The Middle East holds a little less than half the world’s proven natural gas reserves, but several countries in the region are facing gas shortages. In fact, many of these fossil fuel titans are pursuing solar power and other alternative energy technologies to supplement their soaring power generation requirements.
The International Energy Agency discusses this issue in its recently released Medium-Term Gas Market Report 2012 and says that – with the exception of existing export contracts – incremental medium-term production will exclusively serve domestic markets in the Middle East.
It is necessary to examine resource fundamentals at the country level to uncover “wide regional disparities,” the agency notes, with Iran and Qatar representing 72% of the region’s proven gas reserves. A majority of regional natural gas reserves are “associated,” meaning the gas is located in the same geologic structures as crude oil.
Between Rocks and Hard Places
“Opec crude oil production capacity will increase by 2.3 million barrels per day over 2010 – 2016, with 80% of it coming from Iraq,” the IEA said in the report. In addition, natural gas prices are often subsidized and maintained at below cost levels, “creating a vicious cycle with an artificially high demand without any driver to increase efficiency.” In 2010, most Middle East wholesale natural gas prices were below $1/million Btu, according to the International Gas Union as cited in the IEA report. That is well below international market prices.
“This explains why, despite apparent abundant resources, many Middle Eastern countries actually face shortages. A large proportion of associated gas is reinjected in the fields to enhance oil production, while some is still flared or vented, which restricts even further marketed gas production,” said the IEA.
Many countries in the region struggle with competing interests and hard choices in their energy policies. Friction between these competing goals has increased with the social upheaval that continues to unfold across the region, giving leaders even greater incentive to continue providing cheap energy to their growing populations.
As populations expand, domestic energy demand increases and infrastructure becomes strained – particularly for power generation needed to supply air conditioning and water desalination. Much of the region’s existing power generation is fired by crude oil or oil products, which can be problematic for governments that rely heavily on oil export revenue to run their countries.
Global oil prices have been trading toward the higher end of the historical price spectrum in recent years, which motivates oil producing countries to export as much oil as possible, while switching to natural gas for power generation fuel. However, this strategy is often easier said than done when significant volumes of natural gas need to be reinjected to keep the oil flowing.
This confluence of artificially depressed domestic natural gas prices, a need to maintain or increase oil exports and growing domestic energy demand is becoming unsustainable for some Middle Eastern governments, with some analysts describing the situation as a regional gas crisis.
“Within the region, only Qatar seems able to meet its booming demand and export commitments without any difficulties,” said the IEA.
Iraq is described as a wild card, with huge production potential, but considerable uncertainty as well. “Even though the light at the end of the tunnel is becoming a bit brighter, it is still relatively far away,” the agency said.