The ‘Arab Spring’ that swept much of North Africa and the Middle East in 2011 - 2012 carried a fresh breeze through the region, sweeping aside regimes that had seemed deeply entrenched for years if not for decades. Now, many are left to question how deep the changes actually went. Pro democracy movements in many countries have lost steam, giving rise to debates about the coming ‘Arab Winter’. Many of the same social ills remain: a wide gap between rich and poor, unemployment, unpopular governments, religious extremism, and violence. The oil and gas industry remains a high priority, because revenues are crucial to government budgets. But many areas lack security and rule of law, discouraging investment.
Now, external events in international oil and gas markets are also changing the business horizon for Middle Eastern exporters. The global economic downturn in 2008 hit some markets harder than others. The drop in demand exerted a slight moderation of prices that might otherwise, because of political turmoil, have spiked even higher. So in this regard, the consumer countries began to recover more easily. Demand remained weak in most of the OECD countries, and, in a remarkable turnaround, supply began to expand. The breakthroughs in shale oil and gas production in the US have revivified the upstream sector. US crude production has risen by 3.2 million bpd since 2008, and natural gas production has risen 21.5 billion ft3/d since 2006. Changes in global and regional supply and demand balances are changing the pattern and volume of Middle Eastern exports.
Upstream oil and natural gas developments
Reserves and increased priority for natural gas
In recent years, many Middle Eastern countries have accorded a higher priority to natural gas. Historically, some gas deposits were considered uneconomic, and a great deal of natural gas was flared. Between the years 2000 and 2013, however, oil reserves have expanded at just 1.2%/y, whereas natural gas reserves have grown at 2.6%/y. The gas rich countries are increasingly channelling natural gas into their domestic markets, into LNG exports and into pipeline exports in the cases where connections are possible.
Iran possesses the region’s largest natural gas reserves, 1 192 907 billion ft3 according to the Oil and Gas Journal. However, the long lasting UN sanctions have had a major impact on the Iranian economy and on its ability to develop its oil and gas industry, especially since the sanctions were ramped up in 2011 and 2012 and affected Iran’s ability to sell oil. A host of projects have been delayed. Many of these relate to the development of the giant South Pars gas field, which is the Iranian portion of the South Pars/North Dome field that is shared with Qatar. It is recognised as the largest natural gas and condensate field in the world. The North Dome portion is in Qatari waters. Its recoverable gas reserves have been estimated at 900 trillion ft3, and the South Pars portion is estimated to contain 360 trillion ft3. The Qatari portion is also estimated to contain approximately 10 billion bbls of condensate, while the Iranian section is estimated to contain 9 billion bbls of condensate.
To date, Qatar has been much more successful in developing its section of the field, and as discussed in the following section, it has become the world’s largest exporter of LNG. Iran has long desired to join the ranks of LNG exporters, and several phases of the South Pars development involve LNG projects. But these projects have not been completed. Phase 11, for example, had initially been planned as an LNG project with Total and Petronas, but the partners and contracts could not be finalised. The Phase 11 development was transferred to China’s CNPC in 2009, yet the project still has not come to fruition. Iranian natural gas production has leveled off recently, though the upward potential is, of course, immense. Oil developments have also tapered off. Over the past five years, Iranian oil production has fallen by over 0.8 million bpd. It is possible that new leadership and the recently confirmed Iranian Oil Minister will pave the way to an easing of sanctions, which may once again stimulate investment in Iranian oil and gas. Many fields are old and in decline, however, so easing sanctions alone would not revivify the industry.
Gas and oil trade
Natural gas exports via pipeline
There are ambitious plans to expand natural gas pipelines in the Middle East and to create cross border trade, and there have been even grander visions of building a pipeline network that would connect the region and extend even into Europe, yet at the current time, Iran and Qatar are the only major exporters of pipeline gas. Iranian gas is exported to Turkey, Armenia and Azerbaijan, and Qatari gas is sent to the UAE and Oman. Omani exports to the UAE vanished by 2008, and Oman became an importer. Qatari exports to the UAE have also grown significantly, jumping from 0.95 billion m3 in 2007 to 15.4 billion m3 in 2008 and 17.8 billion m3 in 2013. Figure 6 displays pipeline gas exports. Exports leapt in 2007 - 2008 following Qatar’s entry. Qatari exports are now at a plateau, awaiting decisions for further gas developments and potential expansion of trans border pipelines.
Iran has set forth numerous plans to develop natural gas export infrastructure, but these plans have suffered setback after setback. The largest plan is called the ‘Peace Pipeline’, which would enable Iranian gas to flow to Pakistan, with the eventual goal having been to connect Iranian supplies with India and possibly China as well. This is to be an extension of the Iranian Gas Trunkline (IGAT) VII, which started carrying gas in 2010, though the idea had actually been in the works for approximately 20 years. However, India withdrew from the plan, citing concerns over security for the line through Pakistan. Then, in 2013, Iran cancelled its promised US$ 500 million loan to Pakistan for line construction, citing the economic problems caused by the UN sanctions. It will be difficult for Pakistan to finance the US$ 2 billion required. The US has pressed Pakistan to abandon the Peace Pipeline project in favour of the Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline. Iran has in fact already been importing some natural gas from Turkmenistan for use in its northern provinces, showing the need for expanded gas infrastructure within the domestic market.
Iran also planned the ‘Islamic Pipeline’, which was to carry Iranian gas to three power plants in Basra, Iraq, beginning in 2013, but this project never materialised. Iraq plans to build oil and gas pipelines from Basra west to Jordan, but the route is highly insecure. Iran also announced plans to export natural gas to the Ukraine and Moldova, who receive natural gas from Russia, but these plans never firmed up. Iran has also negotiated with Oman to build a gas pipeline across the Persian Gulf, with Iran agreeing to provide gas at below market cost, but this line has not been built either, and Oman has been importing Qatari gas delivered via the UAE.
Qatar is by far the Middle East’s premier natural gas exporter. Pipeline exports began in 2007, as the Dolphin Energy gas project began to come onstream. The project was linked to Oman, where domestic gas demand had risen to the point that exports to the UAE ceased and the country became an importer. The pipeline from Oman to Dubai was reversed. On an historic note, the Dolphin Project pipeline linking Qatar’s giant North Field with Oman and the UAE was the first cross border natural gas pipeline in the Middle East. Qatar’s exports to Oman have been in the range of 1.5 - 2 billion m3 between 2008 and 2013. Gas exports to the UAE jumped to 15.4 billion m3 in 2008, were contracted at 17.25 billion m3 from 2009 - 2011, and rose to
17.8 billion m3 in 2013.
LNG exports and destinations
While Qatar is the main exporter of pipeline gas in the Middle East, the majority of its natural gas is exported as LNG. Qatar is the largest exporter of LNG in the world. In 2013, Qatar exported 105.6 billion m3 of LNG, over 32% of the global total. Malaysia was a distant second with exports of 33.8 billion m3, approximately 10% of the global total. In the Middle East, Oman, the UAE and Yemen are also LNG exporters, exporting 11.5 billion m3, 7.4 billion m3 and 9.6 billion m3 respectively in 2013. Collectively, the four Middle Eastern LNG exporters account for 41% of global LNG exports. Figure 7 presents the growth in Middle Eastern LNG exports. LNG exports from Oman and the UAE have been relatively stable, while Qatari exports have grown enormously, more than quadrupling from 24.06 billion m3 in 2004 to 102.6 billion m3 in 2011. Yemen also emerged as an exporter in late 2009, and its exports grew to 9.63 billion m3 in 2013. Overall, Middle Eastern LNG exports leapt from 40.47 billion m3 in 2004 to 134.2 billion m3 in 2013, a growth in exports of 14.2%/y.
Given the natural gas bubble in the US and the stagnation of European imports, Middle Eastern LNG exporters, both current and prospective, pin most of their hopes on the Asian market. Yet even here a cautionary note has emerged. Australia is in the midst of a major expansion of its LNG capacity, and if the projects now underway are completed, Australia could overtake Qatar to become the world’s leading exporter of LNG, perhaps as quickly as 2018 or 2019. Japan has been Australia’s chief LNG customer. Japanese companies hold equity positions in all three of Australia’s currently operating LNG facilities plus most of the projects now underway. The Japanese market for LNG may become saturated, particularly as the country begins to bring some of its idled nuclear power plants back online. On the other side of the Pacific Ocean, both the US and Canada are planning to build LNG export capacity. The Panama Canal is now being widened, with work expected to be complete in December 2015. LNG carriers will be able to transit the Canal, paving the way for the LNG projects now planned along the US Gulf Coast. Japan and other Asia Pacific consumers, in principle, tend to view supply diversification as a way to enhance energy security and to reduce costs, so it is likely that Middle Eastern LNG exporters will face a more competitive market in Asia in the coming years.
Changes in the destination of oil exports
In addition to contending with additional competition in gas and LNG markets, Middle Eastern countries are also finding the global oil market to be more competitive. The oil price spike and economic downturn in 2008 cut into demand in many key consumer countries, and, as noted, oil and gas production is now growing in the US. Canada is also increasing its output of bitumen based products from oilsands, adding further to North American supply. North American import dependency is falling, an amazing turnabout that caught the world by surprise.
Political events have been responsible for some of the changes in trade flows. Iran, for example, exported over a million bpd of crude oil to Western Europe in 2005, but this slowed to a trickle of 128 000 bpd in 2013, according to OPEC. Iranian exports have been sent to Asia instead. Iraqi crude exports to the US and Europe have remained relatively stable, in contrast. Saudi Arabian and Kuwaiti crude exports also have tended to flow to diverse destinations, in part because of the numerous cooperative business ventures their national oil companies have made in foreign countries, including refineries.
Focusing on domestic markets
Middle Eastern countries have worked to increase natural gas production and utilisation for a variety of reasons: to capture value from associated natural gas and to reduce flaring, to provide fuel for the power and industrial sectors, to create the basis for a domestic natural gas pipeline network, to develop petrochemical industries, and so forth. At the heart of many of these reasons, however, has been the goal of substituting gas for oil, which is more easily transportable to export markets. Most of the Middle Eastern countries also moved into export refining to capture additional value from their crude oil resources. As noted, however, some of the largest oil importers in Europe and the Western Hemisphere have cut their oil imports. US crude production has risen dramatically, and the restrictions on crude exports have channeled the new crudes into US refineries, causing a drop in product import requirements and an increase in refined product exports. European demand has stagnated, and the region suffers from refinery overcapacity. The increase in oil and oil product demand in Asia is strong, but it has lagged the drop in demand in the rest of the world. Yet Middle Eastern production has grown anyway, so where has the oil gone? A growing volume has stayed at home. The shifting global supply and demand balance has encouraged consumption in Middle Eastern domestic markets.
Adapted for the web by Emma McAleavey.
Read the article online at: https://www.oilfieldtechnology.com/special-reports/06102014/spring-moves-to-fall-1353/