The MENA region is leading global LNG demand growth in 2016 – a trend that will continue as domestic gas output falls short of surging regional demand for power and industry, Arab Petroleum Investments Corporation (Apicorp) said in its "Energy Research" report for August this year. Egypt and Jordan received their first LNG shipments in 2015; Kuwait, the Gulf's first LNG importer, and Bahrain are looking to construct permanent import terminals; and Abu Dhabi has opted to import LNG via a floating storage and regasification unit (FSRU). Regional LNG importers are seeking to tie up term supply deals, making the most of structural oversupply to lock in favorable pricing and flexibility. It will all make MENA a growing demand-side force in the global LNG sector. Despite its dominant role in terms of hydrocarbons reserves, MENA will become the world's second-largest gas-importing region, believes the International Energy Agency. Consumption of natural gas in the Middle East, the agency forecasts, will rise from 480bn cubic meters (bcm) in 2015 to 738bcm in 2040. Yet despite its strong gas reserves base, production has largely failed to keep pace with historical demand growth and nor will it do so in the coming years. Absent also is a large build-out of regional gas pipeline import options. The potential for LNG to make up some of the balance is therefore strong. Imports by consumer countries in the region in 2015 amounted to just 10.5bcm of LNG, of which 40% arrived from Qatar. But these levels will rise steeply, spurred by the present global supply overhang, which should allow regional buyers to lock in preferential prices and allow them to choose from a wider range of suppliers. Despite this, some MENA countries will take a "wait and see" approach to building capital intensive permanent LNG-import terminals, wary of a looming tightening in LNG balances and the potential for price inflation in the second half of the next decade. MENA countries will still invest around $10.3bn in LNG-importing facilities over the medium term to cater for growing demand, and will increasingly charter floating storage and regasification units (FSRUs) as a temporary and lower-cost solution. Demand for gas has grown more quickly than for either oil or electricity over the past three decades, for several reasons. First, gas has been prioritized in power generation, which has itself risen strongly to meet the needs of a growing population whose per capita income levels have also continued to rise. MENA countries have encouraged gas-intensive industrialization, too, partly to capture value from low energy prices and, in the case of oil-producing countries, to help diversify their economies. Indeed, petrochemicals and energy-intensive industries have been beneficiaries of policies designed to increase the use of gas. The MENA region's reputation as a supplier of global energy obscures a looming domestic supply crunch for natural gas, which will be mostly met by LNG imports. By the end of 2017, MENA countries will account for 6.5% of global LNG demand – a sharp rise from about 1% in 2013. The current market conditions – an abundance of cheap supply – will also encourage MENA countries to think more strategically about gas's role in their energy mix. While the GCC's per capita gas demand ranks among the highest in the world, domestic production has mostly failed to keep pace. Some GCC countries have initiated energy-pricing reforms, but the short-term impact on demand is not expected to be significant, at least at current price levels. This means the onus is on supply-side solutions, notably the securing of LNG imports for the short to medium term. Kuwait is a case in point. Domestic production has not kept pace with the rise in gas consumption in the country, a situation exacerbated by the relatively unattractive terms offered to IOCs for development of sour gas and high-cost non-associated gas reserves. So Kuwait was the GCC's first LNG importer and is committed to building permanent LNG-import infrastructure to meet its needs. In 2014, KNPC signed a five-year contract with Golar LNG to charter an FSRU with an import capacity of 7.9bcm a year (bcma). Kuwaiti imports averaged 4.1bcm in 2015 and will exceed those levels this year: first-half 2016 was up 26% year-on- year. In 2015, KPC signed four-year contracts with BP and Shell to purchase 1.36bcm of LNG from each for 2016 and another four-year contract with Qatargas for 0.68bcma. Kuwait also plans to build a permanent LNG-import terminal in Mina Al- Ahmadi. The $3.3bn terminal will have a processing capacity of 15bcma with the option of expansion to 30bcma. The UAE is in a slightly different position. It has relatively large reserves of natural gas, but relies on imports to meet peak summer demand. Despite attempts to incorporate renewables in the energy mix and Dubai's commitment to reduce the share of gas in power generation to 70% by 2030, gas demand across the UAE is still expected to rise. Falling oil prices have hindered the prospects for domestic gas development too. Shell, for example, announced its withdrawal from Abu Dhabi's landmark Bab sour-gas project in January. Dubai began importing LNG in 2014. Imports totaled 3.1bcm in 2015 and are expected to reach 4bcm in 2016. Emirates LNG has put on hold plans to install a 12.3bcma LNG-regasification and storage facility in Fujairah, instead opting to boost imports by chartering an FSRU in Ruwais, which should come on line later this year. This option utilizes the current cheaper prices and offers a flexible solution to meet power shortfalls, until the UAE's four nuclear reactors are completed in the early 2020s. Bahrain produced 15.3bcm of gas in 2015, a third of which was used for domestic power generation as electricity demand almost reached the country's 4GW of installed generation capacity. But government plans to expand generation by 1.5GW and a proposal from aluminum producer Alba to build a 1.35GW plant by 2019 will require an additional 3.3bcma of supply. Bahrain's National Oil and Gas Company has already signed a $653m deal with Teekay LNG, Samsung C&T and Gulf Investment Corp for the development of an LNG-import terminal, to be commissioned in 2018. The terminal will have a capacity of 4.1bcma with an option to double this to 8.2bcma. Saudi Arabia has the third-largest gas reserves in the Middle East, and all production is committed to power generation and industry. The kingdom announced energy-pricing reforms in early 2016 and has indicated it is open to LNG imports; part of an effort to displace oil used in electricity generation and raise the share of gas in the generation mix from 50% to 70% by 2030. Global gas demand has increased by 700bcm over the past decade, with 70% of this increase coming from Asia Pacific and Middle East countries; and gas is expected to be the only fossil fuel whose share in the global energy mix will grow between now and 2040. Within that market segment, LNG's share has been rising for the past 10 years, driven by the need to transport gas efficiently over longer distances to a more diverse customer base. Expectations of rising LNG demand from Asian countries have been a key driver for investment in liquefaction capacity. But despite these bullish projections for long-term demand, the short-term picture is different, characterized by weaker-than-expected consumption growth and rising supplies. Gas prices have been falling for the past three years, turning a sellers' market into a buyers' one. This creates an opportunity for MENA importers to profit from low prices at a time when budgets are tightening. Lower prices have, in part, reflected declining oil prices because of crude-oil indexing in many LNG contracts. But the fall in gas prices has also been an outcome of supply and demand fundamentals, which shifted in recent years amid a sharp rise in upstream liquefaction capacity and a weakening of Asian gas demand growth rates. In particular, the advent of shale gas in the US – which now supports a growing liquefaction sector in the Lower 48 – and weak demand in key hubs such as Europe, South Korea and Japan, the world's largest LNG consumer, have combined to push prices lower. LNG prices in Japan were a little over $15/mmBtu in 2012 but dropped to $5.20/mmBtu as recently as 1Q2016. Regional prices can also be expected to converge, reducing regional spreads to within $0.60/mmBtu. Thanks to investments sanctioned when prices – and forecasts for demand growth – were higher, significant LNG supply additions will come from Australia and the US in the coming years. Australia will overtake Qatar as the world's largest LNG producer by 2018, helping lift global capacity by a third compared with 2013 levels. To regain supply-demand balance in the medium term, the LNG market is counting on strong demand growth in Asia and Latin America – but also from the Middle East, despite competition from renewables and nuclear power. The current squeeze on budgets and significant cuts in energy investments suggests that the market will tighten, but this will not be visible before the first half of the next decade.
