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Natural gas: changing the Middle East energy landscape
The Middle East faces a natural gas puzzle: while the region holds 40% of the world’s proven gas reserves some countries find themselves gas short. In this speech, Malcolm Brinded, Executive Director of Shell Upstream International, discusses how the region’s gas exporting nations could exploit their export opportunities while ensuring that gas importing nations can obtain their supplies reliably. Solving the puzzle requires unlocking more of the region’s hard-to-access sour gas and tight gas resources, and investing more in regional and liquefied natural gas (LNG) infrastructure. It also needs policies that promote energy efficiency and conservation, including gas prices that reflect the rising cost of tougher domestic gas production and more supplies from imports.
Natural gas: changing the Middle East energy landscape
Figure 1: Unlocking Kuwait’s Jurassic Gas
More recently – in February of this year – Kuwait Oil Company and Shell agreed to work together to develop Kuwait’s Jurassic gas fields.It’s an important project for Kuwait as it seeks to enhance security of natural gas supply as the cleanest burning fossil fuel, by extracting gas from challenging tight, sour, high pressure reservoirs.
And it’s relevant for the wider region.
That’s because this region faces a gas puzzle.
The Middle East and North Africa region has over 40% of the world’s proven gas reserves and, with scope for new discoveries, it is set to play a pivotal role in the global LNG market.At the same time, domestic demand is burgeoning – fuelled by economic growth, low gas prices, and a gradual switch from oil to gas for power generation.
As a result, some Middle East countries face natural gas shortages.
This is the puzzle that needs to be solved.
Before we zoom in on the Middle East and discuss how to do that, let’s review the global context for a moment.
What are the global natural gas trends that will also influence the Middle East?
Global natural gas outlook
First of all, global gas demand is likely to grow by around 2% per year, probably for several decades.
By 2030, we’re looking at up to 4.5 trillion cubic metres (tcm) of gas per year, compared with 3.1tcm today. That’s a rise of almost 50%.
Most of this demand growth will come from the electricity sector, where increased reliance on natural gas is an affordable and fast route to lower CO2 emissions.
A modern gas plant emits only half the CO2 of a modern coal plant, and 70% less than decades-old steam turbine coal plants, of which there are still hundreds in operation in North America, Europe and China. Many of these will be decommissioned in the next 5-15 years.
In deciding what replaces all that old coal capacity, governments and utilities are beginning to realise that natural gas capacity is both faster and cheaper to install than other new-build sources of electricity – and much easier to link into intermittent wind or solar electricity than either coal or nuclear.
But what about the supplies?
Well, in principle there’s enough gas around. The International Energy Agency (IEA) in its latest Outlook speaks of total technically recoverable gas resources worth 250 years of current global production.
It will cost a lot of money to get enough gas out of the ground.
According to the IEA, to grow supplies by 40% over the next twenty years, cumulative global investment of some $5 trillion will be needed (or $250 billion a year).
But to realise this, the industry will have to use an array of innovative production methods.
Over the next decade, technological advances will further accelerate the expansion in unconventional gas production, which has already proved to be such a game-changer in North America.
By 2020, our industry will be producing from shale gas, coal bed methane, tight gas and sour gas resources in a host of new locations beyond North America.
To see the direction of travel, you only have to look at China.
As China seeks to diversify its energy supply, the government has thrown its weight behind natural gas. It aims to more than double its share of the primary energy mix to around the 8-10% mark by 2020.
Tens of thousands of kilometres of new pipelines are planned. The result will be a more flexible and integrated gas market, allowing China to import more LNG, in addition to pipeline gas from Central Asia and Russia.
China’s annual gas demand – which stands at around 100 billion cubic metres today, is likely to double, and could even triple by 2020.
As a result, China will likely overtake Japan as the largest gas market in Asia by 2015.
“… natural gas capacity is faster and cheaper to install than other new-build sources of electricity…”
LNG imports into China are likely to grow fast. To date, China has contracted some 25-30 million tonnes per annum (mtpa), and I expect that some 20 mtpa more will have been contracted within three or four years for deliveries later in the decade.
Global LNG market developments
Developments in China are part of a broader story of rising demand for LNG.
Despite the difficult LNG short-term market we have today, world-wide LNG demand is likely to grow – and grow much faster than overall gas demand.
In fact, it could double this decade. This growth will be driven not only by China, but also by Europe’s growing import dependency, and by a host of countries in Asia that will begin importing LNG, including Indonesia, Malaysia, Thailand, Singapore and Pakistan, and here in the Middle East, Kuwait, Dubai and Bahrain.
And why this focus on LNG? It’s because LNG offers unique supply security advantages because of its flexibility. Unlike pipelines, LNG ships can follow demand as it shifts and fluctuates around the world.
Right now, supplies are growing at the rate of around 6-8% per year, around three times the rate of natural gas overall. And the number of LNG exporters is likely to increase by nearly one third by 2015.
So the LNG sector will have to continue its rapid expansion and innovation to keep pace with the growing demand.
For example, this decade will see the industry converting Coal Bed Methane into LNG in Australia. Shell and PetroChina’s planned acquisition of Arrow Energy marks our involvement in this exciting area.
This new joint venture will help meet growing demand for cleaner energy in Australia and international markets through the export of LNG.
We also see progress on innovations like floating LNG, which will allow gas liquefaction at sea, instead of having to build pipelines to the coast. That will open up gas resources once considered too remote or expensive to tap.
An added advantage is that once production from one gas field has been completed, the 3.5 million tonnes per annum floating LNG facility can then be re-deployed to another.
Shell’s floating LNG plans for Australia are most advanced, but we think that there may be opportunities to use the concept in the wider Asia-Pacific region, Latin America, the Mediterranean and West-Africa.
So between now and 2030, the global natural gas story is one of surging demand, massive investment, tremendous innovation, and rapid globalisation of LNG.
Middle East and North Africa: the gas export opportunity
Where does this leave the Middle East?
Three of the world’s top four gas reserve holders are here: Qatar, Iran and Saudi Arabia.
The Middle East currently supplies around a fifth of world cross-border LNG trade. And it is expected to deliver over half of new LNG supply to 2015, driven by growth in Qatar, Egypt and Libya and, in addition, nearly all new global GTL supply.
Shell has been involved in the region’s LNG exporting industry from the beginning.
In 1964, the world’s first commercial natural gas liquefaction plant came on stream in Algeria, using Shell technology.
That same year, Shell undertook the management of the first two LNG ships ever built. My cousin was actually Chief Engineer on one of them, the Methane Princess. Today, we have involvement in around a quarter of the global LNG fleet.
In Oman we have been involved in exporting LNG as a partner in Oman LNG (OLNG) since 2000, and through OLNG as a partner in Qalhat LNG, a project that was added 5 years later, under construction management by Shell. Both projects have excellent track records.
In Qatar, Shell has a 30% stake in a joint venture with Qatargas, known as Qatargas 4. LNG from the plant will go to China, Dubai and the United States. And we are working hard to send even more gas towards the East.
We’re also happy at our role working with the Qatargas transport company, Nakilat, in operating and maintaining their fleet of 25 new-built LNG vessels.
Figure 2: Pearl GTL, towards completion
In Qatar, we are also building our flagship GTL (gas-to-liquids) project – Pearl GTL.
When finished, it will be the world’s largest GTL plant. Currently, more than 50,000 workers from 60 nations are at work on a site the size of 350 football fields, one of the world’s largest industrial developments.
Gas-to-liquids technology will take gas into new markets. Pearl GTL will produce enough GTL fuel to fill over 160,000 cars a day and enough synthetic base oil each year to make lubricants for more than 225 million cars. Last year, we secured approval for the use of GTL kerosene blend in commercial aircraft, only the fourth time in 100 years of aviation history that a new fuel has been so approved.
Shortly afterwards, Qatar Airways flew the first GTL-fuelled commercial airliner, from London to Doha, with paying passengers.
In short, there are plenty of opportunities in the global gas market.
But these global opportunities represent only one side of the coin.
Growing domestic demand for gas
The other side is domestic demand growth in the Middle East itself.
The region’s strong economy is driving local gas demand higher. More gas will be needed for the switch from oil to gas in the power sector, for a growing industrial sector, and for injection into oil reservoirs to enhance oil recovery.
As a result, the region’s gas consumption is predicted to grow by about 5% per annum, similar to that of China, and twice as fast as that of the major European economies.
Which brings me to the question of how to solve the Middle East’s gas puzzle of resource abundance, export opportunities and rising domestic demand.
I believe the solution has three crucial elements:
- first, increasing natural gas supplies through exploration and development;
- second, expanding the region’s natural gas and LNG infrastructure;
- and third, adjustment of the region’s gas pricing policies.
Solving the gas puzzle: increasing domestic gas supplies
Let’s first look at the potential for increasing domestic gas supplies.
One reason for the imbalance is that natural gas in the Middle East is not distributed evenly and a lot of it is difficult to access.
Of the currently known accumulations totaling more than 70tcm (~2500 tcf), almost 80% is in two countries, Iran and Qatar.
Of the remaining volume outside these two countries, around 70% is in associated gas accumulations.
Associated gas is tied to oil production so its use is not flexible. If oil production quotas go down, then a country dependent upon associated gas can find itself gas short.
Conversely, if oil production increases, that country must find something to do with the gas.
This sounds like a nice problem to have but in reality it isn’t so easy, as is evidenced by the amount of gas that is flared.
There is of course real value in capturing associated gas instead of flaring it.
Iraq is a case in point. We signed a provisional Heads of Agreement with the Iraqi Ministry of Oil in 2008, setting out the commercial principles to establish a JV with the aim of capturing and processing natural gas in southern Iraq that otherwise gets flared.
By end 2009 , projects jointly executed by Shell and South Gas Company had already resulted in 135 million cubic feet per day of gas and 500 tonnes per day of LPG (liquefied petroleum gas) being gathered that was previously flared. Even before any binding deal was in place. This represents 20% of the currently flared gas, and over a third of the current Iraqi LPG import requirements.
Gathering associated gas is important, but won’t be enough to satisfy the region’s long-term gas requirements.
We also need to increase production of non-associated gas resources.
For example, in Saudi Arabia, which is the third biggest gas reserve holder after Iran and Qatar, with roughly 260 tcf (7.5 tcm) of discovered resources, we estimate that about:
60% of the gas is associated gas.
Of the remaining 100 tcf of free gas, 75% is in accumulations that are sour or in tight reservoirs, or both.
Leaving about 25 tcf of “easy” conventional free gas to be developed.
That is still a lot of gas but not enough for the significant long-term energy requirements of Saudi Arabia.
There is more gas to be found in Saudi Arabia where the US Geological Survey yet-to-find estimate is for 640 tcf (18 tcm), the most in the Middle East.
But much of that gas is also likely to be found in tight reservoirs. And much of it will contain hydrogen sulphide and carbon dioxide. Treatment of that gas is a costly and technology-intensive activity.
Fortunately, development of tight and sour gas resources is possible with the right technologies.
In Shell we have six decades of experience in sour gas development – especially in Canada – including one field with up to 90% hydrogen sulphide.
At the peak of production, the Shell-operated Canadian sour gas fields produced well over 1 billion cubic feet per day of gas – that’s roughly three quarters of Kuwait’s entire gas production in 2008.
So, clearly, this kind of experience will help us to give the right kind of support to Kuwait Oil Company in developing Kuwait’s sour Jurassic fields.
In Oman, as JV partner in PDO, we’re building a miscible gas injection project to enhance recovery from the Harweel oil field.
The Harweel project is particularly challenging. It involves the injection of associated sour gas - with 4% hydrogen sulphide and 15 % carbon dioxide - at very high pressures of 550 to 600 bar. The aim is to enhance the Harweel oil field’s recovery factor from about 10% to some 40%.
The sour gas challenge goes beyond upstream operations.
It also involves developing commercially attractive products from the sulphur that gets produced as a by-product from sour gas fields.
I’m happy to say we’ve have had some success at Shell in doing so.
One product, Thiocrete, replaces cement in concrete and could reduce the lifecycle CO2 impact of concrete by 30-50%.
Another product, Thiopave – sulphur-enhanced asphalt – has been named a low-carbon technology by the Alberta government in Canada, which means you can get carbon offsets for using it there.
We’ve only just begun to market these products, but it’s already clear they have the potential to absorb large volumes of sulphur.
I hope they can therefore help unlock more Middle East contaminated gas resources.
But to achieve gas supply security for all countries in the Middle East and North Africa, still more is needed.
While there is much gas to be found by exploration, most of this gas is likely to be found in the same countries that hold current resources.
LNG: option for Middle East importers
So the second element to solving the gas puzzle is to continue investing in the infrastructure that enables countries with a gas deficit to import their needs.
In that context, LNG is an interesting option.
By investing in LNG regasification terminals, countries can tap into the fast-globalising LNG market and diversify their gas supplies.
Regasification terminals can be built rapidly, in three years or less. And thanks to the freedom of the seas they do not require the same bilateral agreements on which cross-border pipelines depend.
Who would have predicted only five years ago that one of the very first LNG cargos from the Sakhalin II project in eastern Russia would be delivered to Kuwait?
Dubai currently has a regas terminal under construction and will probably be the second country in the region to import LNG. Bahrain is likely to follow.
The Gulf region’s market is attractive for exporters because of its anti-cyclical nature. GCC countries require LNG in the summer –
for air conditioning and cooling – when demand in Europe and Asia is low.
So in addition to finding and developing more gas supply, we need more investment in regional infrastructure, including and in particular for LNG.
Low regional gas prices
A common factor to unlock both the domestic gas and LNG potential is the tricky question of gas price.
Part of the reason for the gas supply challenge in this region is a history of low natural gas pricing.
There have been times when regional gas prices were a fifth of the gas price of the UK and US, a tenth of gas prices in the Far East and less than one-twelfth of the energy equivalent price of oil.
While the availability of cheap gas has helped drive industrial growth and keep inflation low, it has also encouraged relatively high per capita consumption of energy and water.
Some countries – mainly net gas exporters - can subsidise domestic gas with the income from exports.
But other countries are only likely to attract imports at competitive export prices.
So I’m not surprised that countries in the Middle East are increasingly seeking to develop energy policies that promote energy efficiency and conservation – as a way to keep open options for future generations.
Part of such an approach could be for industrial users to pay gas prices that reflect the increasing cost of more difficult domestic gas production and the increasing proportion of supplies coming from imports.
Egypt, which I visited two weeks ago, has done exactly that: in May 2008, the Egyptian government announced an increase in the price of natural gas to energy intensive industries by nearly 60%. This resulted in significant cuts in the government’s energy subsidy bill.
As we look to the future, policymakers in the Middle East face a fascinating gas puzzle.
The global gas market offers opportunities for exporters to capitalise on their resources.
At the same time, there is a growing local market for gas. And a growing number of countries will have to increase gas imports to meet their domestic needs.
Strong partnerships between National Oil Companies and International Oil Companies will be needed for deploying the technologies to increase domestic gas production.
These partnerships will also be important in moving gas out of the region, into the region, or across the region, as LNG, GTL or through pipelines.
NOCs can benefit through these partnerships from existing positions of the IOCs in the gas value chain.
But that in itself won’t be enough: to fully realise the region’s gas potential, it would help if gas prices began to reflect global trends.
Natural gas is the cleanest-burning fossil fuel and has many other advantages that make it a highly attractive fuel for the electricity sector.
These benefits of gas are important to policy makers in Europe and Asia, especially China, as they move to increase their countries’ reliance on natural gas through long-term LNG supply deals.
As the countries in the Middle East ponder their energy future, I am convinced that they will conclude that natural gas has many benefits and could change the region’s energy landscape – and quite literally help clear the air.