The topsy-turvy nature of the global energy markets is expected to continue with the Middle East and North Africa (MENA) projected to lead the way in new LNG demand in 2016, according to a recent Apicorp Energy Research report.
A forecast from the International Energy Agency (IEA) found that MENA would be the second-largest LNG importing region by 2040.
“Consumption of natural in the Middle East, the agency forecasts, will rise from 480 billion cubic meters in 2015 to 738 billion cubic meters in 2040,” the report said. “Yet despite its strong reserves base, production has largely failed to keep pace with historical demand growth nor will it do so in the coming years.”
This is quite the change from the previous decade, which saw MENA hold the position as the dominant player in hydrocarbon production, with North America being among the largest regions for import demand.
Unlike the positional change of North America, which reversed course from an importing to exporting region due to the explosion of the shale revolution, MENA is still one of the largest producers of oil and gas.
This change began in 2015 with Egypt and Jordan importing their first LNG volumes. This year has seen Kuwait, the Middle East’s first LNG importer, and Bahrain announce plans to construct new import terminals, while Abu Dhabi is planning to build an floating storage and regasification unit (FSRU). These plans are being sped up because of the current global supply glut, which is making long-term contract positions more attractive to buyers.
Not only is regional production failing to keep pace with demand, the region also lacks pipeline import options, which makes LNG all the more attractive to make up the growing demand shortfall. According to Apicorp, MENA countries will invest about $10.3 billion in LNG import facilities over the medium term.
The region is experiencing large growth in industrial and power generation demand that it is becoming a large importer. By the end of 2017, MENA will account for 6.5% of the world’s global LNG demand, up from 1% in 2013.
“The current market conditions—an abundance of cheap supply—will also encourage MENA countries to think more strategically about gas’ role in their energy mix,” the report said. Indeed, even Saudi Arabia is open to LNG imports as it undertakes new energy pricing reforms.
Despite having the third-largest gas reserves in the world, the country is committing all of its gas production to power generation and industry. Officials are seeking to reduce the use of oil in power generation with a goal to increase the use of gas as a power fuel from 50% to 70% by 2030.
In North Africa, Egyptian officials are optimistic that the increasing amount of LNG imports, which began in 2013, will lessen with the discovery of the Al-Zohr gas field. The country has fast-tracked the development of the field, which has an estimated 800 billion cubic meters (cu. m) in reserves. However, Apicorp said that even with a fast development time, Egypt’s demand will outpace supplies by more than 2 billion cu. m a year by 2021.
One of the few Middle Eastern countries with pipeline options is Jordan, according to the report. The country had relied on imports from Egypt and Iraq, but geopolitical activity in both of these countries diminished production and forced officials to increase its use of diesel and fuel oil as a power generation fuel. However, gas still accounts for 80% of power generation and Jordan is seeking to increase the use of this fuel through LNG imports as well as pipeline imports from Israel beginning in 2018.
The biggest obstacle to the growth of LNG in the region is that the creditworthiness of many MENA countries is falling and lower domestic energy prices are making long-term LNG import infrastructure investments less attractive.
“For countries such as Egypt, LNG suppliers are wary of agreeing long-term contracts given the state’s poor payment history,” the report said, noting that Egypt still owes companies involved in its gas sector a combined $3 billion.
On a short-term basis, many countries will continue to build FSRUs and buy volumes on the spot market, but the report advised that to take full advantage of low prices, investment in permanent infrastructure and long-term deals are necessary.
Frank Nieto can be reached at firstname.lastname@example.org.