New challenges of Arab gas industry
Beirut - The record rise of domestic power consumption in Arab oil-producing countries poses a new challenge to the regional natural gas industry.
Electricity demand is increasing by about 10% a year, one of the highest rates globally. State-owned oil companies are under increasing pressure to meet rising local power demand as well as to retain market share in global gas markets. The problem confronting the state-owned companies lies in large subsidies to electricity pricing. Low power prices encourage irrational consumption but do not necessarily assist lower-income groups. In fact the subsidies are more helpful to middle- and high-income households.
Saudi gas to meet local demand
Saudi Aramco, the world’s largest oil company, expects to invest $100 billion in natural gas projects over the next ten years to phase out direct burning of oil products in power plants, according to Chief Executive Officer Amin Nasser, speaking in a Climate Change Forum in Paris in mid-October. Saudi Arabia plans to utilise all its gas resources domestically to meet rising local consumption. Riyadh has no plans to export gas.
Saudi Arabia peak power plants usage is during summer months, when air conditioning is used 24/7 consuming about 900,000 barrels of oil per day (bdp), approximately 10% of the country’s oil production. Riyadh wants to replace burning crude oil with natural gas so it can export more oil. Plans call for gas to be used as the main fuel for newly constructed power stations.
The major challenges encountered by Saudi oil authorities is to discover new gas reserves, guide domestic consumers to rationalise the use of energy and substitute gas for petroleum products in power and water desalination plants and the petrochemical industry. The goal is to allocate as much crude oil for exports as possible, retaining the country’s leading role in global markets. Along with these tasks, Saudi Aramco is increasing oil production capacity from 10 million bpd to 12.5 million bpd.
Qatar local power consumption increases 10% annually
Qatar’s North Field, with its 25 trillion cubic metres (tcm) of reserves, is the world’s largest offshore gas field. Qatar is working with major international oil firms to build a large gas-fed energy industry using North Field gas. Among its partners are Exxon Mobil, Shell and Total.
State-owned Qatar Petroleum (QP) possesses the world’s largest liquefied natural gas (LNG) capacity, with 77 million tons per year. QP is also meeting rising local power and water consumption as power demand increased from 28.14 terrawatt-hours (TWh) in 2010 to 38.69 TWh in 2014, a rise of about 10% annually. Qatar’s desalinated water consumption increased from 374 million cubic metres in 2010 to around 495 million cubic metres in 2014, an annual rise of 6.8%.
QP is dealing with two challenges: First, increasing global LNG supplies, (US shale gas, Australia and offshore East Africa). These new export supplies are projected to enter the market early in the next decade. QP has to readjust its commercial strategy as new exports are expected to pose challenges in US and East Asian markets, the markets that Qatar had targeted for LNG exports. Second, rising domestic power and water consumption.
Qatar may be better positioned than its neighbouring states with its gas reserves. Rising domestic gas consumption has not gone unnoticed. Gas production amounted to 202.7 billion cubic metres (bcm) in 2014. Of that amount, 158.3 bcm was exported and domestic consumption was 41 bcm.
Algeria’s rising domestic consumption caps future gas export growth
Algeria’s state-owned Sonatrach started exporting gas more than 50 years ago. Gas reserves are estimated at around 4,500 bcm, the 10th biggest reserves in the world. Domestic demand has posted sharp growth in recent years, limiting exports to 50 bcm-60 bcm.
According to the International Energy Agency (IEA), Algerian gas exports are not expected to exceed 60 bcm by 2022. With a high-end domestic demand scenario, they could even be lower than 50 bcm. This makes it necessary to rationalise domestic energy demand and for Sonatrach to allocate larger gas supplies to the domestic market, according to Sonatrach’s former director for Marketing Mustapha Faid.
Subsidies for domestic energy products are exceptionally high in Algeria. The gas price sold to the power and domestic sectors was $0.44 per million British thermal units (MMBtu) in 2014, one of the lowest in the world. It is $0.91 per MMBtu for the industrial sector, compared to the export price of $11-$12 per MMBtu in 2013-14, and $6-$7 MMBtu at present.
The annual record rise of power consumption in Arab oil-producing countries makes it imperative for all the regional state-owned oil firms to meet the challenge, providing sufficient and stable gas supplies to the local power stations. Failure to do so leads to frequent power cuts, a phenomenon familiar in several Arab countries. The responsibility to meet this challenge requires taking necessary measures by state-owned oil firms, the power companies and governments.
Oil firms need to find more gas, dedicating a large part of reserves to local markets. State-owned electricity companies have to modernise power systems with a larger role played by private firms, either in generating power, delivering it or collecting tariffs through more technically advanced systems. Governments are called upon to review the subsidies for electricity prices.
A policy review should be undertaken in oil-producing countries addressing the following questions: Which social group benefits most from subsidies? What is the effect of low power prices on the country’s investments in renewable energies? Are low power prices aiding local industry to be more competitive?