NatGas: Is Arab demand seeing a slump?

Conventional wisdom says that Middle East natural gas demand will continue to surge, reports Bloomberg.

In the 10 years through 2016, consumption rose by 25 billion cubic feet a day — much more than in both the U.S., despite its shale boom, and China. BP Plc’s 2017 energy outlook sees demand rising from 47 Bcf a day in 2015 to 73 Bcf by 2035. National oil companies and liquefied natural gas exporters are both relying on the region’s appetite to justify ambitious expansion plans. But this is about to change.

The story of how we got here can be simply told. The region’s economic boom from the early 2000s on, fueled by high oil prices, led to rapid growth, the construction of new cities and demand for air conditioning, winter heating, cooking, desalinated water and all the other accoutrements of a comfortable life.

Governments pursued energy-intensive industrialization, seeking to diversify their economies into sectors where they had a competitive advantage: petrochemicals, aluminium, steel and cement. Mindful of social pressures, they subsidized natural gas, electricity and water, leading to runaway demand and inefficiency.

At the same time, cheap gas, a byproduct of oil production, was increasingly fully utilized. Political and commercial differences derailed projects to export from Qatar’s giant North Field and the contiguous South Pars Field in Iran. Similarly, a pipeline from Egypt to Jordan, Israel and Syria was repeatedly sabotaged; it then ceased operations as Egypt ran short of gas for its own needs.

Remarkably, states in one of the world’s three most gas-rich regions began to import liquefied natural gas (LNG) by tanker: Kuwait in 2009, Dubai in 2010, Israel in 2013, Egypt and Jordan in 2015, Abu Dhabi in 2016. The city of Sharjah in the United Arab Emirates and Bahrain plan to import LNG in 2018 and 2019, respectively. Even Saudi Arabia has recently talked of LNG imports.

Every reaction, though, has its inevitable counterreaction. Gas producers and exporters eyeing the Middle East market should no longer see it as a bottomless well of demand.

The counterreaction is coming on three fronts: economics, efficiency and competition. Relatively low oil prices have led to subdued growth, even recession in places, and expatriate populations in parts of the Gulf have shrunk as state employers are told to save money. There is less money for flashy new infrastructure. The great wave of gasification in Iran has almost run its course, with even remote villages connected to the grid, so future demand isn’t being driven by new customers. Similarly new industry across the region can no longer rely on cheap gas to be viable, a contrast with the U.S., where shale is keeping prices low.

The oil and gas price downturn has made governments aware of the exorbitant cost of their subsidies. By reducing the gap between local regulated rates and international prices, it has paradoxically made them easier to reform. Iran boosted gas, electricity and fuel prices back in 2010, though inflation and sanctions have undone some of the effect. Subsequently, the U.A.E., Saudi Arabia, Oman, Bahrain, Egypt, Jordan and others have followed suit.

The elimination or reduction of subsidies is bringing energy efficiency into fashion. Profligate gas turbines, which turn only 25 percent of the fuel into electricity, are being replaced by combined-cycle plants with efficiencies of 50 percent or more. Governments across the region are introducing efficiency standards for buildings and appliances, and consumers are becoming more conscious of waste.

Higher natural gas prices and the shortage of domestic supply have led Middle East governments to turn to alternative sources. The U.A.E.’s large nuclear power program is set to begin generating soon.

On a different front, solar power, and in some places wind, is taking off, achieving world-record low prices in a region drenched in sun. With peak solar power production largely coinciding with summer air-conditioning use, this energy source could meet 20 percent of the region’s electricity demand relatively easily, without the need for costly storage. Our research suggests that Saudi Arabia could meet its 2032 electricity goals by burning less oil, and a little more gas, at about the same cost as today.

Oman, meanwhile, is using solar thermal mirrors to make steam for enhanced oil recovery, saving gas. Dubai, Turkey and Egypt, however, are turning to coal, which is carbon-intensive but cheap.

Natural gas will still have a leading role, of course: It’s relatively cheap and clean, and there’s a large installed base of users. Existing gas-based industries won’t stop working; Iran has many half-built petrochemical plants waiting for capital post-sanctions, and governments will keep pushing their diversification schemes despite the competitive challenges. Some countries will greatly boost domestic gas use — most notably Iraq, but also Lebanon, Cyprus, and, security permitting, Syria, Yemen and Libya.

But regional gas demand growth, and especially LNG imports, are going to slow a lot. Companies targeting this market need to look to the future, not the past, to guide their plans.