Priyanka Khemka, Nexant, USA, looks at the key trends and challenges in the Middle East fertilizer market.
Given the country’s mounting LNG import track record over the past several years, it’s unsurprising that the topic of shale gas in the Middle East has attracted considerable interest from companies operating in countries with limited conventional resources, as well as for countries with plentiful conventional resources that are costly to develop. Together, Jordan, Oman, and the UAE are estimated by Advanced Resources International (for the Energy Information Administration) to host over 7.3 trillion m3 of wet technically recoverable shale gas resources, whereas third-party estimates for Saudi Arabia are in the neighborhood of almost 17 trillion m3 or more. However, the costs of shale gas production must be weighed against the supply alternatives. If pipeline or LNG imports can be procured more cheaply, and promote intra-regional trade and good-will into the bargain, this is a compelling option indeed. On the other hand, a concentrated focus on higher domestic gas output may prove more attractive in the long run. Several Middle East countries have domestic gas pricing regimes that are very attractive to consumers (owing to the presence of subsidies), which is an obstacle for gas-focused production programs. However, in the medium to long-term, gradual removal of price subsidies may provide incentives for increased gas production. This would also facilitate the imports of market-priced LNG and pipeline gas supplies.
For Middle East countries with both plentiful conventional gas reserves and high shale gas resource potential, however, the latter might not occupy a prominent role in the future gas supply mix. Producers with easily-accessible and cost-competitive conventional deposits may prefer to exploit these reserves instead of embarking on costly shale gas exploration endeavours that may or may not be successful.
Nitrogen fertilizer outlook
The Middle East is one of the largest producers of nitrogen fertilizers in the world, with an estimated ammonia production of close to 17 million t and urea production of 22 million t in 2016. The low cost of natural gas in the region and hence the low cost of production makes the construction of export-orientated, integrated urea plants very attractive. Iran, Qatar and Saudi Arabia are the largest ammonia and urea producing regions within the Middle East, as shown in Figure 1. In 2016, the region exported an estimated 16 million t – 17 million t of urea; the second largest regional export volume in the world. Within the Middle East, Saudi Arabia is the largest exporter of urea followed by Iran and Qatar.
The region’s fertilizer demand is relatively small, with an estimated consumption of approximately 5 million t in 2016. The Middle East is largely an arid region, and the development of its agricultural sector has been hindered by many factors such as small farm sizes, weak infrastructure, soil deterioration, and water scarcity. Due to low precipitation levels in much of the region, however, fertilizer use is critical to enhance agricultural production. Turkey and Iran account for more than 50% of urea consumption in the Middle East. Nexant believes that the Middle East’s total urea demand will grow close to 3% per year up to 2025, faster than the 1% growth per year experienced in the 2000 – 2017 period. The region’s growing population and consequent food demand will drive regional growth for urea in the direct application segment, which accounts for approximately 80% of the total urea consumption in the Middle East. Iran’s consumption, which accounts for one-third of total urea consumption in the Middle East, is expected to grow close to 3.5% in the next decade, driven by rising export demand for various agricultural products.
Current and projected production/exports
Ammonia capacity developments in the Middle East have somewhat slowed down in recent years, from an average annual growth rate of 7% between 2000 and 2012, to a 3% per year growth between 2012 and 2017 period. There have been no significant capacity additions in the Middle East in the past four to five years. This is attributable to various factors. For example, Qatar has not been able to expand capacity because of the moratorium on North Field development, which was just lifted in May 2017, whereas Oman is struggling with feed gas supply constraints that have even affected natural gas export volumes. The outlook for regional capacity growth is also affected by the prevailing global oversupply situation: capacity developments in other parts of the world such as coal-based plants in China and shale gas-based capacity developments in the US have resulted in a global oversupply situation. The incentive to invest in new Middle East production facilities in the near-term is therefore not great.
On a delivered cost basis, US Gulf Coast (USGC) producers are on par with Saudi Arabian suppliers of ammonia/urea into the USGC, thanks largely to the increased availability of competitively-priced shale gas. With the US less dependent on Middle Eastern imports, the onus is now on Middle Eastern producers to identify opportunities in other export markets – most likely in Asia, which Nexant considers to be the world’s biggest demand growth market for fertilizers.
Middle Eastern exporters also face competition from North African producers in supplying the mature European market, since North African sellers enjoy a freight cost advantage due to their proximity to European outlets. However, some North African producers – chiefly Egypt – have experienced feed gas constraints of their own in recent years, necessitating supplemental LNG imports and the temporary cessation of LNG exports. This situation is not expected to persist, as Egypt brings the massive non-associated offshore Zohr field online. In addition, there have also been several new gas discoveries reported in the country in recent years, especially in the Nile Delta region. Together with the optionality of augmenting domestic production with natural gas imports from neighbouring Israel and even Cyprus, Egypt may considerably expand its fertilizer production and export base in the longer-term, thereby posing additional competition for Middle East producers.
Iran poses additional competition for existing Arab fertilizer exporters in the Middle East, although its success would ultimately boost the region’s profile as a source for volumes. The 2016 lifting of sanctions in Iran and various projected new capacity developments are strengthening Iran’s net export position, which translates to stronger competition for current Saudi producers. In Saudi Arabia, Ma’aden is the only company that has started production at a new ammonia plant, with capacity of 1.1 million tpy, in the recent years (in 2016) primarily to feed the Wa’ad Al Shamal phosphates complex. By contrast, some 2 million t – 3 million t of new capacity is expected to come onstream in Iran in the 2017 – 2020 period. However, project activity may be delayed if Iran is unable to secure financing from foreign lenders. President Trump is in the process of reviewing US policy towards Iran, and the uncertainty this engenders is plainly not conducive to the financing of new ventures. Nevertheless, Iran is viewed as an attractive location by many external investors, such as Indian and Bangladeshi companies, who have indicated their interest in establishing export oriented production ventures there.
Even though the Middle East capacity is expected to grow slowly in the near-term, it remains a major producer and exporter of ammonia/urea in the global market. The drop in global oil prices has reduced the returns on investments for manufacturers, but this has not eroded the Middle East’s position as one of the largest urea export regions in the world. The pace of capacity development is expected to pick up post 2022 in Qatar and Saudi Arabia, as manufacturers begin to take advantage of the production from new gas fields. In addition to the lifting of the moratorium on Qatari North Field gas production, Saudi Arabia is in the process of expanding its natural gas production under the National Transformation Program (NTP 2020) that was approved by Riyadh in 2016. In Nexant’s view, the Middle East will retain its position as the largest exporter of urea in the world, as regional capacity developments outpace consumption growth.
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