Gas shortage to double cost of electricity

(CRAIG SCARR)   

The cost of power generation is set to shoot up by at least 100 per cent in the next two years making electricity an even more expensive commodity, industry sources told Emirates Business.

According to a senior official, the current electricity fee will soon be unjustified to the detriment of the plant operators as the price of gas – the ideal feedstock for power generation and water desalination plants – has already been increased by tenfold in less than a decade.

“The price of electricity has not been changed for the past 10 years and with the current cost of feedstock, I don’t see power generation to be making any profit,” said Khalid Al Awadi, gas operations manager at the government-controlled Emirates General Petroleum Corporation (Emarat).

“It’s either the government subsidies electricity or it incurs losses. There is no profit on that,” he added.

He said the UAE had been reeling from a gas crunch and this situation is more likely to continue. Current gas supplies are just over two billion cubic feet per day (cfd) from Abu Dhabi National Oil Company (Adnoc), another two billion cubic feet per day from Dolphin Energy, which imports from Qatar, and around 300-500 million cfd from Dubai, Al Awadi said.

“Gas demand is expected to double over the next 10 years, but the current supply is not enough to feed the growing demand,” he added. In addition, more demand is expected from cement and fertiliser manufacturers, aluminium and steel smelters and other industrial users.

Last summer, the UAE suffered a gas shortage of about one billion cubic feet and had to use other feedstock such as crude oil and coal, said another source who did not wish to be named.

He said Abu Dhabi had diverted its associated gas, originally intended for reservoir re-injection, to its power stations resulting in a drop in oil production. This has worried some as Abu Dhabi is bound by an Opec quota. “They say it occurred for only a week. But the fact they had to divert associated gas for power stations is alarming,” he said.

In Ras Al Khaimah, some cement and ceramic manufacturers have already switched to coal imported from South Africa due to lack of gas. Some companies’ profit fell after they switched from natural gas to high-cost diesel and fuel oil to generate electricity.

“There is a real gas shortage in the UAE,” Al Awadi said. “Today, some power stations in the UAE are burning liquids even though it is the low-peak season. Dubai and Abu Dhabi are the lucky ones as they are currently being supplied by Dolphin so they are not burning any liquids. But Sharjah and the Northern Emirates have been heavily burning liquids to generate electricity.”

Liquids – which refer to diesel, medium fuel oil, LPG, crude oil or kerosene – can also be used as feedstock for power plants, but they cost more than three times the price of gas. Gas, on the other hand, is considered not only cost-efficient but also greener.

“Gas is cleaner for the machine as well as for the environment and it is more efficient,” says Al Awadi. “You need twice as much liquids to generate 1 MW of electricity and at the same time you produce twice as much carbon than when you burn gas.”

Al Awadi said Dubai is currently being supplied by “cheap gas” from Abu Dhabi, Qatar via the Dolphin Energy project and by its own fields. But this cheap supply will soon cease to flow, he added.

“Before, gas was very cheap. When Dubai and Abu Dhabi signed for the Dolphin Energy project the price was less than a dollar, around 50 cents. Today, the gas price in the region is $4.75 to $5 and no new contracts will be signed below that,” he said.

Despite the big leap, the regional benchmark of $5 is still lower than the international rate of $11-14, he added.

With the original contracted price (50 cents to $1.3), Al Awadi said Dewa’s cost of generating one kilowatt per hour (kWh) of electricity stands at Dh14, making room for a “little profit”. But once Dubai signs up for new supplies, the emirate will then have to buy the gas at triple or quadruple the current price. “With the old Dolphin price, the cost of producing electricity is less than 20 fils per kWh,” Al Awadi said. “But with additional gas from outside at $5 per mmbtu, that cost would go up to 40 fils and if they are going to use oil, that would cost 75 fils per kWh.”

Dubai can also get additional gas from Abu Dhabi’s sour gas fields, but the development of this project has been slower than expected and would nevertheless be expensive too.

The amount needed just to sweeten the gas is $4 per million British thermal units (Btu) making Abu Dhabi gas not in any way cheaper than the current benchmark. Liquids on the other hand are costlier with medium fuel oil and diesel trading at $18 and $20 per million Btu, respectively. Btu is a standard unit of measurement used to denote the amount of heat energy in fuels.

All options are therefore expensive compared to what Dubai currently pays. “There is already a very small profit from power generation plant operators during winter and no profit at all during summer,” Al Awadi said.

Despite this looming scenario for plant operators, a power or water shortage is not in sight. Dewa Managing Director and Chief Executive Officer Saeed Mohammad Al Tayer told Emirates Business they can accommodate all existing and planned projects.

“We assure you 100 per cent there is no shortage. We have sufficient capacity for water and for power,” he said. Dewa’s electricity demand is growing at 15-20 per cent, while water demand is increasing at 12 per cent every year.

“Yes, we can survive without gas,” Al Awadi said, but added the emirate will then need to burn liquids and that means more expensive feedstock and less revenue “as you can sell liquids in the international market at a high price instead of burning it in power generation and water desalination plants”.

“I don’t foresee power shortages,” another source said. “It’s just that they have to pay lot of money for electricity. I can’t see a power shortage just like what happened in Kuwait because of mismanagement. Dubai or the UAE will not let it happen.”

The main issue, however, is who is going to pay for the increased electricity cost. “With the increasing cost of labour and material in addition to rising cost of feedstock, how much is Dewa going to charge their customers?” Al Awadi said.

He added Dubai and Abu Dhabi Governments are already subsiding electricity by around 10 per cent during summer season. While in Sharjah and Northern Emirates, government subsidies have been reaching 300 per cent. “The electricity price in Sharjah and Northern Emirates is around 15 fils, but the average cost throughout the year is 70 fils, so it’s three times more. That’s because they have severe gas shortages there and they are using the much more expensive liquids,” Al Awadi said.

The gas shortage is also expected to further delay projects. The $545 million (Dh2bn) desalination plant being built by Imdad, a joint venture between the Umm Al Quwain Government and Saudi Arabia’s Al Rajhi Investment is stalled for lack of feedstock, Gulf State Newsletter said. It said Imdad has issued the tender to build the plant, and short-listed candidates, but cannot issue the contract because there is no electricity.

In Dubai, Dewa denies it has anything to do with project delays. “Developers who are claiming there is a delay because of Dewa,  are themselves the reason for delays,” Dewa’s Al Tayer said. “They are delaying the project due to their local contractors but not Dewa.”

He said Dubai can source out additional gas from other countries, most probably from Qatar. Qatar, however, has been locked up in a moratorium study and is tight-lipped on new agreements until the study is finished by next year. When asked if Dewa is keen to receive gas from the two-year delayed Iranian-UAE venture, Al Tayer said: “Gas is gas. Everybody is looking for gas.”

Dubai had a tentative deal with Dolphin to provide more gas but this is still not certain, said a source familiar with the situation.

In critical supply

With rapid population growth and economic development driving an exponential increase in the demand for water, the region’s governments are having to continuously boost supply to keep pace, according to a MEED power and water special report.