Gas: A growth opportunity

The future role of gas will significantly depend on the ability to drive gas prices down and enable a common, competitive gas market across the entire Middle East.

BCG, Gas, Natural gas
Pablo Avogadri, partner and associate director BCG
Pablo Avogadri, partner and associate director BCG

Gas production has been a mainstay of the Middle East’s growth since the first reserves were discovered in the 1900s, and the recent discoveries in excess of 80 trillion cubic feet of gas reserves in Jebel Ali and Sharjah is a prime example of the role of gas in the region’s energy mix. Today, the Middle East region can deliver approximately 8,500 billion cubic meters (bcm) of gas with average breakeven prices of $2.5 per MMBtu (million British Thermal Units) by 2030, according to analysis by Boston Consulting Group (BCG), in reference to a recent report by BCG, Snam and IGU.

Not only has the region grown at an average of 4.6% per year, which is double the rate of global primary energy demand, but its cost of supply has remained competitive in the long-term despite the shale revolution. To assess what drove the rapid growth in the gas market and the ongoing sustainability of that growth, the energy trilemma framework is a useful tool, outlining a distinct interpretation for gas based on an assessment of historical drivers of gas market growth.

Firstly, the cost competitiveness of natural gas continues to improve and new technology and innovation continue to bring down breakeven costs. Secondly, the security of supply of natural gas is also improving, due in large part to the rapid growth in the availability of LNG. Thirdly, sustainability is a key driver of natural gas consumption growth, now and likely in the future.

Developments in each of the three components of the energy trilemma contribute to strong growth in gas markets. However, there are challenges within each dimension that must be overcome in order to sustain the rapid growth of gas markets in the future, including the following.

1. Cost competitiveness: Gas is an abundant resource, and cost position has improved in the past years, but local market regulations and infrastructure still constrain the competitiveness and monetization of gas. As a matter of fact, Middle East gas prices are still largely subsidized and pricing structures largely regulated.

2. Security of supply: Supply continues to grow and become more diverse, supported by large discoveries and greater and more flexible gas liquefaction capacity. Yet the limited scale of cross-border pipelines and gas trading continue to limit access to gas in many Middle East markets as pipeline networks are not unbundled, privatized, and independently operated by pipeline operators and geopolitical tensions do not favor cross-border commercial agreements. There are some signs of change as NOCs with large pipeline operations are now actively looking to monetize their assets, creating the opportunity to more flexible operations and infrastructure investments.

3. Sustainability: Government policies continue to recognize the role of gas in reducing Greenhouse Gas (GHG) intensity and improving local air quality, spurring further gas market development. But methane emissions present a strong challenge to the industry with gaps in the available data on emissions, and a large disparity between different assessment methods.

The future of Middle East gas

The Middle East could maintain its best-in-class position to 2030, despite a rise in production costs is forecasted, BCG data shows. Assessing what is required for strong, sustained gas growth relative to recent trends reveals several key themes that will shape the future of gas in the region and across the globe:

• More widespread development of low-cost gas resources and unconventional gas will be critical for ensuring the ongoing cost competitiveness of gas versus other energy sources. The more consistent development of lower-cost means of delivering gas to end markets will be critical to sustaining greater and more consistent gas market growth.

• Infrastructure for accessing multiple gas supply, flexible terms, and storage capacity are key gaps in multiple markets with the greatest growth potential. Infrastructure investment to date appears to be insufficient to achieve long-term growth expectations and commercial relations shall be normalized and harmonized across all Middle East markets.

• Government policy mechanisms will be critical for internalizing the cost of environmental impacts, supporting the development of low carbon gas technologies, and developing viable pathways for using gas to achieve deep GHG emissions reductions.

To diversify the growth of natural gas and achieve future projections, further key developments are required, including cost innovation. Despite an abundance of low-cost gas reserves globally and in the Gulf region, there are multiple infrastructures, commercial and regulatory barriers to the supply of gas at competitive costs in key markets.

Substantial infrastructure investment is required across natural gas supply chains to enable growth. Given that gas is not always the incumbent fuel source and is infrastructure-intensive to transport, investment requirements in gas are even greater than other sources of energy. Historically, evidence from established gas markets demonstrates that once the infrastructure is developed, gas demand tends to be resilient, so the challenge is to establish infrastructure in the first instance.

As infrastructures are developed, it is not necessary to remove commercial barriers to the gas market, to facilitate commercial transactions across multiple gas operators. The transmission network shall be unbundled and access to the infrastructure shall be granted to multiple operators, disintermediating transactions between buyers and sellers. Recently, Snam has managed in Europe, a global first for the sector, bilateral transactions for the purchase and sale of natural gas are based on blockchain technology. The Middle East gas market could leapfrog other regions, crate a regional gas hub built on the abundance of resources and leverage the advantages in terms of immutability, security and transparency of the data guaranteed by the blockchain.

Finally, Middle East governments should look at enabling policies in terms of extraction, commercialization and use of gas. Multiple examples of policies supporting gas exist in specific governments, but few governments have combined all the tools that can be applied to accelerate a transition to gas in the near term while also developing low carbon gas technologies for the medium to long term. Doing so will be increasingly critical to combatting the dual global environmental challenges of climate change and air pollution. Consistent policies will also be critical to enabling the development of technologies to reduce the emissions intensity of gas itself.


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Oil & Gas Middle East - March 2020

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