The Middle East in Focus

The Middle East is a robust gas consuming region, with fuel use almost doubling between 2005 and 2016. Despite recent upward price adjustments in several countries in the region, energy prices are still below international levels, especially in Gulf Cooperation Council countries, although they vary substantially across the Middle East. Historically, low domestic prices have incentivised greater gas consumption and, to that end, the Middle East is increasingly dependent on natural gas to fuel new power and desalination plants to provide competitive feedstock for petrochemical projects, and to produce metals. Regional consumption is driven not only by fast growing economies, but also the wants and needs of a comparatively youthful population. According to UN data, the Middle East’s population has a median age of about 27 years, compared to an average of over 42 years in the economically-advanced G7 countries. Looking ahead, Nexant expects that projected regional gas consumption will remain supported by the availability of gas at subsidised prices, despite some recent progress in phasing out subsidies in various countries, albeit from very low base prices. This sets the scene for significant gas consumption growth in the long-term. Gas already occupies a prominent position in the regional energy mix (just under 50% in 2017), but scope exists for additional penetration. The same trends that have governed regional gas consumption growth over the last decade remain in force: ample resource availability in several (but not all) countries; population growth; strong economic factors; urbanisation; a boom in the industrial sector led by the rapidly expanding petrochemical business using gas as a feedstock; and policies that have kept end-user prices at relatively low levels. However, optimism must be tempered with the knowledge that not all Middle East countries will be willing and/or able to sustain subsidies for domestic energy prices in the long-term. The growing competitiveness of renewable energy sources in the power sector moreover poses increasing competition for natural gas, which may erode gas’ share of this all-important segment.

• According to Nexant’s modelling, the power and industrial sectors account for a large part of forecast consumption growth by 2040. The power sector (including water desalination, where gas-fired plants combine power generation with freshwater production) almost doubles its gas use over the forecast period and accounts for almost half the region’s gas consumption in 2040.
• Industrial gas use grows by almost 105 billion m³, where switching away from oil is also a driving force.
• Middle East gas producers are conflicted between increasing gas prices to incentivise gas producers and reduce the resulting financial price subsidy burden and retaining the political support of industrial consumers whose business models are predicated on access to low-cost gas supplies. The Middle East’s increased focus on natural gas is ultimately driven by the economics of oil as an export commodity and also to some extent the use of cleaner fuel supplies.

Historic and projected supply

A common assumption today is that the Middle East has an abundance of readily available natural gas supplies. However, the reality is quite different. To date, the Middle East, which has 40 – 45% of the world’s proven gas reserves, has struggled to produce sufficient gas to meet its needs. This is attributable to several factors

• The region’s proven conventional gas reserves are unevenly distributed. While some countries in the region (e.g. Qatar, Iran, and Saudi Arabia) have significant deposits, others (e.g. Jordan) are gas-poor. Even countries with modest reserves endowments face supply problems (e.g. Bahrain and Oman). As oil-poor countries, they historically focused on gas as a means to develop their economies, and are already contending with production declines.
• Gas reserves do not translate to available gas supply, with Iran and Iraq being the most obvious examples. Iran’s isolation from the global community until 2016 precluded the country from assuming the status of a large gas exporter, whereas Iraq’s potential is constrained by political strife.
• Some of the region’s gas supply is associated with crude oil. Reserves may not be available to supply domestic markets or export markets because production is dictated by crude oil production quotas (if applicable) and/or the need to re-inject gas to maintain current levels of crude oil production.
• Even countries with rich non-associated gas reserves are concerned about production sustainability. Qatar, which is the only Arab country not dealing with security of supply issues and is currently the world’s largest exporter of LNG, imposed a moratorium on further North Field resource development in 2005, citing concerns about the effects of large scale production on the reservoirs. This moratorium was only lifted in the summer of 2017.
• A decision taken in early June 2017 by Saudi Arabia, the UAE, Egypt and Bahrain to impose sanctions on Qatar due to its perceived support for Islamic terrorism has not (as of June 2017) affected LNG flows from the emirate, or even Qatari pipeline exports to Oman and the UAE. Consequently, Nexant does not foresee a material long-term effect on regional gas movements.

Of the region’s approximately 600 billion m3 of annual production in 2016, less than a quarter was exported to other global regions. Aside from LNG export projects in Oman, Qatar, the UAE and Yemen, the vast majority is consumed within the region. Indeed, inter-regional gas imports have assumed increasing importance in the Middle East over the last several years. In addition to Iranian pipeline imports from the former Soviet Union, the Middle East has assumed the status of an LNG import province, with receiving terminals operating in Israel, Jordan, Kuwait, and the UAE. The Middle East’s seemingly incongruous rise as an LNG import province is testimony not only to gas’ growing importance to the region, but also internal supply availability issues in certain countries. For example, Israeli and Jordanian LNG receipts were a response to unreliable (and ultimately suspended) Egyptian deliveries via the Arab Gas Pipeline, whereas a mismatch between the ramp-up of demand and new non-associated gas production ventures in Kuwait and the UAE account for the 2010 startup of Arab Gulf LNG imports. Regional LNG deliveries totalled a provisional 8 billion m³ in 2016.

It is hoped that the ramp-up of new non-associated gas supply projects in Kuwait, Israel, and the UAE will eventually eliminate the need for LNG imports in these countries, but if production capacity additions fail to match demand increases, LNG imports will remain crucial to the region’s supply mix. Moreover, there is scope for new LNG importers to emerge such as Bahrain, which needs LNG to compensate for declining output from mature indigenous sources. In Nexant’s view, the Middle East will remain a modest but tangible import market for LNG going forward.

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