The Gulf gas sector: Challenges and solutions for the 21st century

Nov 04, 2009 01:00 AM

In this DSG Research Seminar, Dubai Initiative Research Fellow Justin Dargin discussed the historical development of the gas sector and offered recommendations as to how Gulf policy makers might optimally expedite gas development projects.
Dargin began the presentation by noting that although the GCC region accounts for 23 % of proven world reserves of natural gas, it only has 8 % of world production. At the same time, regional demand for natural gas is growing rapidly, primarily because of heavy investment in infrastructure and national stimulus packages.

Electricity demand is already high, and GCC states have the fastest rate of power demand growth in the world. Dargin attributed this to a number of factors, including young demographics, industrialization and emphasis on petrochemical expansion, desalination plants and the second "oil price revolution."
According to Dargin, the UAE imports 1.8 bn cfpd from Qatar and, according to a recently published white paper from the UAE government, power demand in the country is expected to jump from 15,000 MW/daily in 2008 to 40,000 in 2020.

Dargin noted that, like other GCC states, the UAE has implemented a number of measures-including conservation drives, the Masdar project, nuclear power capability, and others-to address its power shortage. However, he asserted, these are mostly cosmetic remedies that do not address the fundamental problem.
At the heart of the problem, according to Dargin, is a fundamental imbalance in gas pricing in the GCC. The price of natural gas is below the price of production, de-incentivizing production while rewarding profligate and wasteful consumption. The end result is an imbalance between regional suppliers and consumers.

Dargin proposed a price reform structure whereby the region's industrial sectors would be supplied with natural gas at the cost of production, while consumers would pay rates over the cost of production.
Such a structure, he reasoned, would reward additional production, cut waste, and still allow the region's heavy industries to retain their competitive advantage regarding inexpensive natural gas supplies.

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