in the Middle East.

"The moratorium in place on further development of the North Field and the resulting gas export policy pause have shelved and postponed projects at around 37 per cent of potential investment capital requirements of $76bn. This translates into a project value of nearly $24.5bn," Apicorp said.

According to Sarkis, other Arab and non-Arab gas exporters in the Middle East and North Africa have joined Qatar in putting some projects on hold.

In Algeria, which controls the world's sixth largest proven gas wealth, the objective of stepping up the annual volume of natural gas exports from 63 billion cubic metres to 85 billion cubic metres, originally scheduled for 2010, has officially been put back to 2012-2013, and there is even the possibility that it might be put back further to beyond 2013.


Iran's domestic demand

Another example is Iran which, despite possessing the world's second largest natural gas reserves, remains a net gas importer.

The growth in gas exports in the coming years will be appreciably curtailed by the sharp rise in domestic needs, which have been increasing at an annual rate of 8.2 per cent in recent years and now total 112 billion cubic metres a year.

The rate of growth of domestic consumption is expected to accelerate in the coming years, including the rising needs of the petrochemical industry.

"There is also fast-growing demand for gas for reinjection into mature oil fields, with the volumes re-injected forecast to double to 100-110 billion cubic metres a year between now and 2015," Sarkis said.

"The rapid growth in Iran's internal needs is one of the factors that explain the problems with Iran's gas export contract with Turkey. The contract provided for 10 billion cubic metres of Iranian gas to be supplied to Turkey, but the actual volumes delivered since 2003 have not exceeded half that volume."


Other producers

Sarkis said the rapid increase in domestic needs is also driving down earlier export forecasts for other Mena gas producers.

In Libya, the growth in domestic demand and the few new gas fields being discovered have diminished the hopes of a rapid increase in gas exports, despite the efforts made to step up the volumes exported to Italy through the Green Stream pipeline and the expansion of the Marsa el Brega gas liquefaction plant.

"Egypt is not an exception to the rule either, since the upsurge in domestic demand, which increased by 72 per cent in the seven years from 2000 to 2007, is one of the main reasons for the imposition of a moratorium on the conclusion of new export contracts until 2010."

Sarkis's figures showed that the combined natural gas consumption of Mena countries jumped by nearly 53 per cent during 2000-2008, and "everything suggests that this trend will continue in the years to come".

"Despite the size of the region's proven natural gas reserves, Gulf countries are facing a growing gas shortage… that is the case of the UAE, Kuwait, Saudi and Oman."

He said to meet their domestic needs, these countries are turning either to neighbours such as Iran and Qatar or to more distant countries.

He warned that such developments would further reduce the export capacity of countries like Qatar and Iran towards other regions.

"In this context, the global recession is an additional factor that is driving countries with substantial gas reserves, including Russia, to reconsider their export projects," Sarkis said.


Main victim

In another study published last month, Apicorp said the Arab gas industry has been one of the main victims of the global crisis. Saudi Arabia, the world's dominant oil power, as well as Qatar, the UAE, Algeria, Egypt and Libya accounted for larger part of the shelved gas projects, which are estimated at nearly $200 billion during 2009-2013.

A breakdown showed the value of the projects put on hold in the gas downstream sector stood at $60bn while those in the oil downstream sector were estimated at $40bn.

Other projects were also shelved in the upstream and midstream oil and gas sector as well as in power generation albeit to a lesser extent.

"Our 2009-2013 review points to potentially higher capital requirements with the upside likely to be capped by the shelving of a substantial number of projects," Apicorp said in the study.

"Current trends in the credit and oil markets have combined to increased downside risks for both the Mena macroeconomic outlook, which may deteriorate substantially and the energy investment outlook whose potential is likely to be capped further," it added.

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