Natural Gas in the Middle East Gas Projects Surge In The Middle East As Governments Seek New Revenue Sources

Michael D. Williams
International Energy Agency
Paris

• Fig. 1 - Iranian Government Deficits/Surpluses [28184 bytes]

• Fig. 2 - Kuwaiti Government Deficits/Surpluses [30129 bytes]

• Fig. 3 - Qatari Government Deficits/Surpluses [29495 bytes]

• Fig. 4 - Saudi Government Deficits/Surpluses [30319 bytes]

• Fig. 5 - U.A.E. Government Deficits/Surpluses [30776 bytes]

• Fig. 6 - Combined Emirates Deficits/Surpluses [23840 bytes]

• Fig. 7 - Gas Production to Reserves Ratios - 1995 [29048 bytes]

• Fig. 8 - Uses of Middle East Natural Gas [29551 bytes]

The rapid development of natural gas and condensate reserves in the Middle East results from a simple motivation: the desire of governments to earn revenues.

For the past decade, Middle East governments have run budget deficits, which they funded by drawing down foreign assets and issuing debt. Now in the process of structural economic reform, they have begun to use an under-utilized resource-natural gas, of which Middle East governments own about one third of the world's reserves.

Governments receive revenues from several sources in natural gas developments, which makes the projects very attractive. Revenue comes from the sale of the natural gas in the domestic market and, if exported, the international market; the sale of associated condensates; the additional exports of crude oil or refined products if natural gas is substituted for refined products in domestic markets; the increased sale of crude oil if natural gas is injected into reservoirs to maintain pressure; and the sale of petrochemicals where natural gas is used as feedstock.

The governments own the natural gas, the condensates, and the crude oil and are often large shareholders in the petrochemical companies. Further, condensates produced in conjunction with natural gas are not counted in the quotas of countries belonging to the Organization of Petroleum Exporting Countries (OPEC).

The cost of developing natural gas is part of the cost of projects having multiple outputs, making it difficult to estimate costs per unit. For gas associated with oil production, costs may be considered minimal. Often, condensates are produced in conjunction with natural gas, and their costs are clearly interlinked. If natural gas is developed for reinjection in oil fields, the cost of development should be considered part of the oil field development. If natural gas is developed to be feedstock or fuel for the petrochemical sector (because the government does not want to import natural gas), the cost of natural gas development is linked to associated petrochemical projects.

Four examples will be discussed here: a natural gas recycling scheme that produces condensate in the United Arab Emirates; development of LNG, condensates, and petrochemicals in Qatar; expansion of the petrochemical industry in Saudi Arabia along with substitution of natural gas for oil in electricity generation; and natural gas development for use in oil field reinjection programs, feedstock for petrochemicals, and substitution for oil in the Iranian domestic market. Each of these examples has multiple revenue sources, interlinked cost structures, and benefits that go beyond additional government revenue.

For the next decade, total natural gas production for the Middle East is projected to increase at about 6%/year. Of the total gas produced, far less will be flared than is done at present, substantially more will be exported, significantly more will be consumed domestically, and more will be used for reinjection in oil fields. If new applications (such as converting natural gas to middle distillates) proves to profitable, production would increase even more dramatically.

Two decades of deficit

Governments in the Middle East have run budget deficits more often than surpluses over the last 20 years and funded them by drawing down foreign assets, issuing debt, and borrowing on international capital markets (Figs. 1-6).

Structural economic reforms under way since the mid-1990s include privatization of state assets, establishment of and emphasis on domestic stock markets, increases in the prices of government goods and services (including domestic fuel), reintroduction of production sharing, changes in the domestic energy mix, and changes in the energy export mix.

Changes in the domestic energy and energy export mixes are particularly important since natural gas is being substituted for oil in domestic economies, exported, and used as a feedstock for petrochemicals produced for export.

In terms of utilization of its gas resource, as measured by dividing gas production by reserves, the Middle East lags behind other major producing areas as well as the world at large (Fig. 7 [29048 bytes]). A part of the reason for this underdevelopment is the historic emphasis of exploration in the Middle East on oil.

Motivated by their budget deficits, governments in the region now are recognizing the value of natural gas and pressing development. Associated condensates are providing additional revenues and further stimulating gas activity.

Multiple revenues

Developing natural gas for the domestic market enables the governments of oil-producing countries to leverage oil values.

In addition to earning revenues from domestic gas sales, the government extracts increased value from oil freed up for export since export prices of refined petroleum products are significantly higher than domestic prices. Thus, the government gains revenue by exporting the oil instead of consuming it domestically.

Direct exports of natural gas are becoming an important source of revenues for Middle Eastern governments. Pipeline and liquefied natural gas (LNG) projects planned or under way in the region have the potential to increase export capacity by 2000 by a factor of five over the 1994 level. All export capacity now under construction is for LNG, but several pipeline projects are in advanced stages of planning.

Condensates produced in conjunction with the natural gas can be sold, blended with crude, or refined domestically. OPEC member countries have extra incentives to develop condensates, which are not counted in the exporter group's country quotas. Consequently, condensate production capacity in the Middle East appears to be growing twice as fast as crude oil production capacity.

The revenue gains from gas reinjection are obvious: incremental oil production and sales.

Governments derive revenue from two sources when they use natural gas as a feedstock in their petrochemical industries: sale of natural gas to domestic petrochemical firms and the value-added associated with the export of the petrochemicals (for governments holding large shares of the petrochemical plants). This is the motivation for the major expansion of export petrochemical capacity under way in the Middle East.

Governments also benefit from increases in employment and multiple effects on their countries' economies that come from increases in natural gas development. A major project such as a liquefaction or petrochemical plant mobilizes local labor for construction work and can create local businesses to provide services to the new projects-from restaurants and laundries to material suppliers and engineering contractors.

Governments in many Middle East nations are concerned about employment since most of them have young and rapidly growing populations. The economic benefits associated with large construction projects further encourage natural gas and condensate production to move forward rapidly.

Interlinked costs

The cost of natural gas development is not easy to calculate when gas development occurs in conjunction with other activities and especially when no alternative economic use for the gas can be identified. This is particularly true for oil field injection projects and petrochemical projects in which governments use indigenous natural gas rather than importing feedstock.

The most common joint development cost occurs when natural gas is associated with oil production. While the natural gas production costs may be considered nil, processing and transportation may be costly.

When a gas field has associated condensates, the cost of developing the gas is interlinked with the cost of developing the condensates.

For a petrochemical project fed by indigenous gas production, the development of gas facilities needs to precede construction of the petrochemical plant so the natural gas production system can be fully operational by the time the petrochemical plant is ready. Although it is easy to allocate the costs between gas facilities and petrochemical facilities, the development costs of the two are interlinked because the decision to produce gas was based on manufacturing petrochemicals.

When all produced gas is reinjected for reservoir pressure maintenance, all costs should be considered oil-production-related costs. If some of the gas is taken from the reservoir and used for other purposes, then the cost of development becomes less easy to apportion.

Country examples

Large projects under way in the Middle East highlight the consequences of multiple revenue sources and interlinked costs of natural gas and condensate development. Other countries in the region are undertaking similar projects, so these examples represent only a portion of what is occurring.

Abu Dhabi

Abu Dhabi National Oil Co. (Adnoc) has almost completed a project that brings natural gas from three Thamama reservoirs in Bab field to the surface, removes the condensate, sells some of the dry gas in the domestic market, and reinjects the remainder to improve condensate recovery.

At full capacity, this project will produce 125,000 b/d of condensate. Revenues are derived primarily from the sale of condensate, although some revenue is obtained from the sale of natural gas to the domestic market.

Adnoc plans another project at Asab field similar to the Bab project. The main difference is that no Asab dry gas will be sold in the domestic market; thus, all of the revenues will come from condensate sales. Production of condensate should amount to about 130,000 b/d. The project is to be operational by 1999.

When the Asab project is complete, Adnoc will be producing about 255,000 b/d of condensate from these two projects. Condensate from the Bab project is already being sold in international markets, with the bulk of the revenues accruing to the government of Abu Dhabi.

Qatar

The largest expansion of LNG production capacity in the Middle East is under way in Qatar.

The Qatargas liquefaction and export facilities began shipping LNG in December. When fully operational, the project will produce about 6 million metric tons/year of LNG and 40,000 b/d of condensate.

Qatar has another project under construction called Ras Laffan LNG Co. (Rasgas). Only a portion of this planned project is currently under construction. If completely developed, it will produce 10 million tons/year of LNG and 70,000 b/d of condensate.

In addition, Enron proposes a third LNG project that would add 5 million tons/year of LNG and 35,000 b/d of condensate.

If all three projects develop according to plans, Qatar eventually could be exporting on the order of 21 million tons/year of LNG and about 145,000 b/d of condensate. Since the Qatar government owns about 65% of the projects through its national oil company, Qatar General Petroleum Corp. (QGPC), it will receive the bulk of the revenues.

Qatar's crude oil production in 1995 averaged 450,000 b/d, so the condensate output would increase the emirate's liquid hydrocarbon production by more than 32%. Qatar will also receive revenue from the domestic sale of natural gas to Qatargas, Rasgas, and Enron, although amounts will be small since about 35% of the projects are owned by the partners.

Qatar has also decided to build its first downstream petrochemical facilities. Development is under way to construct plants that will produce ethylene chloride, vinyl chloride, and other petrochemicals. QGPC will retain a 51% interest in the plants, which will use Qatari gas as feedstock. Other petrochemical projects are being evaluated.

Qatar will receive its share of revenues from the export of petrochemicals but will also generate revenue from the domestic sale of natural gas to the foreign portion of the petrochemical companies.

Qatar also is expanding its natural gas injection program in both onshore and offshore oil fields. It has signed production sharing contracts with several international oil companies, which have agreed to use the latest technology and enhanced oil recovery (EOR) methods. The volume of gas used for reinjection projects will increase substantially as these programs are implemented. Additional revenues will be earned as oil production and exports increase.

Saudi Arabia

Saudi Arabia, already a world-class petrochemical producer and exporter, has plans to increase petrochemical capacity dramatically. Several projects are under construction, most of them to use natural gas as feedstock.

To help provide adequate natural gas supplies, Saudi Arabian Oil Co. (Saudi Aramco) is in the process of expanding its natural gas processing capacity by debottlenecking three plants-Uthmaniyah, Shedgum, and Berri. In addition, the kingdom plans to construct another plant at Hawiyah. Together, these plants will increase nameplate capacity of the Saudi Master Gas System (MGS) by 61% from 3.95 bcfd in 1995 to 6.34 bcfd in 2002.

In association with expansion of the MGS, Aramco will expand production of natural gas and associated condensate. The volume of additional condensate is not known since the liquids content varies considerably for the Khuff formation.

The government of Saudi Arabia will obtain revenue from three sources-the domestic sale of natural gas to the petrochemical companies (less the government share); total export earnings from the sale of condensate; and the government's share of export revenues from the sale of petrochemicals (the government typically owns about 45% of the projects).

As part of the expansion of the MGS listed above, Saudi Aramco will lay a pipeline from the Hawiyah gas processing plant to the Saudi Consolidated Electric Co. for the Central Province of Saudi Arabia (Sceco Central). Sceco Central now uses about 200,000 b/d of Arab Light crude oil to generate electricity. It is estimated that 100,000 b/d of oil burned at Sceco Central will be replaced by natural gas.

The government will obtain revenues from both the domestic sale of natural gas to the electric utility and from the incremental value of the additional exports of 100,000 b/d of Arab Light crude (since the export price for Arab Light is much higher than the domestic price Sceco Central pays).

Iran

In Iran, the government is expanding its natural gas grid to hook up villages and homes so natural gas can be used for heating and cooking. The government also plans to substitute natural gas for oil in electricity generation. In addition, the government has a program of substituting liquefied petroleum gas (LPG) for refined products in taxis. At this writing about 5,000 of Tehran's 22,000 taxis had been converted.

Iran plans to provide gas to the domestic market by developing several gas fields, including the offshore South Pars gas field. Development of South Pars is scheduled to be done in phases, ultimately reaching 7 bcfd, with associated condensate in excess of 40,000 b/d. The South Pars project is one of many projects that Iran has put up for international bid.

By substituting natural gas for refined products domestically, the government can increase its net exports of oil products. Since the export price of refined products is significantly higher than Iranian domestic prices, the government realizes additional revenues from the exports and saves hard currency by importing less of the products for which it now must rely on international supplies. Thus, additional government revenues will come from the export of condensate, the sale of natural gas in the domestic market, and additional exports of refined products.

Several of the projects Iran has made available to international participation would use gas to improve productivity of Iran's very mature oil fields, where output is in decline. One of the projects, for example, would revive production of offshore Doroud oil field through injection of gas produced but now flared from fields nearby. The project would gather and transport the gas to a processing facility, blend it with gas produced in association with Doroud oil, and inject the mixture into Doroud's Yamama and Manifa oil reservoirs to increase pressure.

If successful, crude oil production would increase from about 160,000 b/d to about 330,000 b/d. It is expected that 5,000 b/d of condensate will be produced with the gas developed for this project. Additional revenues would come from both the increase in oil exports (as oil production is increased) and from the sale of condensate.

Iran's long term strategy is to increase natural gas and petrochemical outputs so they eventually replace oil as the main earner of foreign currency. Minister of Energy Gholamreza Aghazadeh predicted that Iran's output of petrochemicals would triple in the next decade and earn $6 billion/year in the export market.

Iran's plans for natural gas exports will be built on agreements recently signed with Turkey and Armenia. Aghazadeh suggested Iran would be earning about $3 billion/year from the export of natural gas by the turn of the century.

The future

The production of natural gas is projected to grow at 6%/year in the Middle East during the coming decade, but if Iran is able to obtain partners and financing for most of its projects, this figure could be significantly higher.

Flaring and venting has decreased from 103 billion cu m/year, or 71% of total production, in 1976 to 50 billion cu m/year, or 23%, in 1995 (Fig. 8 [29551 bytes]). Saudi Arabia accounted for the largest portion of this flaring. With the expansion of the MGS under way, both the absolute volume and the share of gas that is flared and vented should decrease substantially.

Reinjected volumes will likely increase, but possibly in line with overall growth in gas volumes. Much will depend on the speed with which Iran moves forward with its projects.

In the coming decade, consumption of gas in the Middle East will probably increase greatly in volume and as a share of total gas produced. The rapidly expanding petrochemical industries and the generation of additional electricity from natural gas will be driving forces behind increases in domestic consumption in the Middle East.

Exports will likely see the fastest growth rates because they are starting from a relatively small base. As the expansions of LNG production capacities in Abu Dhabi and Qatar (Qatargas and Rasgas) become fully operational, the absolute volume of gas could increase five-fold by 2000 from 1994 levels. Any exports by Iran, Oman, or Yemen would add to the rate of increase, ensuring that the export share of total production enlarges as well.

Gas emphasis

Investment statistics reflect the needs of Middle Eastern governments for revenues, their ownership of gas reserves, and their large interests in petrochemical facilities. According to the Arab Petroleum Investment Corp., 50% of all Arab upstream investments allocated between 1995 and 2000 are for natural gas projects, and 61% of all downstream projects for the same period are for petrochemical plants.

With costs interlinked and revenue potential high, prospects are high that these investments will indeed be made and that development of gas and condensate will increase rapidly. In fact, in large measure because of the exclusion from OPEC quotas, condensate production is growing more than twice as fast as crude production capacity for OPEC members in the Middle East.

One more effort is in progress to make economic use of the region's vast gas resource. Exxon has been negotiating with Qatar for over a year to build a plant that would convert natural gas into oil. According to reports, the plant would cost about $1 billion and convert 500 MMcfd-1 bcfd of gas into 50,000-100,000 b/d of middle distillate.

If this project were implemented successfully, the 6%/year growth rate projected for Middle East gas production would prove to be much too low.

The Author