Why are Mid­dle East­ern LNG im­ports soar­ing?

Tehran Times - - ENERGY -

The Arab world is blessed with some of the most im­pres­sive hy­dro­car­bon re­serves in the world, but de­spite im­pres­sive do­mes­tic re­serves, pro­duc­tion has failed to keep pace with ris­ing con­sump­tion. Be­cause of this, the Mid­dle East and North Africa re­gion or MENA will be­come the world’s sec­ond largest im­porter of LNG in the com­ing years ac­cord­ing to the In­ter­na­tional En­ergy Agency, with con­sump­tion ris­ing from 480 bcm in 2015 to 738 bcm in 2040.

Al­ge­ria was a pi­o­neer in us­ing LNG tech­nol­ogy with the world’s first liq­uefi­ca­tion plant in 1964. The MENA has come a long way since the early days of the in­dus­try. Un­til 2015 al­most 50 per­cent of the world­wide nom­i­nal LNG pro­duc­tion came from the re­gion. Re­sources, how­ever, are un­evenly dis­trib­uted. While some coun­tries pos­sess sig­nif­i­cant re­serves, such as Qatar, oth­ers rely on im­ports to meet de­mand.

Egypt went from the world’s eighth largest ex­porter of LNG in 2009 to the world’s eighth largest im­porter in 2016. How­ever, Cairo’s for­tunes have changed again due to the dis­cov­ery of a mas­sive gas field off its coast in the East­ern Mediter­ranean. Oth­ers, such as the UAE, pos­sess sig­nif­i­cant re­serves, but rely on LNG to meet peak de­mand dur­ing the sum­mer. Qatar, on the other hand, is slated to re­main the largest LNG pro­ducer for the fore­see­able fu­ture. Doha re­cently lifted its self-im­posed mora­to­rium on pro­duc­tion re­gard­ing its North Dome gas field, the sin­gle largest field in the world.

Grow­ing de­mand for LNG

MENA’s grow­ing en­ergy de­mand is caused by nat­u­ral rea­sons and changes in gov­ern­ment poli­cies. The pop­u­la­tion is slated to dou­ble un­til 2050. Log­i­cally, more peo­ple re­quire more en­ergy to power homes and fac­to­ries. Lag­ging do­mes­tic pro­duc­tion needs to be sup­ple­mented by LNG im­ports in or­der to keep the econ­omy go­ing.

Gov­ern­ment poli­cies have cre­ated in­cen­tives to in­crease nat­u­ral gas con­sump­tion due to its ad­van­tages com­pared to other fos­sil fu­els. The price of LNG fluc­tu­ates on ba­sis of the same eco­nomic fun­da­men­tals of sup­ply and de­mand as with other prod­ucts. Costs de­creased sig­nif­i­cantly in 20132014 amid a sharp rise in up­stream liq­uefi­ca­tion ca­pac­ity and weak de­mand in some parts of the world.

Ac­cord­ing to some an­a­lysts, a ‘sup­ply glut’ was to per­sist un­til mid-2020. Bei­jing’s coal-to-gas pol­icy, how­ever, mit­i­gated some of the gloom think­ing with an in­crease in de­mand by 25% in 2018. China is now the sec­ond largest nat­u­ral gas im­porter in the world af­ter Ja­pan and is slated to claim the ti­tle of largest LNG im­porter in 2019.

LNG’s ap­peal in­creased af­ter prices dropped sig­nif­i­cantly in 2013-2014. In the MENA re­gion, heavy fuel oils and diesel are im­por­tant sources of en­ergy for power pro­duc­tion. Be­sides the heavy pol­lu­tant na­ture, fi­nan­cial ar­gu­ments have strength­ened the need for more LNG. It makes eco­nomic sense to switch to less pol­lu­tant fos­sil fu­els when the price di­ver­gence com­pared to other sources of en­ergy is sig­nif­i­cant enough.

Fur­ther­more, the us­age of LNG for the pur­pose of power pro­duc­tion of­fers an­other fi­nan­cial ad­van­tage to the oil­rich MENA coun­tries. Us­ing LNG to sub­sti­tute do­mes­ti­cally sourced fu­els means that more oil is avail­able for buy­ers on the in­ter­na­tional mar­ket. Buy­ing cheap nat­u­ral gas and sell­ing more ex­pen­sive oil cre­ates a fi­nan­cial ad­van­tage.

Lastly, MENA’s wealth in abun­dant sun­shine of­fers an­other fi­nan­cial ben­e­fit. The re­gion suf­fers from ex­tremely high tem­per­a­tures dur­ing the sum­mer and more mild weather in the win­ter mean­ing en­ergy con­sump­tion peaks in the warmer months. Glob­ally, LNG de­mand is at its high­est when win­ter hits the densely pop­u­lated north­ern hemi­sphere in­clud­ing Europe, China, and North Amer­ica. There­fore, the MENA re­gion is able to take ad­van­tage of a rel­a­tive drop in prices when de­mand weak­ens glob­ally dur­ing the sum­mer.

Con­fronta­tion and chang­ing poli­cies

While the re­gion is awash with nat­u­ral gas re­sources, LNG has be­come a sta­ple fuel. The rel­a­tively small dis­tances be­tween re­source rich and re­source poor na­tions are ideal for pipe­lines. Trans­porta­tion of nat­u­ral gas us­ing LNG tech­nol­ogy be­comes eco­nom­i­cally fa­vor­able when the dis­tance is more than 1900 miles or 3000 km. How­ever, po­lit­i­cal dis­agree­ments and gov­ern­ment poli­cies have pre­vented the con­struc­tion of in­fra­struc­ture.

The block­ade of Qatar by Saudi-Ara­bia and the UAE is a ma­jor im­ped­i­ment of get­ting en­ergy from the rich­est Arab coun­try in terms of nat­u­ral gas re­sources to its neigh­bors. Egypt, on the other hand, has cho­sen to fo­cus on the in­ter­na­tional LNG mar­ket in­stead of ty­ing it­self to a sin­gle or lim­ited num­ber of cus­tomers re­gard­ing pipe­lines.

De­spite im­pres­sive growth, LNG im­ports to the MENA re­gion could de­crease on the medium-term. The wealthy Per­sian Gulf coun­tries have plans to con­struct nu­clear power plants. Be­sides higher en­ergy de­mand, Iran’s nu­clear pro­gram has in­creased the need with Arab states to keep up. Also, the re­gion is rich with sun­shine which has put re­new­able en­ergy on the agenda of most coun­tries. Fi­nally, the rein­vig­o­rated Egyp­tian LNG in­dus­try will change the sit­u­a­tion for the most pop­u­lous Arab coun­try. The dis­cov­ery of ma­jor gas fields has made LNG im­ports su­per­flu­ous.

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