GCC needs market-based gas pricing model: Study

Yahya Anouti
Updated 23 October 2016

GCC needs market-based gas pricing model: Study

DUBAI: Maintaining the GCC’s low gas prices, which are set considerably below international prices, is unsustainable and will create significant problems for the region in the future, according to a recent study by management consultancy Strategy&, formerly Booz & Company, part of the PwC network.
While keeping GCC gas prices low has supported local economies in the past, the cost of new gas production is set to rise significantly in the future.
According to Strategy&, average weighted costs of new gas production across the GCC could rise by a factor of one-third to two-thirds by 2030 as technology requirements necessary for accessing and successfully extracting gas becomes greater — from $1.50 to $4.50 per thousand cubic feet in 2015, to $2.00 to $7.00 per thousand cubic feet in 2030.
Developing new sources of gas production is therefore not sustainable at current prices which are typically significantly below this level and, if not addressed, will lead to a potential gas supply gap of over 300 billion cubic meters by 2030.
Advising GCC countries on the need to adopt gas pricing reforms, George Sarraf, Partner with Strategy&, said: “If the cost of gas does not start to reflect its true market value and appropriate investment in the oil and gas sector is not allocated soon, the GCC will be unable to meet demand for gas in the future. Reforms should define a mechanism that prices natural gas closer to its true value and that in some manner reflects the global and regional dynamics of supply and demand. While abundant and cheap gas has played a critical role in the development and diversification of GCC economies, the current system is not sustainable.”
The best approach to setting gas prices is to use market mechanisms such as “oil indexation” and “gas hub pricing.” Oil indexation requires gas prices to be linked to a basket of commodities including crude oil and oil products. Gas hub pricing, also known as “gas-to-gas competition,” is when gas is traded based on spot prices set by the market in a liquid trading hub to better reflect the true price of gas to consumers.
David Branson, an executive adviser with Strategy& in Dubai and a member of the energy, chemicals and utilities practice in the Middle East, said: “Many markets around the world are becoming increasingly liberalized and are gradually moving from oil indexation to gas hub pricing as the preferred pricing method. In 2014, 43 percent of all gas sold was subject to gas hub pricing and 17 percent was indexed to oil. However, the Middle East is yet to adopt market-based gas pricing with almost all prices regulated by national governments.”
For the GCC market specifically, Strategy& suggests four possible effective gas pricing regimes for countries to implement:
1) increase wholesale prices to match — at a minimum — the increasing production costs and encourage investments in new supply sources,
2) index gas prices to oil prices,
3) link domestic gas prices to prices in existing hubs in other geographies or
4) establish a dedicated GCC gas hub price.
“The time to act is now and some countries have already taken steps in this direction but more is needed to advance this vital reform across the region. Although a new regime will result in higher gas prices, carefully crafted mitigation measures can help with the transition. These will allow the economy as a whole to benefit from increased diversification, private investments, true competition and a greater sense of energy security,” added Dr. Yahya Anouti, principal with Strategy& in Dubai and a member of the energy, chemicals and utilities practice in the Middle East.
As a consequence of a new pricing regime however, gas prices will inevitably increase and may have an adverse socioeconomic impact on consumers unless managed carefully.
The impact of a new potential gas-pricing mechanism therefore requires proactive and targeted risk mitigation measures to ensure that the benefits of the new pricing model are captured.
According to Strategy&, GCC countries need to proactively communicate with all key stakeholders to evaluate potential risks of higher gas prices and offer appropriate solutions.
For example, mitigation measures might include offering incentive packages to industrial customers and instituting targeted compensation mechanisms for the poorest households.
Accompanying a move to market-based gas pricing, a regulator for gas should also be established to govern the new gas pricing regime and monitor its application.


Oil recoups losses as OPEC, US Fed see robust economy

Updated 14 November 2019

Oil recoups losses as OPEC, US Fed see robust economy

  • US-China trade deal will help remove ‘dark cloud’ over oil, says Barkindo

LONDON: Oil prices reversed early losses on Wednesday after the Organization of the Petroleum Exporting Countries (OPEC) said it saw no signs of global recession and rival US shale oil production could grow by much less than expected in 2020.

Also supporting prices were comments by US Federal Reserve Chair Jerome Powell, who said the US economy would see a “sustained expansion” with the full impact of recent interest rate cuts still to be felt.

Brent crude futures stood roughly flat at around $62 per barrel by 1450 GMT, having fallen by over 1 percent earlier in the day. US West Texas Intermediate crude was at $56 per barrel, up 20 cents or 0.4 percent.

“The baseline outlook remains favorable,” Powell said.

OPEC Secretary-General Mohammad Barkindo said global economic fundamentals remained strong and that he was still confident that the US and China would reach a trade deal.

“It will almost remove that dark cloud that had engulfed the global economy,” Barkindo said, adding it was too early to discuss the output policy of OPEC’s December meeting.

HIGHLIGHT

  • US oil production likely to grow by just 0.3-0.4 million barrels per day next year — or less than half of previous expectations.
  • The prospects for ‘US crude exports had turned bleak after shipping rates jumped last month.’

He also said some US companies were now saying US oil production would grow by just 0.3-0.4 million barrels per day next year — or less than half of previous expectations — reducing the risk of an oil glut next year.

US President Donald Trump said on Tuesday Washington and Beijing were close to finalizing a trade deal, but he fell short of providing a date or venue for the signing ceremony.

“The expectations of an inventory build in the US and uncertainty over the OPEC+ strategy on output cuts and US/China trade deal are weighing on oil prices,” said analysts at ING, including the head of commodity strategy Warren Patterson.

In the US, crude oil inventories were forecast to have risen for a third straight week last week, while refined products inventories likely declined, a preliminary Reuters poll showed on Tuesday.

ANZ analysts said the prospects for US crude exports had turned bleak after shipping rates jumped last month.