Gas hubs are in fashion. The US and UK have long had them, continental European markets are now increasingly integrated and Turkey, Singapore, China and Japan, in different ways, want to be gas nexuses. But could the Middle East develop a hub of its own and what advantages would it bring?
It is strange that the Middle East’s gas markets are so fragmented. The region holds more than 40 per cent of the world’s reserves, 17 per cent of its production and 14 per cent of its consumption. And from being primarily an exporting region, it is now also a growing importer and consumer.
But there are almost no intra-regional pipelines and for those that exist, most capacity is tied up under long-term contracts at fixed rates. Large gas markets – Saudi Arabia is the world’s sixth biggest – are completely isolated. Only two Gulf countries can import liquefied natural gas (LNG). Countries short of gas, such as Kuwait, Bahrain, the UAE and Oman, lie next to the world’s largest gasfield in Qatar and Iran.
Gas prices are shrouded in fog. State-regulated rates are public in Saudi Arabia, Oman, Bahrain and other regional countries. But these are just an administrative fiction, not “prices” in the normal sense. Since gas is in short supply, it is not possible to turn up at the headquarters of Saudi Aramco or Oman Gas Company and offer to buy at these prices. Instead, gas supplies have to be allocated by bureaucrats. A business that fails to obtain a ration of gas cannot go out and buy at world market prices from another supplier.
Compare this situation to North America or north-west Europe. A dense network of pipelines connects producers and importers with consumers and exporters. Gas is freely traded and prices publicly available, by the millisecond, at hubs. These can be physical locations where pipelines intersect, such as the US’s Henry Hub in Louisiana, or they can be virtual, as for the UK’s National Balancing Point.
The EU has made a determined effort to create a common market between key hubs in Belgium, the Netherlands, Austria and Italy and to expand it east, by building pipelines and passing the necessary legislation. Connectivity and transparency are a great tool against dominant suppliers, such as Russia’s Gazprom, which seek to squeeze higher prices from isolated or ill-informed buyers.
Asian markets, traditionally isolated and mostly reliant on domestic production or LNG imports, are also developing pricing hubs. Singapore has launched an LNG index, by which traders or consumers could hedge their future purchases. China is becoming increasingly connected by gas pipelines to central Asia and Russia, and LNG terminals to the world market.
Powerful forces are against such an endeavour in the Arabian Gulf region. Major suppliers do not want to lose their control over price. The GCC and its neighbours lack sufficient pipeline connections, with politics an obstacle.
But in the next few years, the building blocks of an integrated market could be laid. Abu Dhabi has started LNG imports and Sharjah plans to start a terminal by 2018 (Dubai has had one since 2010). Iran is likely to begin exports by pipeline to Iraq soon and, in a few years, to Oman. Oman and Abu Dhabi already export LNG.
Dolphin Energy recently signed new contracts to expand supplies of Qatari gas to Sharjah and Ras Al Khaimah. Prices are undisclosed but are probably comparable to the current cost of LNG.
These advances make the UAE-Oman area the natural site for a Gulf hub – where gas can be freely traded with transparent prices. Such a hub will not appear from nothing – local gas players and governments can encourage it. By energising industrial investment, this would be the next step in the region’s gas evolution.
Robin Mills is chief executive of Qamar Energy and author of The Myth of the Oil Crisis
business@thenational.ae
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