Gulf countries pursue gas projects despite credit crunch

Gulf oil producers are pushing ahead with costly gas projects despite a sharp decline in their crude export earnings and tough global credit markets.

Experts said the global financial crisis could even prompt regional countries to intensify their gas projects on the grounds they ensure a stable income in the long term and a diversified economy.

There is another factor that could push the Gulf countries to step up gas projects, said George, an adviser at the Institute for International Finance (IIF).

"I believe since oil demand is receding and its growth could remain slow in the next couple of years, the Gulf governments could channel part of their planned investments in crude capacity expansions to gas ventures," he said.

In the UAE, the Abu Dhabi National Oil Company (Adnoc) is expected soon to announce an agreement with the US ConocoPhilips to develop sour gas at Shah field after a long delay because of soaring costs.

Lower costs

The recent steep fall in construction expenses because of the global financial turbulence is expected to slash the costs of that project by nearly 30 per cent.

According to Ismail Al Rumhi, Director of the Gas Treatment Section at Adnoc, the project is part of a major oil and gas capacity expansion programme and Adnoc is pressing ahead with such projects despite the global credit crisis.

"Adnoc will invite bids for oil and gas projects worth billions of dollars in the next two years… They include mainly the Shah Sour Gas project," he said.

"Adnoc expects the costs of this vital project to decline by more than 30 per cent following the drop in the prices of many commodities, construction supplies and labour costs due to the global economic crisis."

Rumhi did not specify the new costs of the project but industry sources estimated them at more than $12bn (Dh44bn).

The project had been in the pipeline for many years but was delayed because of the surge in costs. Initial costs were around $8bn.

ConocoPhilips said last month negotiations were still under way with Adnoc to implement the project.

According to the London-based Meed magazine, Front end engineering and design (Feed) for the venture will be finalised within the first quarter of 2009, paving the way for a final investment decision for the project.

ConocoPhilips said in November that a final investment decision on the development would be delayed until the Feed was completed.

The US-based Fluor Corporation is working on the Feed for Abu Dhabi Gas Industries (Gasco), the Adnoc subsidiary, which is managing the scheme. WorleyParsons is the project manager.

Adnoc launched a massive sour gas development masterplan in 2006 along with the $5bn Dolphin project, which began pumping Qatari gas into Abu Dhabi last year.

The plan is designed to narrow a widening gap between gas supply and demand caused by a 13 per cent rise in consumption because of a rapid population growth, a surge in power and desalination projects, and an increase in gas re-injection in enhanced oil recovery.

Qatar projects

Qatar, which controls the world's third largest gas resources after Russia and Iran, is also pursuing mega liquefied natural gas (LNG) projects to maintain its position as the dominant global LNG exporter.

Officials said last month all LNG projects would be completed on time and would not be affected by the global financial crisis.

Like the UAE, Qatar has also sought major foreign partners to co-finance costly gas projects.

According to the International Monetary Fund (IMF), Qatar has allocated in excess of $150bn for various projects, including nearly $100bn for LNG and other hydrocarbon ventures.

The bulk of funding would come from Qatar's oil and gas sales and foreign partners such as Exxon Mobil and Total.

"Falling oil prices have not influenced Qatar's ongoing hydrocarbon investments because of committed contracts for LNG," the IMF said.

"The global economic slowdown and the sharp decline in oil prices could weaken somewhat overall economic activity in Qatar, but the authorities pointed out that most of the hydrocarbon investments are firm and at various stages of implementation, and are unlikely to be affected because the LNG has been committed under long-term contracts

"The country's medium-term outlook is positive. Real GDP growth is projected at nearly 29 per cent in 2009, as the production of LNG and gas products is expected to almost double with the commissioning by Rasgas of two trains."

Qatar became the world's top LNG exporter in 2006 when it overtook Indonesia following the completion of some of its projects to tap its mammoth offshore North Field, the largest reservoir of non-associated gas in the world, with estimated proven reserves of around 900 trillion cubic feet.

At the end of 2008, Qatar's LNG output peaked at nearly 30 million tonnes and is expected to surge to the targeted 77 million tonnes a year by 2012.

Saudi gas

In Saudi Arabia, the government-owned Saudi Aramco said this week it had awarded a contract for the Karan gas field to J Ray McDermott.

The deal provides for the manufacture and installation of four platforms and the construction of a 110 kilometres undersea pipeline to carry the gas from the Karan field.

The gas from Karan will be processed at the onshore Khursaniyah gas plant with start-up production scheduled for the middle of 2011.

Karan will produce 1.5 billion cubic feet per day, and will process about 1.8 billion cubic feet per day.

International companies awarded concessions of more than 200,000 square kilometres in the barren Rub Al Khali (Empty Quarter) desert are also stepping up their hunt for gas but have yet to stumble across commercial quantities several years after they launched their search.

Saudi Arabia has the fourth largest gas resources in the world but most of them are associated with oil, making their separation a costly process.

Saudi situation

The kingdom's dilemma in such a situation is that it has to increase its oil production for higher gas output but is faced with crude production constraints within Opec.

In a study last week, the Riyadh-based Jadwa Investment company said Saudi Arabia's steady cuts in its oil supplies in line with Opec's agreements would hurt its gas production in the long term.

"Cuts in Saudi Arabia's oil production designed to stimulate oil prices have reached a level at which gas supply is close to falling below demand," Jadwa Investment said.

"This situation is manageable in the near term, but it highlights the long-term gas supply issue the kingdom faces.

"Gas is a vital feedstock for the petrochemical industry and power and water projects. It is estimated that if oil output falls below eight million barrels per day the kingdom may not produce enough gas to meet demand," it added.

Other GCC countries

Kuwait, where gas demand is growing fast, has been locked in a programme to develop recent findings of natural gas.

The programme goes parallel to plans to import gas from Qatar in a deal that could be signed this year.

Bahrain, which has negligible hydrocarbon deposits, is also getting gas from Qatar.

Oman has completed a $750 million project to expand the output capacity of its southern LNG plant by around 50 per cent to 10 million tonnes per year.

The country has also embarked on a drive to explore more gas while it has just started to receive natural gas from Qatar through the Dolphin pipeline via the UAE.

Reduced investment

According to the Saudi-based Arab Petroleum Investment Corporation, an affiliate of Organisation of Arab Petroleum Exporting Countries (Oapec), the global financial distress has already forced Gulf and other Arab nations to cut planned energy investments by nearly $200bn.

But it noted that upstream gas projects have not been affected.

"Against a backdrop of collapsing global growth, scarce and high cost credits and depressed oil prices, our 2009-2013 review of energy investments in the Arab world points to a significant capping of their potential," the corporation said.

"This stems from the shelving or postponement, beyond the five-year review period, of a substantial number of initially planned projects, mostly downstream oil and gas supply chains. As a result, actual capital requirements are projected at $450bn, falling short by at least 19 per cent of potential."

It said around 69 per cent of these investments are located in the six-nation GCC and over half of them are shouldered by the UAE, Saudi Arabia and Qatar.

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