Gulf States’ Gas, Power Shortage Might Curb Crude Exports During Peak-Demand Season

Gulf Gas Crunch

As the electricity peak-demand season is approaches in the Gulf region, with high temperatures forcing the sustained use of air conditioning equipment, the problems that most of the region’s countries have in producing sufficient quantities of gas to fuel their power plants will again come to the fore. The region has let its domestic energy usage spiral over the past decades—its population encouraged by heavily subsidised utility prices and frequent neglect in collecting citizens' payments—and, because of a sustained oil-windfall-funded economic boom and decades of high population growth, now finds itself with some of the highest domestic energy demand levels per capita in the world. With little success in discovering new gas assets and rapidly bringing them onstream in many of the Gulf states, fears are now being raised internationally that the already tight crude market will be tightened further as oil increasingly will be used to provide emergency fuel for the region's power plants—staving off the widespread blackouts suffered in past summers. A shortfall would be exacerbated by gas being diverted from oilfield injection, hitting crude output further.

Power Shortages

Rolling blackouts and brownouts have been the norm in Kuwait over the last few summers and have also affected large parts of Saudi Arabia, Oman, and the United Arab Emirates (U.A.E.)'s northern emirates. It is well known that Abu Dhabi redirected some gas from its oilfield injection programmes to its power plants, in order for blackouts not to rock economic growth, as well as investor and consumer confidence in Abu Dhabi and Dubai, causing some temporary declines in its crude production. Elsewhere in the Gulf, Iran has suffered problems in getting sufficient amounts of gas onstream to satisfy domestic demand, although much of the problem has been as a result of an insufficient pipeline network. Also, peak demand among Iran’s most populous areas falls during the cold northern winter and its southern population is relatively concentrated close to its gas assets. Resource-poor Bahrain has also suffered energy shortages and a tight Saudi market has made sourcing supplies increasingly complex. Qatar remains the only Gulf country currently not suffering shortages, mainly because of its large gas assets. This means the will increasingly become a regional supplier, although geopolitical and economical reasons have hitherto made it focus on larger and strategically diversified markets.

Alarmist Assumptions?

Edward Morse, chief rnergy economist at U.S. investment bank Lehman Brothers, yesterday estimated the possible shortfall from the Gulf to 1 million b/d, saying that a similar volume was probably withheld from world markets last year, starting gradually from May and peaking during the July-August heatwave.

A 1-million-b/d estimated export shortfall seems on the extreme side, not least because it should have been more widely apparent while it was happening, although increased domestic consumption has made the regions' exports naturally lower than they otherwise would have been and therefore have contributed to the overall tightness of the crude markets. A first indication of lowered exports this year could well be falling tanker freight rates, which started to dip last May, as summer heat started to set in over the region, Morse said. He also added that he expected output capacity to catch up with domestic demand in 2009, probably making the mid-2009 summer season much less tight when it comes to Gulf crude exports.

Saudi Aramco is aiming to bring its large Khursaniyah development onstream in the coming months, adding around 500,000 b/d of oil and significant amounts of NGL to the output, while some scattered smaller crude developments in the Gulf states will have added some production in the past months. Kuwait is also seeing first production from its first non-associated gas field, although delays might indicate a certain production insecurity over the peak period. Also, Iraq has managed raise its oil exports significantly since last summer and, while its own population keeps suffering from the lack of power plant repairs, this means that larger amounts of its current production hit the world market as the domestic fuel prices keep Iraqi demand to a minimum. All in all, Global Insight does not believe the region's export capacity picture to be as bleak as Lehman Brothers suggest, although we do not rule out crude—and Omani LNG—export levels suffering somewhat across the Gulf. Global Insight has forecasted domestic demand growth of 400,000 b/d during the year, which would appear well matched by added production capacity.

Outlook and Implications

With countries like the U.A.E., Oman, and Kuwait looking at becoming energy importers, through buying Qatari and Iranian gas and LNG, the energy map of the Middle East is being redrawn, causing some concern globally. Saudi Arabian failures hitherto to find gas in its Empty Quarter desert have further fuelled fears that the region's hydrocarbons are drying up, although the picture is far more complex. While the Gulf states need to curb their domestic demand and clearly assess their energy strategies, the region will remain a net crude exporter for the foreseeable future.

While the coming summer heatwave will no doubt cause a renewed gas and electricity crunch in most of the region, potentially spilling over into somewhat temporarily lowered crude export volumes mainly in the U.A.E. and Kuwait, the extent is not likely to be close to 1 million b/d. This is mainly because of structural reasons, where relatively few of the installed gas-fuelled power plants can run at anything near full capacity on oil and some of them cannot take feedstock other than gas. Also, a generally lifted production capacity of condensates should not be discounted, although it is often forgotten, as NGL might make a large difference in alleviating the power shortages.

Related Reading:

Saudi Arabia: 3 March 2008: Saudi Aramco's 500,000-b/d Khursaniyah Development Suffers Further Construction Delays

Saudi Arabia: 19 March 2008: New Strategic Electricity Blueprint, Privatisations, Mulled by Saudi Government

Saudi Arabia: 19 February 2008: Khursaniyah Field Mega-Project Needs Two Months More, Saudi Aramco Says

Oman: 28 January 2008: Coal Power Mulled by Omanis as Gas Crunch Persists

Kuwait: 17 July 2007: Shuwaikh Power Operation Delayed Amid Continued Kuwaiti Electricity Shortage

Kuwait: 11 July 2007: Electricity Grid at Breaking Point, Kuwaiti Government Says; Will Impose Fines for Wastage

Kuwait: 25 June 2007: Kuwait Enforces Electricity Rationing While U.A.E. Suffers Blackouts

Saudi Arabia: 21 June 2007: US$51 bil. Earmarked for Electricity Development in Saudi Arabia

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