New challenges of Arab gas industry

Friday 30/10/2015
A BP worker at the Tiguentourine Gas Plant in In Amenas, 1600 kilometres south-east of Algiers, on January 31, 2013.

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.

Gas pricing

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?