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Middle East gas players weigh up how to deal with the US LNG surge

Saudi Aramco’s recent proposed investment in Sempra Energy’s liquefied natural gas (LNG) export project in Port Arthur, Texas, is indicative of the growing power of the US in the global energy market. The surge in US oil production has already had a major impact on the Middle East: the oil price crash which began in 2014 put an end to a 12-year period of budgetary comfort for MENA oil exporters, largely because of the extra US output. That country’s rapid climb up the ranks of the world’s LNG exporters is now an important factor in the calculations of many regional economies in which natural gas is of strategic importance, whether in the domestic energy mix or as an export commodity.

 

US LNG exports catching up with global market leaders Australia and Qatar

The scale of the US natural gas boom has been astonishing. Over the past ten years production has risen by 44% to reach 842bn cu metres in 2018. The volume of the increase during that period was 260bn cu metres, which is higher than the 2018 output of Iran, the MENA region’s largest producer.

During 2019 and 2020 US production is expected to increase by a further 10%, or 90bn cu metres, according to the US Energy Information Administration. That is slightly higher than Algeria’s current annual output and compares with 60bn cu metres produced by Egypt in 2018 and 112bn cu metres by Saudi Arabia.

The US started exporting LNG in 2016. It was the fourth largest exporter in the world last year, narrowly behind Malaysia in third place, and could be challenging current market leaders Australia and Qatar for the top spot within a few years.

Following the recent start-up of three plants, there are now eight LNG “trains” in operation in the US, with combined capacity of 37m tonnes per year (tpy). By the end of 2021 US capacity is set to reach 70m tpy and, based on projects already in development, it could reach 100m tpy by end-2025.

 

Qatar and Saudi Arabia size up investments in US gas market

Meanwhile, the Australian LNG boom appears to be peaking, owing to a combination of rising costs, policy wrangles and the depletion of fields in the east of the country. Australia is set to nose ahead of Qatar in 2019, with LNG exports of just over 80m tpy, but Qatar is likely to reassert its dominance by the mid-2020s when it completes projects aimed to bring its nominal capacity to 110m tpy from 77m tpy at present.

In tandem with the decision to invest in protecting its market share directly, Qatar has also moved quickly to gain a foothold in the US LNG sector, by taking a 70% stake in the Golden Pass project in Sabine Pass, Texas (ExxonMobil holds the remaining 30%). A final investment decision was announced for Golden Pass in February, and the first of its three 5.4m-tpy trains is scheduled to start up in 2024.

Saudi Aramco’s deal with Sempra Energy is at an earlier stage. An initial “heads of agreement” was announced in May, which would entail Saudi Aramco committing to buy 5m tpy of LNG from the Port Arthur plant and taking a 25% equity interest in the project. The two-train project has been approved by the US authorities but has yet to reach the stage of a final investment decision.

The Port Arthur deal is part of Saudi Aramco’s emphasis on natural gas in its new strategy. Saudi Arabia is a major gas producer, but it would need to either produce or import significant additional volumes in order to cover an effective supply deficit, which is reflected in its heavy reliance on oil for power generation and desalination.

According to the most recent annual data from the Saudi Electricity and Cogeneration Regulatory Authority, in 2017 Saudi Arabia consumed the equivalent of about 2m barrels per day of oil for power and desalination, of which 53.7% was natural gas, 21.9% heavy fuel oil, 19.6% crude oil and 4.7% diesel. Saudi Aramco is now looking to build up its oil and gas trading business, and increase exploration and development of natural gas. Importing LNG is also an option – in the Gulf, Kuwait and Dubai already import LNG, and Bahrain is preparing to do so.

 

Increased LNG supply met with strong demand, but prices dropping on back of Asian slowdown

The US LNG supply surge has so far been matched by strong increases in demand, most spectacularly in China, where LNG imports doubled between 2016 and 2018, reaching 54m tpy. China’s decision to impose a 10% tariff on LNG imports from the US, rising to 25% since June 1, means that US exporters have been looking elsewhere to sell their rising volumes. This has been reflected in a big increase in European LNG imports from the US.

However, the increased supply and a slowdown in Asian demand have pushed down gas prices in Europe and in the Asian LNG market. This, in turn, has eaten into the profit margins of US LNG suppliers, despite the relatively low costs of production in the US itself.

 

Narrower profit margins a worry for new market entrants in East Mediterranean

Energy markets are notoriously volatile, but low prices are a matter of serious concern for aspiring new entrants to the LNG trade, such as the East Mediterranean players.

Rising output has enabled Egypt to revive its LNG export business, albeit on a modest scale, but it is questionable how long this can be sustained, given the strength of Egyptian domestic demand growth and the high rate of depletion of its shallow-water fields. Egypt will soon receive its first deliveries of Israeli gas, and there is a possibility that Cyprus could also use Egypt’s LNG export terminals, if Turkey’s objections can be overcome. However, whether such schemes can make economic sense in the face of a market brimming with supply from the major players—the US, Russia, Qatar and Australia—is open to question.

 

David Butter is an analyst of the political economy of the MENA region, with a special interest in Egypt. He is an associate fellow in the Chatham House MENA programme and was previously the regional director for the Middle East at the Economist Intelligence Unit and editor of MEED magazine.

 

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