Global Insight Perspective | |
Significance | Shell and Qatar Petroleum (QP)'s Qatargas LNG venture has signed a 15-year LNG supply contract with Dubai, which will import 1.5 million t/y delivered throughout the peak-demand season, starting in 2010. The United Kingdom's Golar will supply a floating regasification vessel, to be moored offshore the emirate. |
Implications | Dubai is following Kuwait's example in resorting to LNG imports to cover peak-demand shortages, amid declining domestic resources and what looks to be a medium-to-long term lack of sufficient gas-supply capacities in neighbouring Abu Dhabi. Qatar's moratorium on new gas development projects, and Iranian delivery and reliability problems leave it with little alternative. |
Outlook | Amid gas demand growth on a par with that of China, traditional Gulf energy exporters have begun to suffer from a severe gas crunch with little near-term relief on the horizon. Only Qatar—and possibly Iran—stand out as notable exceptions, making some future LNG import deals in the region likely and casting exports, notably those from Oman, in doubt. |
Dubai's Solution
Anglo-Dutch major Shell, along with its Qatargas venture partner Qatar Petroleum (QP), has agreed to supply Dubai with 1.5 million t/y of LNG starting from 2010, under a 15-year deal. The gas will be supplied to Dubai during the region's peak-demand season—generally falling between May and October—and will be partly sourced from Qatargas's liquefaction plants (most probably from the Qatargas IV train) in Qatar and partly from other facilities in Shell's LNG production portfolio, Reuters reported.
The United Kingdom's Golar has been awarded the contract to supply a floating storage and regasification unit (FSRU) vessel to the Dubai Supply Authority (DUSUP, Dubai's state-owned authority owning all gas pipelines and managing its gas purchases) under a long-term time charter. DUSUP has signed a 10-year charter agreement, with a five-year extension option, whereby Golar will convert its LNG carrier Golar Freeze into an FSRU, with an LNG storage capacity of 125,000 tonnes and a regasification capacity of 480 mmcf/d (equivalent to the regasification of 3 million t/y of LNG). Golar put the value of its 10-year contract at US$450 million and said that the conversion would be finalised and the ship commissioned for its Dubai mission by the beginning of the second quarter of 2010.
DUSUP will in the meantime construct a jetty for the FSRU's permanent mooring, as well as receiving facilities under the advisory of Shell. The onshore package, which according to LNG Unlimited is about to be tendered shortly, with awards expected in the third quarter of this year, is understood to consist of a 1,500-metre subsea gas pipeline, connections to the local pipeline network, and landing areas for delivery vessels, in addition to the permanent jetty at the Jebel Ali port. U.K. company Halcrow is undertaking the project consultancy for DUSUP and the Dubai Electricity and Water Authority (DEWA).
The Regional Situation
Across the Gulf region, strong oil-boom-fuelled economic growth, together with bulging populations and wasteful consumer patterns encouraged by high energy and fuel subsidies, has seen countries struggle to meet electricity demand in recent years. While much of the past years' shortages have been due to long-delayed capacity investments—put off during the 1990s, when oil revenue was low and many states had to cut back spending—the recent years of high oil prices have led to investment being pumped into generating capacity and output in most of the Gulf, starting to catch up with demand. This, however, has exposed a harder-to-solve feedstock shortage in the region. The traditional energy-exporting states across the region are struggling to bring sufficient quantities of gas onstream and, increasingly, experiencing feedstock shortages at their power plants.
Qatar and Iran are the main exceptions here, with vast gas reserves at their disposal, although Iran for political and economical reasons has failed to invest sufficiently in its production and transportation infrastructure to fully avert shortages at times of peak demand. Iraq could be added to the group of potential gas exporters, although the lingering effects of decades of underinvestment and wars have left the country currently unable to meet its domestic market's gas and electricity demands. Hence, large oil exporters such as Kuwait, the United Arab Emirates, and Saudi Arabia are increasingly forced to seek new ways to source gas, while Oman, for several years an LNG exporter, finds itself under strain to deliver the volumes it has undertaken to provide.
Outlook and Implications
Different Responses, Rising Costs
Kuwait earlier this year signed up for imports of between 1.4 million t/y and 1.7 million t/y of LNG from Qatar, starting in 2009, immediately embarking on the construction of regasification and receiving facilities (see Kuwait: 5 February 2008: Kuwait to Import Qatari LNG, as Cost of Boosting Production Rises amid Delays). Oman has been eyeing Iranian imports and the development of shared offshore fields, while at the same time pursuing some limited import options of Qatari gas through the Dolphin pipeline. Its own hopes of pushing the development of vast, but domestically challenging, tight gas reserves, led by BP, have been frustrated by the time needed to evaluate and execute such a project. Saudi Arabia has also increasingly found itself in a similar position, with new gas being brought onstream from large developments barely allowing it to catch up with demand growth and forcing it to search for gas in new and increasingly inaccessible areas. It still harbours hopes of being able to find the necessary reserves in the long run, however, and has in the meantime started once again to lift its use of fuel oil in electricity generation.
Abu Dhabi, Dubai, and the northern emirates of the United Arab Emirates federation have chosen a middle way, with Abu Dhabi tendering the development of its sour gas reserves under a groundbreaking project that could lead to the commercial unlocking of sour gas reserves across the region, while at the same time importing gas from Qatar through the Dolphin pipeline (see United Arab Emirates: 15 February 2008: ConocoPhillips Reported to Have Bagged US$10-bil. Abu Dhabi Sour Gas Contract). Most of the Dolphin network's throughput has been secured by Abu Dhabi, however, meaning that emirates such as Dubai and its smaller northern neighbours have been forced to look elsewhere as consumption continues to grow—in Dubai at levels close to 20% per year.
Ras al-Khaimah recently struck a deal to import 50-150 mmcf/d of Oman's 200-mmcf/d share of the Dolphin deliveries during the winter season, when the mountainous emirate experiences a need for heating. For this its government was ready to pay US$5/mmBtu, according to the Middle East Economic Survey (MEES), a far cry from the US$0.75-1.00/mmBtu traditionally paid in the region and the US$1.25/mmBtu that Qatar charges for the Dolphin gas. Sharjah had hoped to get its import of Iranian gas through a Crescent Petroleum pipeline under way by now, but a long-standing price dispute—and what seems to be an unwillingness by the Iranians to commit to the final investment amid domestic shortages—has stalled an agreement (see Iran: 17 April 2008: Sharjah's Crescent Petroleum Could Lose Iranian Gas Unless it Agrees to Hefty Price Rise).
As Qatar has introduced a moratorium on further development of its vast North Field, awaiting a deep reservoir study of the impact on the field of the rapid production-capacity ramp-up it has experienced, Gulf states have no other alternatives to pursue when it comes to gas export pipelines. Hence, Kuwait and now Dubai feel forced to resort to the more expensive LNG market, which is especially telling given both emirates' location, which would have made pipeline connections economically feasible.
As new gas reserves prove a struggle to find, or put developers under severe technological challenges—making results expensive and time consuming while shortages grow—more and more import deals will be struck by states previously known to be exclusively exporters of energy. In Saudi Arabia imports might seem to be a too politically sensitive step, while hope remains high that new gas reserves will be discovered in the Empty Quarter (Rub' al-Khali) desert, leading to an increased use of fuel oil in electricity generation, at least in the medium term. Oman faces several challenges, but with Iranian co-operation yet some time off, it seems it will be sorely tested to rein in domestic demand in order to be able to fulfil its LNG export agreements, while it waits for its tight gas resources to be developed. It seems, however, that Dubai and the northern emirates will have to get used to dramatically rising energy costs, in order to be able to sustain their high levels of economic growth.