By Neil Partrick
Sunday, March 30, 2008
DUBAI: According to BP’s latest “Statistical Review of World Energy,” Iran and Qatar sit on 30 percent of the world’s total natural gas reserves.
Yet within the Gulf, the ability to meet the growing local demand for natural gas is being frustrated by underdeveloped supply mechanisms and limited regional cooperation.
The state-dominated Qatari gas provider, QatarGas, aims to be the world’s largest producer of liquefied natural gas, LNG, by 2010. But concentrating on securing the most favorable terms for its gas exports internationally, it has given top priority to supplying Europe, the United States and Asia, rather than its Gulf neighbors.
In 2006 a joint venture between Qatar and Exxon Mobil awarded a $4 billion contract to Japanese and French companies to build a liquefaction plant to supply the U.S. market.
Meanwhile, although there are plans for Qatar to supply a proposed inter-Gulf natural gas network, this is limited to just one undersea pipeline, connecting to the United Arab Emirates.
This so-called Dolphin pipeline, inaugurated in 2005 and majority-owned by the United Arab Emirates, pipes 2 billion cubic feet, or 57 million cubic meters, of natural gas a day from Qatar to Abu Dhabi, one of the seven emirates of the United Arab Emirates. Tenders have recently been sought for an extension of the pipeline to Al Fujayrah, another emirate, while Oman, is also supposed to be linked to the Dolphin network next year.
But Dolphin, while adhering to its contractual obligations, is supplying gas at levels far below the emirates’ fast-growing needs, and a moratorium on additional extraction from Qatar’s huge North Field has been extended to at least 2011, preventing any increase in volumes from passing through the Dolphin network until at least that date.
Projections of future demand indicate that the natural gas needs of the emirates will double by 2015 from 5 billion cubic feet a day now, and could reach 15 billion cubic feet a day by 2020, Khalid al-Awadi, gas operations manager at Emirates General Petroleum, was quoted as saying last month by The Middle East Economic Survey, a weekly publication.
The emirates themselves produce gas in volumes comparable to Qatar, but much of the output is associated with oil production and is therefore constrained by oil output quotas imposed by the Organization of Petroleum Exporting Countries. If oil prices weaken, the Organization of Petroleum Exporting Countries could agree to lower quotas, which would automatically reduce the emirates’ natural gas output.
Unable to gain access to gas from Qatar or Iran, the northern emirates of Ras al Khaymah and Al Fujayrah have been obliged to import diesel and coal to meet their power generation needs, said Simon Williams, a senior economist with HSBC in Dubai.
“Demand has accelerated more quickly than anticipated and additions to supply have fallen behind,” he said. “They’ve had little option but to look to alternative sources of energy supply. The irony of the Gulf importing hydrocarbon energy is not lost on anyone.”
Seeking to expand its production of nonassociated natural gas – natural gas from reservoirs without crude oil – as a feedstock for its expanding petrochemical industry, Saudi Arabia in 2003 and 2004 awarded exploration and development contracts in the Empty Quarter to joint ventures between the Saudi oil company Aramco and foreign companies including Total, Royal Dutch Shell, Lukoil, Sinopec, Eni and Repsol. But so far the search there has produced no commercial discoveries, and Total pulled out in frustration in February. The deadline for the current phase of exploration is January 2009, and it is unclear if the international oil companies will renew their commitment after that.
The complexities of the region’s gas supply equation are well illustrated by the case of Kuwait, which, like the United Arab Emirates, produces gas almost exclusively as an associated byproduct of oil, and which hopes to start receiving LNG from Qatar in mid-2009 after negotiations that have dragged along since the mid 1990s.
A discovery of nonassociated natural gas was made in 2006, and production was expected to start in December last year; but the inexperience of the state oil company, Kuwait Oil, in nonassociated natural gas production is stalling the project, according to the industry journal Oil and Gas Engineer.
Kuwait’s government is “laying strong emphasis on the need to import gas in the short term,” according to Laura James of the Economist Intelligence Unit, “to tide over the power sector until gas production can be boosted.”
Kuwait has an existing deal to buy gas from Iraq. But that, like a United Arab Emirates’ proposal to tie Iraq and Iran into a regional supply network, seems unlikely to take off without major foreign investment to Iraq’s crude and associated gas sector. Speaking at a Middle East gas conference, John Roberts, an energy specialist at Platts, described the contribution that Iraq’s gas sector could make to easing Gulf gas shortages as strictly an issue for the “long term.”
Even with foreign investment, Iraq’s gas export potential would be limited by rising domestic demand, said Rajnish Goswami of the energy consultancy Wood Mackenzie.
How much liquefied natural gas Kuwait will be able to buy from Qatar remains unclear, but the volume is unlikely to meet its expanding needs. Its efforts to pipe in gas from Qatar have been thwarted for years by Saudi Arabia, which asserted that the pipeline would cross its maritime waters.
Political relations between Qatar and Saudi Arabia have been sour for more than a decade, reflecting a range of foreign policy differences and supposed Saudi support for a deposed Qatari emir. But as wider regional tensions have risen, fellow member countries of the Gulf Cooperation Council have tried to mend the relationship. In December, the Saudi ruler, King Abdullah, attended a council summit meeting in Doha, the Qatari capital, but it remains to be seen if relations have improved to the point where the Kuwait pipeline may go ahead.
Blocked in its efforts to buy from Qatar, Kuwait has looked also to Iran to meet its domestic energy needs. A deal with Iran dating to 2005 was supposed to supply piped gas at double the rate envisaged for the first phase of Kuwait’s own nonassociated natural gas program. But like many of Iran’s external gas supply commitments, it has failed to materialize.
Iran has rich sources of nonassociated as well as associated natural gas and is keen to expand sales both to the region and internationally. But three decades of underinvestment, combined with an internal political fight over its own domestic needs and the U.S.-led campaign against trade and investment in Iran, have limited its export potential.
Iran has signed multiple supply deals with its regional neighbors. Most recently, after a visit by President Mahmoud Ahmadinejad to Bahrain last year, Bahrain predicted in February that an agreement to buy 1 million cubic feet of Iranian gas a day – almost as much as Bahrain produces domestically – would be in place by the end of this year.
But such deals do not automatically equal supply. In December, Iran’s limited ability to meet export commitments was underscored when arguments over pricing curtailed imports from Turkmenistan that were needed for electricity generation in northern Iran, while Iranian exports to Turkey were held back to meet domestic energy demand during a harsh winter.
Iranian crude oil output also suffered from the halt in Turkmen gas imports after Ayatollah Ali Khamenei, Iran’s supreme religious leader, authorized some Iranian gas output to be switched from reinjection to meet energy needs in the north of the country.
“Gas is essential for injection in Iran’s oil fields, not just to expand production capacity, but also to maintain it at current levels,” said Peter Wells, a director of Neftex Petroleum Consultants.
Iran is now importing gas from Azerbaijan to make up the shortage of supply from Turkmenistan.
Iran’s domestic natural gas supply network provides low-cost gas for much of the country’s housing. The Iranian government says it has reduced gasoline consumption by more than half by rationing vehicle fuel in the summer. But rationing heating or cooking fuel or reducing the domestic gas supply would be a much trickier political gamble.
Heavy subsidies for domestic gasoline and natural gas use would need to be cut to switch supplies from domestic use to lucrative export markets. But Iran’s highly factionalized political system makes that difficult.
Any attempt to increase the domestic gas price “becomes difficult,” Wells said, “given the objections of those who say that this will hurt the poor.”
Iran’s energy minister, Gholam-Hossein Nozari, enjoys the support of the Iranian Parliament, where support for gas reinjection and suspicion of natural gas exports run high.
Some Iranian lawmakers favor the “strategic diplomacy” of deals with neighbors and, more ambitiously, the completion of talks with international energy companies for the development of gas liquefaction facilities at the North Pars field. But the head of the energy committee, Kamal Daneshyar, has argued in parliamentary debates that Iranian gas reserves are running low and must be safeguarded.
Despite the supply shortage, and the political feuding, some export pipeline construction is under way.
One plan is intended to supply 600 million cubic feet of gas to the United Arab Emirates through Sharjah. The Iranian section of this pipeline has been completed, but it is not yet connected to the Mubarak platform in Sharjah.
Another, more ambitious plan, the so-called peace pipeline is intended to supply Pakistan with 2.2 billion cubic feet a day by 2012 and later to reach India. But pressure by the United States on India could prevent it from joining the project.
Meanwhile, speculation has been circulating in the United Arab Emirates that the Abu Dhabi energy company Taqa might agree to Iran’s building a separate pipeline to supply gas to the emirates.
The infrastructure for such a project is not in place, however, and U.S. objections would almost certainly prevent it.
In theory, foreign investment could unlock additional gas for liquefaction projects and circumvent the Iranian domestic energy debate. But with U.S. pressure for international sanctions severely limiting financial transactions with Iran in both euros and dollars, and with the possibility of a U.S.-Iranian military conflict in the background, Western energy companies are resisting the increasingly insistent Iranian demands that they should commit to financing agreed-on liquefied natural gas projects.
As a result, involvement by international energy companies is likely to remain stalled.
Unless Iran can surmount its internal and external constraints, or the Gulf states set a higher priority on regional gas cooperation, domestic energy shortfalls in much of the region can only continue to rise.
Gulf states, including the emirates, are turning to renewable and nuclear power to build energy self-reliance, and that trend can only increase if gas cooperation remains elusive.
Neil Partrick is a Gulf regional analyst based in Dubai.
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