Gulf gas shortage a problem for electricity generation
Gulf gas shortage a problem for electricity generation
So why is it that Kuwait — along with neighboring OPEC powers Saudi Arabia and the UAE— is left wanting for gas when the region houses around 30 percent of the world’s resources?
For decades, gas was overlooked while these producers went all out to exploit their vast oil reserves. Political feuds and low local gas prices also slowed development of this clean-burning fuel and held up purchases from nearby Qatar, the world’s top exporter of liquefied natural gas (LNG).
Galloping demand from a population and industrial boom is forcing gradual change, although many billions will be needed to tap the region’s gas. Much of that gas is low in quality and high in sulphur, making it expensive and difficult to extract.
“Most Middle East crude producers are now realizing the economic and environmental benefits of increasing gas production — and, in the near term, gas imports — for their rising power demand,” said Kelli Maleckar of energy consultancy IHS.
Kuwait and the UAE have done just that — boosting their reliance on imported gas to meet power demand, especially in summer when consumption to power air conditioning goes through the roof. Saudi Arabia does not import gas.
Domestic political issues have long delayed Kuwait’s negotiations with oil majors to help tap its gas reserves could also derail its purchases: it has signed a $3 billion five-year LNG deal with BP and a $12 billion six-year LNG deal with Shell.
After pressure from Kuwaiti lawmakers, an investigation was launched in 2011 into a gas service agreement with Shell.
“Even though Kuwait has signed these (Shell and BP) deals, there is always that risk that a parliamentarian is going to come and say ‘you know what, I would actually like to question this deal’,” said Eman Ebed Alkadi of consultancy Eurasia Group.
Kuwait also signed a short-term gas deal with Qatar last month, but it is unlikely to depend on Doha in the long term due to a political rift over Doha’s support for Islamists, analysts say.
A long-discussed regional pipeline network would meanwhile go a long way toward solving supply problems, but it has also been hampered by political disputes.
Demand for gas in the Gulf Cooperation Council (GCC) states is likely to rise more than 50 percent, from 256 billion cubic meters (bcm) in 2011 to 400 bcm in 2030, according to IHS.
Objections by top oil exporter Saudi Arabia had halted a plan for Qatar to pipe gas to Kuwait in the past. Many GCC members have long-running border disputes with each other.
Riyadh also opposed Qatar’s pumping gas to the UAE, but the Dolphin Energy project went ahead regardless. It now carries about 2 billion cubic feet of gas per day to the UAE and Oman.
The UAE has exported LNG since the late 1970s, but soaring domestic demand and sluggish progress with its own production have turned it into a net gas importer over the last five years.
In the longer term, Iraq, which invaded Kuwait in 1990, could also provide supply for the region. For now, however, it faces its own acute power shortage.
And Iran, which holds the world’s largest gas reserves, is unlikely to provide a quick supply fix even if it reaches a deal with world powers over its nuclear program and sanctions are lifted.
“(Iran) faces a number of obstacles, among which is a crowded market place of suppliers, neighbors unwilling to pay a higher price for its gas, and its own national financial and operational hurdles,” said Valerie Marcel of Chatham House.
In anticipation of rapidly rising consumption, Saudi Arabia is exploring unconventional gas — “a game changer in our upstream production strategy”, according to Saudi Aramco.
It expects natural gas demand to almost double by 2030 from 2011 levels of 3.5 trillion cubic feet per year.
Saudi Arabia burns a significant amount of its crude to generate electricity and analysts warn that rising consumption will erode the amount available for export.
Petroleum and Mineral Resources Minister Ali Al-Naimi has estimated unconventional gas reserves at over 600 trillion cubic feet — more than double its proven conventional reserves.
“This means that resources in the kingdom are not the problem, but rather how to discover, develop and produce such resources,” said Sadad Al-Husseini, a former top executive at Aramco.
Gulf companies challenged by debt and rising interest rates
- Debt restructurings on the rise, but below crisis levels
- Central Bank of the UAE has raised interest rates four times since last March
There has been an uptick in recent months in heavily-borrowed companies in the Gulf seeking to restructure their debts with lenders. Although the pressure on companies is not comparable to levels witnessed in the region following the 2008 global financial crisis, rising interest rates will eventually begin to have a greater impact, say experts.
Speaking exclusively to Arab news, Matthew Wilde, a partner at consultancy PwC in Dubai, said: “We do expect that interest rate increases will gradually start to impact companies over the next 12 months, but to date the impact of hedging and the runoff of older fixed rate deals has meant the impact is fairly muted so far.”
The Central Bank of the UAE has raised interest rates four times since the start of last year, in line with action taken by the US Federal Reserve. The Fed has signalled that it will raise interest rates at least twice more before the end of the year.
Wilde added that there had been a little more pressure on company balance sheets of late, although “this shouldn’t be overplayed”.
Nevertheless, just last week, Stanford Marine Group — majority owned by a fund managed by private equity firm Abraaj Group — was reported by the New York Times to be in talks with banks to restructure a $325 million Islamic loan. The newspaper cited a Reuters report that relied on “banking sources”.
The Dubai-based oil and gas services firm, which has struggled as a result of the downturn in the hydrocarbons market since 2014, has reportedly asked banks to consider extending the maturity of its debt and restructuring repayments, after it breached certain loan covenants.
A fund managed by Abraaj owns 51 percent of Stanford Marine, with the remaining stake held by Abu Dhabi-based investment firm Waha Capital. Abraaj declined to comment.
Dubai-based theme parks operator DXB Entertainments struck a deal last month with creditors to restructure 4.2 billion dirhams ($1.1 billion) of borrowings, with visitor numbers to attractions such as Legoland Dubai and Bollywood Parks Dubai struggling to meet visitor targets.
Earlier this month, Reuters reported that Sharjah-based Gulf General Investment Company was in talks with banks to restructure loan and credit facilities after defaulting on a payment linked to 2.1 billion dirhams of debt at the end of last year.
Dubai International Capital, according to a Bloomberg report from December, has restructured its debt for the second time, reaching an agreement with banks to roll over a loan of about $1 billion. At the height of the emirate’s boom years, DIC amassed assets worth about $13 billion, including the owner of London’s Madame Tussauds waxworks museum, as well as stakes in Sony and Daimler. The firm was later forced to sell most of these assets and reschedule $2.5 billion of debt after the global financial crisis.
Wilde told Arab News: “We have seen an increasing number of listed companies restructuring or planning to restructure their capital recently — including using tools such as capital reductions and raising capital by using quasi equity instruments such as perpetual bonds.”
This has happened across the region and PwC expected this to accelerate a little as companies “respond to legislative pressures and become more familiar with the options available to fix their problems,” said Wilde.
He added that the trend was being driven by oil prices remaining below historical highs, soft economic conditions, and continued caution in the UAE’s banking sector.
On the debt restructuring side, Wilde said there had been a “reasonably steady flow of cases of debts being restructured”.
However, the volume of firms seeking to renegotiate debt remains small compared to the level of restructurings witnessed in the aftermath of Dubai’s debt crisis.
Several big name firms in the emirate were caught out by the onset of the global financial crisis, which saw the emirate’s booming economy and real estate market go into reverse.
State-owned conglomerate Dubai World, whose companies included real-estate firm Nakheel and ports operator DP World, stunned global markets in November 2009 when it asked creditors for a six-month standstill on its obligations. Dubai World restructured around $25 billion of debt in 2011, followed by a $15 billion restructuring deal in 2015.
“We would not expect it to become (comparable to 2008-9) so barring some form of sharp external impetus such as global political instability or a protectionist trade war,” said Wilde.
Nor did he see the introduction of VAT as particularly driving this trend, but rather as just one more factor impacting some already strained sectors (e.g. some sub sectors of retail) “which were already pressured by other macro factors.”