[R-G] Why the Energy-rich Gulf Faces a Gas Shortage (and What Russia Can Do with It)

[Yoshie Furuhashi]

Russia -- which has the eighth largest oil reserves and is the second
largest oil producer and exporter in the world
(<http://www.eia.doe.gov/emeu/cabs/Russia/Background.html>) -- will be
more powerful in the future: it has the largest gas reserves in the
world ("nearly twice the reserves in the next largest country, Iran,"
<http://www.eia.doe.gov/cabs/Russia/NaturalGas.html>) and is the
largest gas producer and exporter, to which the Gulf states, short on
gas, will want to turn; and it has nuclear weapons and a still
powerful military (cf.
<http://en.rian.ru/russia/20080801/115463931.html>) and can thus
guarantee not only its own security but also regional security of the
Middle East (i.e., protecting Arabs and Iranians from Israel and vice
versa).  Russia also has ideological resources: it has succeeded where
America has failed, winning the "war on terror" (in Chechnya,
essentially coopting its adversary) and winning the good will of the
Islamic world at the same time.  Russia's relation with China is
better than ever:
<http://www.worldpoliticsreview.com/article.aspx?id=2517>.  A
strategic alliance of Russia, China, and Iran -- the only nation in
the Middle East that is really rich in not only oil but also gas (and
has more water resources than most MENA countries: "Three-quarters of
MENA's available fresh water is located in Iran, Iraq, Syria, and
Turkey" <http://www.prb.org/Publications/PolicyBriefs/FindingtheBalancePopulationandWaterScarcityintheMiddleEastandNorthAfrica.aspx>)
-- makes sense.  A United States of Latin America in the making has
rolled out the red carpet for Russian arms and investments.  Key
African states, from North to South, look to Russia for support.  If
France and Germany manage to prioritize the interests of European
capitalists over the American geopolitical wishful thinking, the
resulting new political geography of energy, combined with the US debt
burden, really makes for a new world order, a post-American world. --
Yoshie

<http://www.ft.com/cms/s/0/0f85143c-2a85-11dd-b40b-000077b07658.html>
Overlooked resource: why the energy-rich Gulf faces a gas shortage

By Andrew England

Published: May 25 2008 19:27 | Last updated: May 25 2008 19:27

To one senior oil industry official, "it's a fascinating and somewhat
bizarre phenomenon". To another it simply "looks a bit weird". But for
Middle East states, the dynamic the two are describing is deadly
serious – the globe's most hydrocarbon-rich region is facing the
prospect of critical shortages of gas.

Some analysts estimate that the cumulative supply shortfall for the
six countries of the Gulf Co-operation Council up to 2015 will reach
at least 7,000bn cubic feet. To put the number into perspective,
according to BP the UK's entire remaining proven gas reserves total
just under 17,000bn cu ft. "There is a Middle East regional gas crisis
brewing," says Rajnish Goswami at Wood Mackenzie, the Edinburgh-based
energy consultancy.

Gas shortages in the Middle East could also have big implications
globally, impacting future regional projects aiming to meet demand
elsewhere. Countries increasing the amount of oil fuels they use for
power generation could also affect future exports.

Of the GCC states – Saudi Arabia, Kuwait, Qatar, Bahrain, Oman and the
United Arab Emirates – only Qatar, which has the world's third largest
gas reserves, can avoid a problem that will hamper the development of
their economies and their ability to create jobs, experts say.

Gas is the main feedstock for petrochemicals and energy-intensive
industries such as aluminium and fertilisers as well as its use in
power generation – not least for the desalination plants that provide
water in the desert. The GCC countries have some of the world's
fastest growth rates for electricity demand, estimated at 6-12 per
cent annually, compared with demand increases in developed countries
of only around 2-4 per cent a year.

With the region's focus historically centred on oil production, gas
has been seen there as financially less attractive. But today – driven
by record oil prices – their economies are expanding rapidly and
governments are seeking to use their petrodollars to upgrade
infrastructure and boost industry. With gas a key ingredient in
achieving those aims, countries are faced with trying to reverse
decades of underinvestment in the sector.

Difficulties they have to overcome include extracting the various
types of gas found in the region – some of it "sour" gas, which is
both lethal and corrosive – and deciding which downstream industries
get priority in how it is used.

Gulf gas chart
<http://media.ft.com/cms/5747afd2-2a6c-11dd-b40b-000077b07658.gif>

Saudi Arabia, home to the world's largest proven oil reserves, is
estimated to have about $30bn (£15bn, €19bn) of investment planned to
develop energy- and gas-intensive industries over the next five years.
But the Saudi petroleum ministry is adopting a policy of approving gas
supplies to new petrochemical projects aimed at ensuring they either
produce a product not already being manufactured in Saudi Arabia or
increase added value by going further downstream than others.

It is examining planned energy-intensive projects "within the context
of national and international economies taking into account the
value-added they bring for Saudi Arabia," says a Gulf official. "The
reason is, of course, they want to take advantage. Everybody wants to
come – and we told them, 'no gas unless you give Saudi Arabia a really
good product'."

"There is enough gas but the problem is it's cheap and everybody wants
to use it. The petrochemicals people, the desalination people,
everybody – and Saudi Arabia has to expand."

Experts say Saudi Arabia already has a queue of projects that have
been unable to secure gas resources, including aluminium and
petrochemicals developments. This is in spite of what one Saudi
economist estimates has been a doubling in volume production of Saudi
gas since 1990.

The government has been encouraged by discoveries in the Karan field –
its first offshore gas discovery – but the size of the reserves is not
yet known. In an effort to get more gas on tap, the kingdom awarded
international companies exploration blocs to explore for gas not
associated with oil in the Empty Quarter in 2003 and 2004, outside the
area reserved for Saudi Aramco, the national oil company. But, so far,
no discoveries have been made and this year Total of France pulled out
of the project, selling its stake to Royal Dutch Shell and Aramco.
Total had drilled three exploration wells but the results were
disappointing, causing it to conclude the potential for commercial
discoveries was low.

The Saudi economist says the kingdom may even have to think the
unthinkable and consider importing gas in the future, even though it
has the world's fourth largest proven gas reserves. "In the long run
we have to find more gas," the economist says. "Unless the gas
ventures in the Empty Quarter get some gas, then maybe supply might
not come to satisfy growth in demand."

The issue worries Mohamed al-Mady, chief executive officer of Sabic,
the Saudi group that is one of the world's largest petrochemicals
companies. He says Sabic has gas for its current projects but "our
concern is really the future". When asked how far away that future is,
he says: "Well, it's now."

"The Middle East has been relying too much on oil, and gas discovery
has been ignored for a long time", Mr Mady adds. "In my opinion, there
is no balanced utilisation of gas. The gas can go either to smelting,
to iron ore, to power, to water, to petrochemicals – and how do you
allocate the gas to these various things? It can be very, very
important down the road."

Elsewhere in the region, Oman is "talking very seriously about
building a coal-fired power plant", one analyst says in illustrating
the acute nature of the problem. The UAE already uses liquids for
power generation at peak load times. Kuwait, meanwhile, is burning
about 160,000 barrels of liquids – crude or diesel – a day for power
generation, according to an international oil executive, and is
looking to import from Qatar.

The impact of using fuel oils ranges from environmental consequences
to an additional financial burden, largely due to the opportunity cost
of not exporting oil products. Significant sources of gas could be
available in both Qatar and Iran. But Qatar has put a moratorium on
future projects for its North Field, the world's largest reservoir of
pure gas, until 2010 and observers expect any new projects to be
delayed until at least 2012. Sanctions-bound Iran is an unlikely
supplier in the immediate future because of global and regional
politics.

"That's why the situation in the rest of the region is pretty dire –
ensuring adequate energy supplies for domestic growth is a top
priority," says Mr Goswami at Wood Mackenzie. "However, country-level
challenges differ. For Kuwait, a near-term shortfall in power
generation capacity could be likely. In Oman, proposed gas-based
industrial expansion is likely to suffer. In the UAE, the gas supply
situation is very serious; rapid growth in power demand means nuclear
power is being looked at as an option."

UAE authorities have concluded that national peak electricity demand
will rise to more than 40,000MW by 2020. But they estimate that known
volumes of natural gas that could be made available for electricity
would provide adequate fuel for only 20,000-25,000MW by 2020. The
government announced this year that it would embark on a civilian
nuclear programme.

Gulf countries are exploring for more gas – particularly
non-associated gas – but that is no easy process given current
worldwide shortages of exploration equipment and engineers. They have
the money to overcome this but, even so, the lead time from
discovering a deposit to gas coming on line is at least five years,
experts say.

Much of the region's gas is also regarded as difficult to extract –
either sour or "tight" gas with geological complications. This
increases costs and ties up equipment. It is a factor that Abu Dhabi,
which produces nearly all the UAE's hydrocarbons, discovered as it
sought to develop two sour gas fields in a project the federation
hoped would allow large-scale investment in energy-intensive
industries.

Officials had put the development of the Bab and Shah fields out to a
joint tender but the technical challenges meant the authorities later
decided to re-tender just for Shah, which is less complex and has
higher liquid yields, analysts say. Abu Dhabi's reserves include some
of the sourest gas in the world, which requires the latest technology
to handle.

In spite of having the world's fifth largest proven gas reserves, the
UAE is already importing from Qatar through the so-called Dolphin
project, which went online last year. But the emirates' government has
still to reach an agreement with Qatar to boost supply by 60 per cent
to reach the pipeline's capacity. With the moratorium in place on its
North Field, it is uncertain whether Qatar will agree to the increase.

In Kuwait, after the state oil company made its first discovery of
non-associated gas, production will begin, says Jamal Alnouri,
managing director of planning at Kuwait Petroleum Corporation. KPC
intends output to reach 1bn cu ft a day by 2015. But as gas production
is new to Kuwait, officials acknowledge that it will be difficult for
KPC to reach its targets without help from international companies.
Kuwait's parliament has consistently opposed awarding foreign groups
anything other than service contracts.

Initial output is to be barely one-sixth of the 2015 target. "For the
scale that so far we are considering, we are not disturbing the
reserves too much," says Mr Alnouri. "It will help us plan our way
forward – our current knowledge takes us this far." He adds: "When you
really get to large exploitation of the reserve, you have to be
careful ... and of course if you do it alone you will take a longer
time."

KPC is hoping to bring international groups into the gas projects even
though the political environment will restrict their level of
involvement. Steve Peacock, president of BP Middle East and South
Asia, says the entire region will require technical support of
international oil companies if nations are to take advantage of
potential resources. "There's plenty of resources – that's not the
issue. The issue is technology challenges, cost challenges and
geopolitical challenges," Mr Peacock says.

BP looked at the Empty Quarter venture in Saudi Arabia and decided
there was too much geological risk attached to that project. But it
won a bid last year to develop tight gas in Oman and Mr Peacock says
BP would be interested in opportunities in Saudi Arabia. But
governments in the region would have to offer decent terms to convince
majors to invest.

The key to a successful partnership between the government, its
national oil company and international energy groups "is making sure
that the relationship is tuned correctly", Mr Peacock says. If the
foreign partner is to "bring large amounts of capital, proprietary
technology and expertise from other parts of world to address
something like extremely sour gas, with long-lasting mutual benefits,
then the reward should recognise the role [it] plays."

<http://www.metimes.com/Opinion/2008/07/23/can_iran-gcc_economic_ties_survive_us_pressures/5677/>
Can Iran-GCC Economic Ties Survive U.S. Pressures?
NADER HABIBI
Published: July 23, 2008

While growing economic and financial sanctions have led to a reduction
of trade between Iran and Europe in recent years, the volume of trade
between Iran and GCC countries has steadily increased. Bilateral
Iran-GCC trade has increased by five-fold from $1.71 billion in 2000
to $8.71 billion in 2007.

The GCC enjoys a considerable trade surplus in its trade relation with
Iran. The GCC goods exports to Iran have increased from $1.26 billion
in 2000 to a record $7.33 billion in 2007 which amounted to 12 percent
of Iran's total imports. As a result the GCC registered a $5.7 billion
trade surplus with Iran in 2007.

Two factors have encouraged Iran to expand its trade relations with
GCC countries.

First, the growing economic and financial sanctions by European
governments and European banks in the past two years have forced Iran
to shift its trade away from Europe and look to other regions for its
import needs. This has lead to an increase in trade with Asia and GCC,
which have so far been more reluctant to go along with these
sanctions.

Iran's second motive for expanding its trade with GCC countries is
political. Iran is actively trying to discourage the GCC countries
from joining the U.S. sponsored economic and financial sanctions or
cooperating with any potential U.S. military operation against Iran.

In pursuit of this goal Iran has tried hard to expand its diplomatic
and economic ties with GCC countries in recent years. Iran's largest
trade partner in the GCC is the United Arab Emirates (UAE) which
accounted for 72 percent of GCC's exports to Iran in 2007.

Aside from this large volume of exports, the UAE receives a large flow
of private investment capital from Iran which has contributed to the
strength of the real estate prices in Dubai in recent years.

However, this rapid increase in Iran-GCC economic relations has
recently caught the attention of the United States. Realizing that
trade with the GCC has enabled Iran to partially neutralize the impact
of European financial sanctions, the United States has tried to
persuade GCC banking institutions to sever their ties with Iranian
banks and deny service to Iranian firms and businessmen. While so far
the GCC governments have refused to impose formal economic sanctions
on Iran, some financial institutions in Bahrain and the UAE have
voluntarily complied with the U.S. demands.

Recent interviews with a number of Iranian businessmen have revealed
that these steps have made it more difficult for them to trade with
GCC countries. If the new round of negotiations between Iran and
Western nations in Geneva proves fruitless, it is likely that the U.S.
pressure on GCC-based banks will intensify in the coming months and
can result in a reduction in Iran-GCC trade. This development will
have an adverse impact on the Iranian economy, which imports a variety
of electronic equipment and spare parts for heavy machinery from the
UAE. It will also reduce Iran's growing exports of agricultural and
handcraft products to Saudi Arabia and the UAE.

In order to further strengthen its economic ties with the GCC, Iran is
also trying to export natural gas to these countries. Iran has
recently announced a natural gas export agreement with Oman. After
several years of negotiations and delays, it is also expected to start
natural gas exports to the UAE in 2008. Negotiations are also underway
for a Kuwait-Iran natural gas export deal. If these planned exports
materialize they will make it more difficult for GCC countries to
cooperate with the U.S. sanctions.

In recent years demand for natural gas has outpaced its supply in
several GCC countries. Qatar, which is the largest natural gas
exporter in the region, has been unable to fill this gap completely.
Consequently they have turned their attention to Iran. These Iran-GCC
natural gas agreements, however, remain vulnerable to U.S. pressure on
Gulf countries which also maintain close economic and security ties
with the United States. At the same time, Iran's ability to export
natural gas to GCC countries has also been adversely affected by
American sanctions. U.S. pressure on international oil firms that
operate in Iran has limited Iran's ability to attract investment to
its energy sector and boost natural gas output in the past three
decades.

--

Nader Habibi is Henry J. Leir professor of Middle East economies at
Brandeis University.