Triumphant return from the desert

Zongqiang Luo (Norway) and Priya Walia (India), Rystad Energy, explore the dynamics of the LNG industry in the Middle East, which is primarily led by the gas powerhouses of Iran and Qatar.

Global gas markets have started to recover after a tumultuous year in which COVID-19 cut gas consumption by approximately 3%. Demand is expected to return to pre-COVID-19 levels this year and continue to rise through 2022. Typically linked to oil growth, the Middle East is now shifting investments towards gas developments as the region’s countries strive to attain gas self-sufficiency and unlock or boost their export potential. In this article, Rystad Energy takes a closer look at the natural gas projects and demand outlook for the top producers of the Middle East, led by gas powerhouses Iran and Qatar.

Before the pandemic, the Middle East’s gas output was rising, despite geopolitical conflicts and US sanctions, putting the region on track to overtake Russia as the world’s second-largest gas producer by 2021 - 2022. However, last year’s slump has delayed this milestone until 2028 (Figure 1).

The Middle East will produce approximately 680 billion m3 of gas in 2021 and around 900 billion m3 by 2030, according to Rystad Energy estimates. The Middle East’s gas production has been neck-and-neck with that of Asia in recent years, after output surged to 630 billion m3 in 2018 from approximately 455 billion m3 in 2010. More than two-thirds of the region’s meteoric rise can be attributed to Iran and Qatar (Figure 2).

Two waves of US-led sanctions have been imposed on Iran’s oil industry since 2010. During the first wave, which lasted until 2016, Iranian players responded by developing domestic gas projects to add approximately 105 billion m3 of annual production by 2021 to the 146 billion m3 produced in 2010 – the biggest addition in the Middle East.

The second phase of sanctions, which began in 2018, had a limited impact on producing fields because they are owned and controlled by national firms and the gas is mainly consumed domestically. Furthermore, even though gas exports to Iraq were briefly halted in December 2020 owing to payment difficulties, total deliveries grew by 13% in 2020 from 2019, and it is expected that exports will keep rising this year. At the same time, gas supplies from Iran to Turkey fell 33% last year after a pipeline disaster in March 2020 that halted exports for two months, and repair work has been slow due to COVID-19. As a result, Iran’s total gas exports fell 5% last year, but Rystad Energy expects this to turn around this year with gas exports exceeding 2019 levels by 5%. Overall, Iran’s gas production is set to climb from approximately 250 billion m3 in 2021 to 265 billion m3 in 2030.

Qatar has, along with Iran, been a driving force in Middle Eastern gas production for many years and will account for approximately one-quarter of the expected gas output growth in the region between 2010 and 2030. After the country in 2017 lifted its self-imposed ban on further development of the giant North Field, new projects like Barzan and Qatargas’ North Field Expansion (NFE) have been kicked off as the country seeks to boost gas output from 120 billion m3 in 2010 and 158 billion m3 this year to a target of 220 billion m3 in 2030.

The country aims to lift its LNG capacity to 126 million tpy from the current 77 million tpy through two phases of the NFE project. The recently sanctioned first phase includes four new liquefaction trains to raise the capacity to 110 million tpy, and the remaining capacity will come from the two-train second phase which is currently at the front-end engineering design (FEED) stage (Figure 3).

Key facility work for the first phase of NFE is divided into four main packages: Package 1 for building the four liquefaction trains was awarded to a consortium of Chiyoda and France’s TechnipEnergies in February; Package 2 for LNG storage tanks, associated pipelines, and expansion of loading facilities went to Samsung C&T in March; Package 3 for pipelines and utility facilities at the terminal was recently awarded to Tecnicas Reunidas; and Package 4 covers the sulfur-handling facilities. Qatar Petroleum has also invited ExxonMobil, Chevron, and ConocoPhillips to form a joint venture for the NFE project.

Leveraging the cost advantage with gas breakeven prices, Qatar Petroleum is pushing ahead with the second phase of NFE and is currently finishing up the prequalification process for the initial tenders for offshore jackets.

In addition to NFE, Qatar has also announced further phases of the North Field Sustainability project, worth over US$6 billion, with an award due later this year. These

developments aim to sustain current gas production levels from the giant North Field. The first two phases, worth approximately US$3 billion, were awarded in 2019 and 2021, respectively.

Saudi Arabia and the United Arab Emirates (UAE) are expected to double their combined gas production from 110 billion m3 in 2010 to 225 billion m3 in 2030, with Saudi Arabia accounting for 70% of this increase.

Saudi Arabia’s goal is to meet local gas consumption while also unlocking gas export possibilities. The government has initiated a three-pronged strategy to expand gas production capacity from non-associated, associated, and unconventional gas resources. Associated gas is being targeted in the Marjan, Zuluf, Berri, and Khurais fields, while compression efforts are underway at the Haradh and Hawiyah fields. On the unconventional front, the nation is making progress toward tight gas development at the Jafurah field, where Saudi Aramco expects to begin construction of a 6 billion m3 gas processing plant. Rystad Energy believes that conventional associated and nonassociated gas may be sufficient to meet domestic consumption, while unconventional developments would be crucial in unlocking gas export potential. However, the country has taken an active role in balancing the market, which may affect the forecast for associated gas.

Figure 1. Global natural gas production split by continent.

Figure 2. The Middle East’s gas production split by country.

Figure 3. Qatar’s LNG production outlook.

The UAE, led by Abu Dhabi National Oil Company (ADNOC), is tapping into sour gas fields, developing gas caps and exploring unconventional deposits to meet the national target of becoming a net gas exporter by 2030. The Dalma sour gas project is first in line, followed by Hail and Ghasha (sour gas), Umm Shaif (gas cap), Shah (sour gas), and Bab (sour gas). The spending plans assume an oil price range of US$55 - US$80/bbl. Even with a breakeven gas price of US$5 - US$6/1000 ft3, a steady pricing environment has opened the path for these projects to be scheduled from 2021 - 2027. On the unconventional front, TotalEnergies is exploring and appraising the Ruwais Diyab concession. The UAE intends to use most of its excess natural gas as a fuel source for power generation.

Oman has not succeeded in boosting its crude oil output, and has instead turned its attention to accelerating gas development. By 2022 - 2023, Rystad Energy expects Oman will become the first Middle Eastern country whose gas production levels will overtake oil production levels. The Omani government has improved the economics of upstream gas projects by raising domestic gas prices and pledging to use gas in the industrial and electricity sectors, prompting operators to shift toward gas production. Omani state player Petroleum Development Oman will add gas output via the Saih Rawl, Saih Nihadya, Barik, Yibal Khuff, Kauther, and Fahud fields. International majors such as BP and Shell are also active in gas developments in the country – the BP-operated Khazzan and Shell-operated Mabrouk gas projects are set to add annual output of up to 16 billion m3 .

In Israel, the Leviathan basin has uncovered massive gas finds like Tamar, Leviathan, Karish, and Tanin, but the country is still waiting for a gas export route to reach its full gas output capability. Israeli production is now at 19 billion m3/y, with a projected increase to 40 billion m3 by 2030. Israel and Egypt have worked together to reverse the flow of the Eastern Mediterranean Gas pipeline between the two countries, allowing Israel to export approximately 7 billion m3 of gas each year. To establish more gas export capacity, Israel is working on a pipeline project to send gas from the eastern Mediterranean via Cyprus and Crete to Greece, known as the EastMed pipeline, and the country is also investigating possibilities for a possible floating LNG project.

Figure 4. Natural gas demand by sector in top five countries.

Figure 5. The Middle East’s gas exports by country.

Figure 6. Turkey’s natural gas imports by source.

Total gas demand in the Middle East will rise by an estimated 5% or 30 billion m3 in 2021. Gas demand for power generation will stay resilient with a 4% or 8 billion m3 increase from 2020, while industrial demand is set to rise by 6% or 2.4 billion m3. Global natural gas prices rallied early this year due to strong gas demand during the winter with tight supplies. This has been followed by a bullish summer for natural gas prices because of lower-than-normal storage levels in Europe and strong gas consumption for power generation in Asia, combined with a warm summer. What will be the main drivers for Middle Eastern gas demand towards 2030?

Iran remains the top consumer of natural gas in the Middle East, even after an estimated decline of 7% last year. The country’s consumption is estimated to be little changed at 214 billion m3 in 2021, or approximately 40% of total Middle Eastern demand (Figure 4). Gas demand from the power sector is still strong as a warmer-than-normal summer triggered significantly higher electricity use for air conditioning, exceeding the power supply by approximately 11 000 MW at a time when drought reduced hydropower generation. However, the US sanctions on Iran may keep discouraging investments in upstream exploration which would limit the availability of gas in the domestic market. This would mean that natural gas demand could peak at 265 billion m3 in 2024 and then decline slowly in line with production.

Saudi Arabia has recovered from COVID-19 with an estimated demand increase of 9 billion m3 in 2021 from 2020, mainly stemming from the power sector. The country is prioritising natural gas for two main reasons: to be able to export more oil and oil products that are currently used for power generation, and to reduce carbon emissions. Rystad Energy expects Saudi Arabia’s gas demand will continue to rise at a rapid pace to approximately 166 billion m3 in 2030, led by higher power sector demand and a potential ramp-up in gas supplies. LNG imports could be an option to meet the rising gas needs for power generation and industrial use – indeed in 2019 Saudi Aramco already signed a preliminary 20-year agreement with Sempra Energy to buy 5 million tpy of LNG from the US Port Arthur LNG project; however, the country still needs to move ahead with the Final Investment Decision (FID) of the regasification plant that would allow the import of this volume.

The UAE, the third-largest consumer in the region, is one of the few countries that may see gas demand drop in the coming years, driven by the country’s ‘Energy Strategy 2050’ plan launched in 2017 which calls for gas to make up 38% of the energy mix in 2050. Electricity supply from natural gas currently accounts for approximately 79% of the UAE’s electricity production. This figure is expected to drop to 42% by 2050, falling short of the country’s target despite rapid growth in renewables such as solar.

Other countries in the Middle East such as Qatar, Turkey, and Iraq have also gradually recovered from the effects of the COVID-19 crisis, with a minor increase in gas demand since last year’s downturn has made more domestic production available, or increased gas imports.

Australia overtook Qatar as the world’s largest LNG exporter in 2020 with 77.8 million t as volumes from the Ichthys projects were ramped up and utilisation rates at existing projects remained high – sailing past Qatar with 77.1 million t of exports.

Qatar remains the largest gas exporter in the Middle East with more than 70% of the region’s exports (Figure 5). The two phases of the NFE are set to lift the country’s LNG export capacity from 77 million tpy to 126 million tpy – and it is expected that Qatar’s total LNG and pipeline gas exports will keep rising to 165 billion m3 by 2030. This would allow the country to reclaim the crown as the top

global LNG exporter, with a breakeven price range of between US$4 - US$4.2/million Btu destined for Asian markets.

Among other Middle Eastern exporters, Egypt may be able to sell more gas abroad in coming years if plans to link Israel’s Leviathan field to Egyptian LNG facilities via an offshore pipeline go ahead. The UAE and Oman are currently estimated to maintain stable exports until 2030 with their existing liquefaction capacities, while Yemen’s exports have been muted in 2020 and 2021 as a result of the country’s protracted civil war.

Turkey is the largest gas importer in the Middle East region with an expected domestic demand of 46 billion m3 this year as power and industrial demand bounces back after COVID-19. This gas use is currently entirely met by imports, which surged to 46.5 billion m3 in 2020 from 14 billion m3 in 2000. LNG imports jumped 20% last year as a result of cheap LNG spot volumes, but pipeline imports from Russia, Iran, and Azerbaijan will continue to be the backbone of Turkish gas supply with approximately 33.2 billion m3 or 73% of total imports this year. Gazprom recently indicated that its gas deliveries to Turkey doubled in 1H21, while Turkish LNG imports from the US are seen to have dropped approximately 20% to 2 million t in the first eight months this year from the same period last year due to higher prices. All in all, Rystad Energy expects LNG imports to Turkey to fall to approximately 9 million t this year.

Fluctuating LNG prices are not the only factor affecting Turkey’s gas imports at the moment. The country’s existing 25-year supply agreement with Gazprom expires next year, which means negotiations are required for both state-owned importer Botas and private Turkish buyers for volumes currently totalling 8 billion m3/y. In addition, work is under way to secure domestic gas supply by developing the Black Sea Sakarya gas field, discovered last year by state-owned TPAO. The operator expects that the field could produce up to 10 million m3/d by 2023 in phase one, rising to 40 million m3/d if a second pipeline is installed in a later phase. Much remains to be completed if first gas is to be delivered before 2023, however. Therefore, over the next years, Turkey will continue to rely on pipeline imports from Russia and Azerbaijan, combined with LNG imports from France (under a 1.2 million t deal between Botas and TotalEnergies), as well as from Algeria and spot cargoes from the US (Figure 6).

Rystad Energy expects a notable increase in Middle Eastern gas development and production in the coming years. This will not boost gas exports immediately but could allow the region to overtake Russia as the world’s second-largest gas supplier by 2028. Gas powerhouse Qatar will continue to raise LNG export capacity, and Egypt could also return as an LNG exporter of gas from Israel. Even with growing capacity in renewable energy like solar and wind, gas demand in the power sector of most countries in the Middle East will remain resilient at least until 2030.

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