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Analysis: Middle East piped gas connections set to grow in 2019 despite LNG shift

Dubai — Piped gas connections are set to grow in the Middle East and North Africa region in 2019, with a number of connections restarting during the year, despite a strategic shift towards LNG use in the region.

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KEY PROJECTS

New discoveries are aiding the East Mediterranean's plans to develop a regional gas hub. Israel issued a new licensing round in November this year, and is expected to award successful bidders in early 2019. The country is set to begin gas sales to Egypt in 2019, potentially giving Egypt the option to export that gas as LNG from one of its terminals.

The Leviathan and Tamar fields have transit rights for up to 3.5 billion cubic meters a year each, through the East Mediterranean Gas pipeline, with Leviathan gas having first rights over Tamar.

Egypt will continue to use domestic gas sources well into the 2020s, as it looks to become a regional gas hub. The country recently announced plans to ramp up exports from its 6.9 bcm/year Damietta facility. Idku, its other facility, can export a total of 10 bcm/year. Egypt has signed a provisional deal to receive gas from the Aphrodite field for Idku.

"With the successful production ramp up of the Zohr field, the expectation is that Egypt will be over-supplied for a couple of years," Lex Huurdeman, senior oil and gas expert at the World Bank told S&P Global Platts. "At the same time, domestic market consumption is increasing, which means that the period of over-supply will be limited."

Egyptian gas supplies will play an important role in the Eastern Mediterranean region. Jordan has outlined plans to decrease LNG imports and increase pipeline nominations from Egypt and Israel on growing gas production at Egypt's Zohr fields and additional output from the Leviathan and Tamar fields in offshore Israel.

Imports to Jordan from the Arab Gas Pipeline will rise to 3 million cu m/d next year, up from the current 1 million cu m/d, Jordanian minister Hala Zawati told journalists in Abu Dhabi in November.

Meanwhile, Saudi Arabia said it plans to deepen connections within the Gulf through an established gas network. The state-owned oil company Aramco outlined plans to increase gas production by 64% within the next ten years to decrease reliance on oil-fired generation.

The move could be partially politically motivated, as a dispute between Saudi Arabia and neighboring Qatar continues. Roughly a third of the UAE's gas is supplied by Qatar through the Dolphin pipeline and LNG exports, and Abu Dhabi's Mubadala holds a stake in the pipeline infrastructure.

"Although gas continues to flow uninterrupted from Qatar to the UAE, Doha is very unlikely to take part in any further regional expansion plans," Torbjorn Soltvedt, principal analyst for Middle East and North Africa at Verisk Maplecroft told Platts. "Existing plans to increase gas volumes to the UAE and to supply Saudi Arabia have already been shelved because of the dispute."

Saudi Arabia and the UAE announced an agreement to cooperate in gas and LNG in November, which could include investing in overseas liquefaction projects. The announcement came just months after Qatar said it would be focusing its efforts on ramping up LNG supply and targeting overseas markets.

Abu Dhabi will likely soon have plenty of domestic gas to spare, but plans for how that gas will be used are unconfirmed.

The UAE's Supreme Petroleum Council in November announced new discoveries of up to 15 tcf of gas, preceding a flurry of deals with foreign investors -- including Germany's Wintershall, Italy's Eni, and France's Total -- to develop the Ghasha, Hail and Ruwais Diyab gas projects, as well as surrounding offshore blocks. Fracking at Total's Ruwais Diyab shale play is expected to start by the end of this year, and supply could be on stream by the end of 2019.

DOWNSIDE RISKS FOR PIPELINE PROJECTS

Like most cross-border energy projects in the region, the main downside risk for progress on potential pipeline projects, or any supply risks for existing pipelines, will be geopolitical tensions.

In Iran, a project to pipe gas between it and Oman has been under discussion for over six years, and reinstated US sanctions on Iran have further complicated progress. Under the sanctions, companies doing business with Iran will be sanctioned from using the US dollar-clearing system.

LNG could also be a downside risk for pipeline projects. Importing the fuel as LNG negates the problem of being reliant on a single producer for gas. The Middle East region's proximity to both the Atlantic basin and Asian markets means it could be well-placed to pick up distressed or unwanted cargoes at cheap rates, as spot market liquidity increases.

Global LNG prices are expected to fall next year on increasing US and Australian supply. Asian demand for the winter is also expected to be weaker than usual, which could pressure spot prices. However, elevated shipping rates could put a brake on cross-basin trading.

While LNG prices remain low, players may choose to import cheap spot gas. Bahrain will begin importing LNG in February or March this year, and supply will be sourced entirely from the spot market. But Bahrain's minister for oil Shaikh Mohammad Khalifa al-Khalifa told Platts that the Bahrain LNG facility's main purpose is security of supply, and that the facility won't be very active.

"We don't believe there will be heavy use of the terminal for the first few years, but currently we are working on the commissioning side, and this is why, because we need to test the facilities," Khalifa said in an interview.

In other countries, Lebanon is set to become an LNG importer next year, which will mitigate some of the region's lost global gas demand from Egypt, and raise overall regional demand forecasts.

The country launched a bidding round to supply three floating storage and regasification units, with the winning bidder due to be announced next year. FSRUs make LNG imports more attractive than earlier, when it was necessary to build costly LNG import facilities.

Sharjah is also planning to import LNG through a regasification terminal under a project which is scheduled for completion in 2020.

From a producer's perspective, for LNG exports to remain attractive, returns will need to be higher than the cost of supply to piped markets. But for consumers, if geopolitical tensions can be kept at bay, the prices piped gas can offer are in most cases much more competitive.

-- Miriam Malek, miriam.malek@spglobal.com

-- Edited by Shashwat Pradhan, newsdesk@spglobal.com