Mixed outlook for Middle East gas projects

Weak oil prices are the main barrier to furthering liquefied natural gas (LNG) export projects in the Middle East, and two of the regions' three existing schemes have been exposed to price-related risk.

Sheikh Ahmed Zaki Yamani, chairman of London's Centre for Global Energy Studies, Mar. 17 offered this view to delegates attending the second annual conference on natural gas at Doha, Qatar.

Yamani view

Yamani said that while LNG suppliers in the past have secured minimum, or floor, prices for delivered LNG, customers for Oman and Qatar LNG have been able to negotiate tougher deals because of competition among suppliers.

"It seems that the Korean Gas Corp.," said Yamani, "has managed to dispense with the floor price in its contract with Shell and its partners for Omani LNG, in return for an undertaking to purchase much more gas.

"And I hear that the same concession is being sought retroactively by the purchasers of Qatari gas. This is a significant development, for it opens these projects to a degree of risk from the oil price."

Qatar Liquefied Gas Co. Ltd. has only in the past few weeks inaugurated an export plant that is supplying LNG to Japanese Electric Co. at a rate of 4 million metric tons/year. Work is under way to add a third LNG train, bringing total capacity of this plant to 6 million tons/year.

On an adjacent site at Ras Laffan, a $3.4 billion LNG export scheme is to be built by Qatar General Petroleum Corp., Mobil Corp., and Japan's Nissho Iwai Corp. and Itochu Corp. This is intended to have initial capacity to produce 5 million metric tons/year of LNG from two trains beginning mid-1999, to Korean Gas.

Price concerns

Yamani said that while the first Qatari LNG scheme has been highly lucrative since its first delivery last December, it is feasible that there may come a point where the project only breaks even.

CGES has estimated that the aggregate supply cost of Qatari LNG landed in Japan is $15.70/BOE, said Yamani, of which 15% of the total is upstream costs, 48% is for liquefaction, and 37% for shipping.

Since the project began deliveries in December 1996, said Yamani, the LNG price has been fixed under a provisional agreement at $24/BOE, but the agreement expires at the end of March.

"I am sure," said Yamani, "that the Japanese clients of Qatargas are already negotiating for a more realistic price. Today such a price would be less than $20/BOE, giving a margin over the supply cost of less than 25%.

"Who is to say, however, that the price of oil will not descend, for argument's sake, to $16/bbl in the Persian Gulf, even dropping below that for brief periods? As I see it, the project would have been a different proposition without the financial cushion of the condensate.

"The condensate enables all costs, including capital charges, to be covered even if the price of oil drops to $11.50/bbl in the Persian Gulf. This seems to be the true bottom line for Qatari LNG at the moment."

Middle East gas potential

After the harsh realities of Yamani's speech, delegates were reminded by Marie-Francoise Chabrelie, general secretary of Cedigaz, of more comforting facts from the Middle Eastern standpoint: the region has gas reserves amounting to 47 trillion cu m.

"Gas resources in the Middle East are relatively underutilized," said Chabrelie, "and production is not as high as could be expected from its high reserves. The region possesses fields with huge gas reserves, featuring the world's lowest production costs."

Chabrelie said the Middle East's marketed gas production is expected to increase from 145 billion cu m in 1995 to about 340 billion cu m in 2010, with natural gas liquids production potentially rising to 1.8 million b/d by 2000.

While Qatar, Abu Dhabi, and Oman already export gas, said Chabrelie, Iran, Saudi Arabia, Yemen, Iraq, and Syria will increase their gas production significantly and may start exporting gas.

Qatar's plans

Besides expanding LNG exports, Qatar is planning to build a refinery at Ras Laffan to utilize condensate produced by the Qatargas and Rasgas LNG projects and to be contemplating a gas-to-liquids project.

"According to QGPC's estimates," said Chabrelie, "condensate output will increase from the current 30,000 b/d to 50,000 b/d at the end of 1998 and 120,000 b/d in 1999 after the commissioning of Qatargas' third liquefaction train and the start of Rasgas.

"Also, QGPC and Exxon are considering a $1 billion-plus plant using Exxon's proprietary gas-to-liquids conversion technology for converting methane into liquid products (see Newsletter, this issue).

"This could add a further use for gas from the huge North field. If synthetic fuels technology can be applied economically on a large scale, it could revolutionize the economics of remote fields where the cost of gas pipelines or LNG plant is prohibitive."

Other Middle East action

Abu Dhabi has doubled gas production from Umm Shaif offshore field to 1.045 bcfd to provide supplies for Das Island LNG plant.

Increased capacity from Umm Shaif is expected to help raise Das Island plant capacity to 8 million tons/year capacity in the near future.

In Oman, gas reserves have been increased to 708 trillion cu m by exploration in the early 1990s, while more than 400 million bbl of additional condensate reserves have also been firmed up.

Chabrelie said reserves of 7 tcf of gas have been allocated to Oman's LNG plant, but this total could be increased to 8.4 tcf. Also, Oman's government is looking to increase gas utilization in petrochemicals, fertilizer production, and electricity generation.

Yemen's emphasis is on its planned LNG project, said Chabrelie, to which reserves of 9.5 tcf have been allocated in the Marib area. This production will support exports and spur local demand, with marketed output expected to reach 5 billion cu m in 2002.

Iran's 23 trillion cu m of gas reserves make it second only to Russia in terms of gas potential, said Chabrelie. The country plans to raise production to more than 290 billion cu m/year by 2010, when exports are projected to reach 50 billion cu m/year.

Saudi Arabia estimates domestic gas demand could reach 6.1 bcfd by 2006 from 3.45 bcfd today. By then, half the gas is expected to be used to generate electricity, substituting for residual fuel oil used today.

Iraq has gas reserves of more than 3.3 trillion cu m, said Chabrelie, and processing capacity of 2.05 bcfd. Because most Iraqi gas production is associated gas, Baghdad's plans to increase oil production to 6 million b/d could mean production of 7.4 bcfd of gas, the surplus being available for export.

While Syria's gas reserves are not negligible, said Chabrelie, marketed production is limited by gas processing capacity. A program to boost gas gathering and processing capability is intended to raise gas production from 8 million cu m/day now to 16 million cu m/day in 2000, with the bulk of additional output to supply gas-fired power stations.

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