Oil-rich but gas-poor in the Middle East

Oct 13, 2011 12:00 AM

by Stanley Reed, Ben Farey and Anthony DiPaola

Life moves slowly at Block 61 in the Omani desert, where the flat terrain bakes in temperatures that can soar above 120 degrees Fahrenheit. Lately, though, activity has picked up as hundreds of workers operate drilling rigs and rearrange the landscape with bulldozers, looking for gas.
The complex project involves drilling for gas that’s tightly packed into rocks more than three miles underground. At $ 15 bn, it’s one of the most expensive exploration efforts ever undertaken in the Middle East.

Yet Oman has little choice. Like most of its Gulf neighbours, the country needs new sources of gas to keep the lights on and factories running. The project, by British oil giant BP, could boost Oman’s domestic supply by a third.
The Gulf may have the world’s largest oil reserves, but it’s facing a shortage of gas. Long viewed as a nuisance that hampered production of crude, gas was typically injected back into the ground or flared off. After Shell discovered the world’s largest gas field off Qatar in 1971, there was little demand for its output.

Those attitudes are changing. As the region’s population climbs and developers build grand, air-conditioned homes and sleek glass towers, electricity consumption is climbing -- fuelling strong demand for gas. To diversify their economies away from oil, the Gulf countries have poured tens of billions of dollars into gas-hungry industries such as petrochemicals.
Edinburgh consultancy Wood Mackenzie figures gas consumption in the Gulf will grow by two-thirds this decade. The Oxford Institute for Energy Studies, a think tank, estimates that the Middle East and North Africa last year experienced a gas shortage of 73 bn cm -- about what Italy consumes annually.

To conserve supplies for domestic use, Oman has cut exports of liquefied natural gas, only fulfilling long-term contracts that were locked in years ago. A senior official in the Saudi Oil Ministry, Prince Faisal bin Turki, now has a big say in which proposed factories and power plants receive gas.
The shortfall is a big reason for growing interest in nuclear power. Abu Dhabi has already ordered 4 nuclear plants from South Korea, while Saudi officials are talking about building as many as 16.

The gas squeeze could wind up cutting investment and economic growth. Swiss petrochemical giant Ineos has had trouble finding a site for a plant it wants to build in the region.
“The big story is there just isn’t gas around,” says Ineos group director Tom Crotty. “That’s a completely different scenario than 10 to 15 years ago.”

Saudi Arabia’s Yanbu Cement says it can’t open a new production line because it can’t secure enough gas.
“There is an inability to fuel the next phase of industrial growth because of the lack of gas,” says John Tottie, an analyst with HSBC in Riyadh.

The shortages are forcing big oil producers to use crude to generate electricity, which cuts into exports and is more polluting than gas. Saudi Arabia this year is burning about 600,000 barrels of oil daily at power plants. That could rise to 3 mm bpd by 2020, Saudi Aramco estimates.
Already, blackouts have started to plague the kingdom on hot summer days. In July an outage shut down 11 factories in the eastern city of Dammam.

Qatar and Iran share the world’s largest gas field, in the Persian Gulf, but regional tensions have scuttled any possible pipeline between Iran and the Arab states. While Qatar is on better terms with its neighbours than Iran is, there are problems.
The Saudis are reluctant to import energy or allow international pipelines to cross their territory. And with the Qataris slowing development of their big gas field, the pipeline to the United Arab Emirates and Oman is running at just 60 % of capacity.

Oil companies see opportunity in helping the region find more gas. Shell, in partnership with Saudi Aramco, is prospecting in the remote Empty Quarter desert. At Shah, near the Saudi border in Abu Dhabi, Occidental Petroleum is working on a $ 10 bn project to develop so-called sour gas, which is contaminated with corrosive hydrogen sulphide that must be filtered out before the gas can be used.
Oil executives think the Middle East has substantial reserves of gas, but that it will be difficult to extract. That means prices will need to rise to create the kind of innovative environment that has led to a surge of gas supplies in the US In Saudi Arabia, natural gas costs consumers less than 20 % what it does in the US and just 6 % of the price in Europe.

Charging more won’t be easy, as governments in the region worry higher prices could spur political unrest after this year’s uprisings across the Arab world.
“Low domestic prices have become entrenched in these countries,” says Oxford Energy researcher Hakim Darbouche.

The shortages, though, are gradually leading to a rethink. Kuwait and Dubai are now being forced to import liquefied natural gas at or near market rates. Says Jonathan Evans, vice-president of BP Oman: “The Middle East is starting to realize there is a market price for gas.”
The bottom line: As the Middle East and North Africa look beyond oil, the region last year saw a gas shortfall of 73 bn cm.

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