The Challenge for Middle East Oil Producers – Gas

Robin Mills

A third of liquefied natural gas imports by both Asia and Europe comes from the Middle East. Gas powers the region’s domestic economies as well as boosting export earnings. But new, more difficult gas resources demand hundreds of billions of dollars of investment, and state oil companies are called on to deliver. To do so, they will have to evolve significantly out of their comfort zone. And those markets in Asia and Europe must bet that they will.

Middle East gas was initially a by-product of oil extraction, used locally in small quantities, the surplus being flared, or burned off. During the 1980s and 1990s, growing populations, rising electricity demand and expansion of petrochemicals and other industries eventually used most of this flared gas productively.

In the 2000s, the oil-fuelled economic boom caused local gas demand to soar, while investment barriers and regulated low prices held back new production. Political squabbles and unrealistic commercial expectations hampered intra-regional gas pipelines, and so several economies – Kuwait, Dubai, Egypt and Jordan – had to turn to importing LNG, sometimes from as far away as Australia. Qatar had meanwhile become the world’s largest LNG exporter based on its supergiant North Field.

Today, the region’s gas industry is entering a new phase. Outside Qatar, Iran and Iraq, the Middle East’s new resources are much more expensive to produce than its legacy fields. Governments have increased gas prices in most countries, yet they remain well below the cost of new production. Demand growth has slowed along with decelerating regional economies, but will still continue.

Like their international peers such as Shell, Total and Equinor, Middle East national “oil” companies (NOCs) are reducing their emphasis on oil and shifting to gas. Asian demand, now led by China, is soaring to clean up smoggy skies. While Europe’s long-term consumption is flat or falling, its own production is dropping faster still, meaning it needs more imports – and preferably not all from Russia.

So gas seems to have a rosier demand outlook than oil, which in the 2020s and 2030s may be increasingly challenged by electric vehicles. The globalization of the LNG business, in part pioneered by Qatar, means that gas can be delivered to more diverse and flexible markets than formerly. Almost every country with a coastline in Europe, Asia and Africa that does not export LNG, already imports it or is considering doing so.

And thus, the Middle Eastern NOCs have set ambitious targets to grow their gas businesses. Saudi Arabia wants to meet 70 percent of its power demand from gas, up from half today, and invest $150 billion over the next decade to boost gas output from 14 billion cubic feet to 23 billion cubic feet (Bcf) daily. This will require developing unconventional gas (shale and “tight” gas from low-permeability rocks), as the US has done with great success. Meanwhile, state giant Saudi Aramco is also looking beyond its shores, to the chilly Arctic where it is discussing a partnership to develop LNG in Russia.

The Abu Dhabi National Oil Company wants to make the UAE self-sufficient in gas, instead of importing from Qatar as, despite the countries’ political rift, it does currently. It will develop 1.5 Bcf per day of new “sour” gas, with a high content of the toxic, corrosive contaminant hydrogen sulphide. In partnership with Total, it too will look to unconventional gas, hoping for 1 Bcf per day by 2030. Much of this gas will go to feed its $45 billion of planned downstream investments, in petrochemicals and refining.

Oman has led the region’s unconventional gas industry. Its LNG export plant was running short of feedstock as domestic consumption rose, but BP’s development of the giant, tight Khazzan field, the world’s largest unconventional project outside North America, has given the sultanate a surplus.

Egypt has also been a turnaround story, but here it is the deep waters of the Mediterranean that has been the saviour. Eni of Italy found the giant offshore Zohr field in 2015, and the country, which started importing LNG in 2015 after being a significant exporter, has now returned to self-sufficiency.

And in April, minor oil producer Bahrain announced large finds of shale oil and gas in its shallow offshore waters, and deep tight gas, still awaiting appraisal and development.

Finally, Qatar, the only country in the region with both remaining large, low-cost gas resources and the wherewithal to develop them, is restarting its LNG growth plans. It wants to recapture its crown as the world’s biggest exporter, briefly lost to Australia, and with the US in pursuit. Boosting capacity from 77 million tonnes per year today to 110 million tonnes by 2024 may cost it on the order of $20-25 billion.

These planned investments are huge, particularly at a time of straitened budgets. The NOCs will have to step up their technical, commercial and managerial abilities significantly to make a success of these megaprojects. Some will work with international firms; others are trying to go it alone. Venturing off home turf for the first time demands them to learn new skills in the international arena.

The downstream and industrial investments are a cornerstone of diversification away from simply extracting and exporting crude oil and gas. But governments will either have to bear large implicit subsidies, or raise domestic gas prices further to cover the higher cost of these new fields. That will crimp demand and make it harder for new industry to be competitive. At the same time, solar power and even coal and nuclear are being adopted in various Middle Eastern countries, breaking gas’s near-monopoly of power generation. This will ultimately require the creation of true gas and electricity markets, as exist in North America and Europe.

The Middle East’s gas ambitions are understandable, even inevitable. The turn to more costly resources is, for most, unavoidable. But governments and state champions have to make a leap forward in performance if these plans are not to become unaffordable.

Robin Mills is CEO of Qamar Energy, and author of “The Myth of the Oil Crisis.”