Projects pushed back or cancelled elsewhere could offer opportunities for the region’s gas producers
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Holders of Mena gas reserves have had a relatively good year, despite the coronavirus pandemic cratering global demand and prices for a large portion of its course. So says Noel Tomnay, head of Emearc gas and LNG consulting at researcher Wood Mackenzie.
“European and Asia prices are back to c.$5.50/mn Btu, [and] there are expectations of very limited curtailments of US LNG this winter. In many ways, the LNG market is back to where it was pre-Covid,” he told Petroleum Economist’s LNG to Power Emea virtual forum in early November.
And, in the longer term, delays and cancellations to planned LNG liquefaction projects elsewhere will play to the advantage of any regional ambitions to increase exports, given that Qatar, Oman and Egypt are looking mainly at brownfield expansion. “They are always going to be lower quartile developers of new LNG capacity,” says Tomnay.
“A lot of higher cost greenfield capacity planned for development before the pandemic is now struggling to raise capital and get off the ground. Many are not going to go anywhere,” he says.
Price must be right
But the economics will still have to be right, cautions Robin Mills, CEO of consultancy Qamar Energy. He foresees a lot more gas production emerging in the Mid-East Gulf in the coming years, particularly in Oman, Saudi Arabia and the UAE. “It may be delayed a year or so by the pandemic, but it will turn up,” says Mills.
And demand for this gas domestically may not be as strong as initially predicted. “We will need to see what the region’s post-pandemic economic recovery is like, but if oil prices remain low, GCC economic growth is also likely to be pretty weak,” he predicts.
Alternative sources of power generation—nuclear in the UAE, coal and “more and more solar over the next decade”, particularly in the aforementioned three countries likely to add most gas supply—also pose a domestic gas demand threat.
But much of the new production outside Qatar is unconventional—tight, shale or sour—and thus not low-cost, warns Mills. Production costs may range from $2.50/mn Btu up to $5-6/mn Btu.
The suitability of this gas to supply liquefaction plants therefore faces a challenge, although Mills agrees that Mid-East Gulf brownfield projects should still be competitive against US greenfields—particularly into Asia, where the Middle East has an obvious lower shipping cost advantage, and against those without access to the lowest-cost US basins.
“Gulf LNG feedstock costs cannot be more than $3.50-4/mn Btu, and probably has to be a bit lower to be really competitive,” he suggests. “If production costs are higher than that, it is going to be hard to make [LNG exports] work.
“Building new plants for anyone other than Qatar is going to be tough. For Oman, they should be able to do some relatively cheap debottlenecking. But for significant new LNG capacity? The upstream costs have got to come down.”
Even low-cost Qatar’s hugely ambitious expansion plans face some challenges, argues Ahmed Eldessouky, a Doha-based partner for Kuwait, Qatar and Oman at EY Consulting, on the basis that it is difficult to prioritise both volume and price in a well-supplied market. “Deals [Qatar Petroleum] has made or is about to enter into with [South Korea’s] Kogas and [China’s] Sinopec suggest it is going to be willing to make concessions on pricing to lock up long-term contracts,” he predicts.
Whither Egypt?
A more contentious issue is the future of Egypt’s LNG exports. “At $4-4.50/mn Btu for the more expensive deepwater gas, it is not economic even to put that into an existing LNG plant, let alone to build a new one,” argues Mills. “Given Egyptian, Cypriot and Israeli feedgas costs, it is difficult to see any expansions, never mind greenfield projects, in the East Med.”
Tomnay disagrees. “If you look at [Israeli field] Leviathan or [Cypriot discovery] Aphrodite, in our view that is sub-$2/mn Btu gas when delivered to Egypt.
“The question is, ‘what is the price coming out of the export facility?’ If these volumes could directly access existing capacity within a tolling structure, rather than going through any intermediate Egyptian weighted average price of gas phase, then they could be extremely competitive,” he contends.
“This is Egypt’s opportunity to try to separate its domestic market from the LNG export piece and to encourage more gas through its facilities. And that could enable brownfield expansion ambitions beyond existing Damietta and Idku capacity.”
Petroleum Economist's second virtual LNG to Power Forum took place this week with a focus on the opportunities and challenges for LNG across the Emea region. This virtual event included eight hours of high-quality content, with a focus on engaging and interactive live panel discussions. Content is now available on demand. Click here to access it.
The next in the LNG to Power series is our North America event, to register for this, click here. To view last month's Apac event, click here.