Should GCC natural gas prices re-evaluated ..?

The ongoing review of natural gas subsidies in the UAE at the government level, has reignited the debate on how well positioned the petrochemicals industry is to face an increase in feedstock prices.

Low gas prices have traditionally provided the region’s petrochemical industry with a significant competitive advantage. Low ethane costs have allowed the sector to quickly capture a larger share of the global petrochemicals market. Historically, the possibility of an increase in gas prices has been met with concern over erosion of the market’s competitiveness. But now, it appears that some stakeholders are of the opinion that incentivising natural gas production will ultimately benefit the industry.

The remarkably low costs of producing associated gas, which are typically restricted to processing and transportation, have enabled the region’s gas-dependent industries such as the petrochemicals sector to grow at an incredible rate. Some might even argue that the region’s petrochemical industry was built on the assumption of low-priced natural gas that would enable it to benefit from cost-savings over global competitors.

But the rapid diversification and expansion of the region’s economy and a booming population, is forcing governments across the Middle East to reconsider their natural gas pricing strategies. As it stands, the current prices do not enable for profitable production of non-associated gas fields, and further discourage players from investing in the technical capacity to produce gas efficiently.


This has only caused some countries in the region, such as Egypt and Kuwait, to continue importing natural gas from exporters like Qatar as a means of filling their demand gap, explained Justin Dargin, Gulf energy expert at the University of Oxford in an interview with Refining & Petrochemicals Middle East.

Simultaneously, the low gas prices are creating an environment of excessive energy consumption, taking the valuable resource out of the market where it could otherwise be used to add more value. A point that Suhail Mohammad Al Mazroui, Minister of Energy for the UAE was quick to point out on a panel discussion at the Abu Dhabi International Petroleum Exhibition and Conference last year.

Thus it seems increasingly likely that a wave of gas-price reform is imminent. In fact, Oman has already taken the initiative to stimulate tight gas reserves with a revolutionary pricing regime. Having acknowledged that unconventional gas production costs are set to exceed $2 per MMBTU, the Omani Minsitry of Oil and gas has revised a pricing scheme to increase natural gas prices to $3 per MMBTU.

With the EIA predicting that the region’s power generation needs will grow by about 50% from 710 TWh in 2010 to 1100 TWh by 2030, with 90% of this energy met by gas fired power plants, one would imagine that investments in natural gas infrastructure would be booming, but the low prices have continued to deter investors and thus, limited production increases.

“The Middle East has not got the commercial structure right, it’s not open to foreign investment and also simply because the gas price is wrong,” said Robin Mills, head of consulting at Manaar Energy. “In every country, prices are too low to make development attractive,” he said last year at a conference in Dubai.

For a region with almost a quarter of the world’s natural gas reserves, the idea of a supply shortage may seem far-fetched. But over the last decade, the growth in LNG exports has been remarkable. According to a report by Wood Mackenzie, Kuwait and the UAE combined, import over 400MMcf/d of natural gas, with LNG imports in the GCC expected to reach over 800 MMcf/D by 2016, when Bahrain begins importing LNG as well. “This is part of a worrying trend in the MENA region. Despite enormous reserves of natural gas in Qatar and Algeria, the region is chronically short of natural gas,” said Cat Hunter, researcher at IHS.

But there are a growing number of stakeholders who are arguing that a mechanism which increases the availability of natural gas, while reigning in the rampant consumption would ultimately benefit the petrochemical industry. After all, the sector must continuously compete with power generators and other manufacturing sectors for its gas allotments.

Others are pointing out that a rise in feedstock prices would only have a muted affect on the petrochemical industry to begin with. As the region has begun to realise the precarious nature of its natural gas supply, the petrochemical industry has begun developing new technologies which will utilise liquid feedstock, such as, gas liquids and refined petroleum products, like naphtha and propane.

“Companies like Sabic, which was more ethane constrained, are looking at technologies that produce petrochemicals from crude oil, and taking the gas out of the equation in order to go directly from liquids to petrochemicals,” said Andy Gibbins, VP MENA of the Euro Petroleum Consultants. “They’re looking at alternative means of keeping a feedstock advantage without being overly reliant on ethane.”

At the same time, the Middle East has generally enjoyed such a low starting point for natural gas that the competitive advantage it enjoys will probably not be as affected as is perceived. “Even if energy prices were to go up, I don’t think they would go up to the point where the significant competitive advantage would be completely eroded,” added Gibbins. “I think there would still be headroom for the Saudi producers to produce at a very low cost.” Source: Arabian Oil and Gas