Rapid economic growth in the Middle East has resulted in the consumption of natural gas outpacing production, according to the Ernst & Young report, The Global Gas Challenge. As a result, tension exists between the requirement to supply domestic markets to fuel economic growth and the desire to achieve higher revenues via export sales agreements.
Forty-one percent of the world's remaining proved (conventional) gas reserves are in the Middle East, with 73 percent concentrated in Iran and Qatar. However, Iran is a net gas importer due to international sanctions, which have hampered Iran's oil and gas reserve development.
While new reserves have been discovered in Iran, these discoveries have failed to translate into higher production as sanctions prevent foreign technology cannot be brought in to develop these reserves, and potential foreign investors for offshore oil and gas projects have been deterred by the complex structure of the buyback contracts that Iran favors, according to analysts with Barclays Capital.
Under these deals, the IOCs (international oil companies) invest money upfront and then hand over a field to the National Iranian Oil Company once production starts; the oil major recoups its costs at a pre-agreed rate of profit, based on global oil prices and field production targets. Iran's oil and gas fields also have some of the highest decline rates in the world.
Qatar is the world's largest liquefied natural gas (LNG) producer and exporter but it has a moratorium on new North Field developments and export sales agreements until 2014.
In 2005, Qatari government officials placed a moratorium on additional natural gas development projects at the North Field, a geologic extension of Iran's South Pars field, to allow time to study field development optimization. The moratorium did not affect projects approved or underway before the moratorium, allowing Qatar to continue its growth in natural gas production.
Qatar holds almost 15 percent of total world natural gas reserves and is the third-largest in the world behind Russia and Iran, according to the U.S. Energy Information Administration. Qatar aims to reach LNG production capacity of 77 million tonnes per annum, the largest LNG capacity in the world, according to Qatargas.
Outside of Iran and Qatar, a significant proportion of the region's gas reserves are in associated oil deposits, meaning gas production is not flexible, Ernst & Young reports. Most of the gas also is sour, which makes it more difficult and costly to extract and process. Domestic sales prices, which are subsidized to varying degrees, may need to rise to cover the additional processing costs and investment required in gas infrastructure.
Gas production has increased in the region over the past decade but only accounts for 12 percent of current global gas production. Gas demand in the Middle East has been rising by around seven percent per annum and has outpaced growth in regional gas production. Domestic demand growth is being fueled by economic expansion, low gas prices, the switch from oil to gas for power generation and the injection of gas into oil reservoirs to enhance oil recovery. The International Energy Agency reports that Middle East gas demand growth in the period to 2030 will be surpassed only by China.
Limited intra-regional infrastructure is in place for transporting natural gas in the Middle East as price subsidies, political differences and more lucrative export opportunities have reduced the availability of gas produced in the Middle East for consumption in the region.
To address this issue, Saudi Arabia is seeking to substantially increase gas production to meet its growing domestic demand. Iraq is in discussions with international oil companies to capture and sell associated gas in southern Iraq, making use of a resource that is usually flared. Iraq's associated gas production also is set to rise as the consortia granted contracts to develop oil fields deliver on promises to boost production.
Abu Dhabi, part of the United Arab Emirates, has been forced to look at unconventional gas reserves to meet its growing domestic gas demand. Associated gas is increasingly being used for reinjection, while little new conventional oil or gas is being discovered, Ernst & Young said.
Rapid economic development and high domestic power subsidies have forced Abu Dhabi to take alternative measures to meet future demand. In 2009, the emirate awarded a contract for its first nuclear power plant to be constructed. However, unconventional gas is still needed.
Imported gas will be needed to meet short-term demand, which means that substantial investment in LNG regasification capacity is required in a number of countries. LNG import terminals can be built with relatively short lead times and they are unlikely to encounter the political difficulties that have historically beset proposed cross-border pipeline deals.
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