The Gulf Gas Sector: Challenges and Solutions for the 21 st Century

1. The Gulf Gas Sector: Challenges and Solutions for the 21st Century Dubai School of Government Nov. 4, 2009 Justin Dargin Dubai Initiative-Harvard University

2. Main Discussion Points • The Basics of the Gulf Gas/Power Sector: • Reserves, Demand • The Current Energy Challenges • Strategies to Increase Gas Supplies • Proposed Solutions

3. Overview of the Gulf Gas Sector Arabian Gulf Region home to some of the largest natural gas reserves:23% of Global total, but only 8% of global production (very little utilization) • Qatar 899 tcf (World’s third largest) & World’s #1 LNG exporter since 2006 • Saudi Arabia 267.3 tcf (world’s fourth largest) • UAE 227.1 tcf (World’s fifth largest) • Kuwait 62.9 tcf (World’s 20th)

4. GCC Natural Gas Demand • GCC gas demand is growing at a rate of 6.6% per annum. • Future outlook in GCC Gas Consumption per oil equivalent: • 2010-4 million/bpd • 2015-5.1 million/bpd • 2020-6.4 million/bpd • With the exception of Qatar, every GCC member is facing a gas shortage.

5. GCC Power Demand The Electricity Sector: • GCC will need to add 60 gigawatts (GW) of additional power between 2009-2015, which represents 80% of current capacity. • Demand Growth has been at 7.7 percent annual growth rate 2007-2015 The fastest rate of growth in the world The GCC members have pledged between $160 bn-$200 bn in the energy sector for the next several years. Demand unlikely to slow as GCC countries have developed huge stimulus plans for infrastructure growth.

6. Reasons Behind Demand Growth • The 2nd Oil Price Revolution (2001-2008) led to rapid econ. growth. • Demographic explosion • Major push for industrialization • Petrochemical expansion • Large need for desalination projects (related to demographics) • Increased oil capacity expansion/using gas for oil field reinjection • low administrative gas prices.Avg. $1.00/MMBTU The low administrative prices have made demand ”artificial.”

8. The Gas Crunch Kuwait: First GCC country to import LNG Petroleum Industries Company had to shut its urea and ammonia plants at Shuiaba in May, 2009 . Annual summer brownouts becoming regularized. Further petrochemical expansion is hampered by the lack of gas supplies. 2005 450 mcf/d went to industrial sector, now it is 370-380 mcf/d. Saudi Arabia: Burning large amounts of crude and fuel oil for power (Could be 470,000 in 2009) Saudi natural gas demand expected to double from approximately 7.1 bcf/d to 14.5 bcf/d by 2030. Could impact KSA’s future oil exports, as well as future industrial projects. Reports of reduced propane availability. KSA experiencing major problems as most of its gas is associated, so recent OPEC quotas prevented it from supplying additional gas to the domestic sector, thus increasing the reliance on liquid fuels.

9. The Gas Crunch: part two The UAE: Importing 1.8 bcf/d from Qatar • The UAE suffered a shortage 1 bcf/d of gas the summer of 2008. • By 2025, the gas shortage is expected to triple. • Sharjah blackout for nearly a month during Ramadan 2009. • The 2008 UAE White Paper states UAE power demand will rise from 15,000 MW in 2008 to 40,000 in 2020. The UAE feels that there will not be enough gas to meet the demand increase. • Oman: Importing 200 mcf/d from Qatar • 2010 gas demand is expected to reach 3.8 bcf/d vs. production 2.6 bcf/d. • The sultanate's three LNG trains account for more than half of consumption, using 1.34 bcf/d of gas • Electricity demand is increasing by 15% annually and water desal by 10%

10. Ramifications • The price paid for gas is too low (-$1.50 MMBTU) when compared to production/international prices. The domestic price distorts investment and consumption decisions. It dampened interest for regional trading in favor of global LNG export. • The price for electricity is too low as well, impacting electricity generation. Dual subsidy: That for the natural gas feedstock, as well as electricity tariff. • The main obstacle between the two regional suppliers, Iran and Qatar, and the regional consumers, Kuwait, UAE and Bahrain, has been pricing issues. • Salman Field Import (NIGEC and Crescent disagreement) • Dolphin Project Phase Two: Old pricing schedule no longer in force. • Kuwait LNG Import (KPC-RasGas dispute) Regional suppliers have also stated that domestic demand will be the first priority for new gas expansion. There is a refusal to pay more than $1.50 MMBTU for gas, but the cost of burning liquid fuels: diesel, medium fuel oil, LPG, crude oil or kerosene as feedstock, can be up to three times more than gas.

11. Gas Strategies Dolphin Interruptible Supply: 400 Mcf/d Regional LNG Import: Shell exports to Kuwait and Qatari exports to Dubai Stimulate Domestic Production: UAE seeking to develop the $10 bn Shah sour gas field, Saudi seeking Karan field, Kuwait: Sabriya and Umm Niqa. Pipeline Import: Due to US sanctions, Iran is seeking to develop its Southern export strategy. Primary stumbling block is seeking to introduce “European prices” into the region. Renewable and Alternative Energy: The GCC Nuclear plan, various solar and wind initiatives, Masdar Initiative. Coal fired plants. Reinjection Alternatives: Research on using nitrogen or carbon for EOR.

12. Gas Strategies: Part Two Gas Cities: Developed by Dana Gas, core industrial complex housing various energy intensive industries (steel, cement and petrochemicals): economies of scale and gas supply guarantees. Onsite Power Production: Gasco and Emirates Aluminum opened a natural gas pipeline that will provide onsite power production at the world’s largest onsite aluminum plant. Energy Conservation Campaigns: Heroes of the UAE Campaign, Tarsheed (Kuwait)

13. Proposed Solutions Many of the foregoing strategies are cosmetic, unless they deal with the underlying structural issues. Pricing reformation is essential as it impacts the availability to domestically produce and purchase gas imports. The new sources of unassociated gas are more expensive to produce: +$5 MMBTU. Without a comprehensive price review, regional suppliers won’t sell, and it will be difficult to secure IOC assistance for domestic production. Development of a rational domestic gas price. Most of the GCC countries have enough gas to supply domestic demand, but the time of “easy” associated gas is over. The cost of unassociated gas production (sour or tight) is rapidly increasing, at a minimum, the cost of production is between $4-5 MMBTU. There must be a comprehensive review of the domestic gas prices and electricity tariff. Demand is inflated, and a low retail market price encourages overconsumption. Dual pricing system, industrial sector can be granted at cost of production rates, while the power sector is gradually brought to cost+ rates. Development of a regional GCC Gas Price A GCC regional gas price should be developed and agreed upon by all stakeholders. Prices have already shown tendency to stabilize for regional contracts in the range of $4-5 MMBTU. Examples: 2009 Dolphin interruptible supplies, Dolphin bridge price, Oman-RaK price. Address the most critical energy peak usage periods Incorporation of district cooling: A critical tool in optimizing GCC energy use during the peak summer seasons. Studies show up to 388 bcf/y can be saved if only half of the GCC’s air conditioning needs are addressed through DC. Introduction of smart grid technology, increase electricity tariffs (especially during peak periods)

14. The New Pricing Reality has Arrived GCC governments will have to get used to the new pricing system. Regional suppliers will not sell for -$5 MMBTU Domestic cost of production is at least $4-5 MMBTU The fuel oil being used to meet repressed demand already costs approximately $12.51 MMBTU (based on WTI price of $72.54 per barrel. Loss of opp. cost, when oil used for domestic use, KSA only receives $5-10 in revenue as opposed to $70+ for export market. The 2006 netback value of Kuwait gas was $6.15 (city gate) and $5.82 (power) (Rezavi figures) The choice in the short to med term is between using high priced fuel oil to meet retail demand, purchasing higher priced gas from regional supplies or producing complex gas from domestic sources. If retail gas and power prices are kept below production cost, the government incurs a substantial financial loss as it subsidizes the domestic market. In most cases, the Gulf consumer can afford the increase in price, even when production cost is incorporated into retail electricity price, the GCC consumer will still have some of the lowest prices in the world.

15. Thank you for your Attention justin_dargin@hks.harvard.edu