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Natural Gas Rising in Oil-rich Middle East

For years, natural gas in the Middle East was overshadowed by the region’s dominant energy source — oil. In fact, most of the region’s natural gas was only discovered while looking for oil. It was then often flared because the cost of development was considered too high.

But natural gas is one of the cleanest burning fossil fuels and demand for it has been rising as governments seek cost-effective ways to reduce their reliance on carbon-intensive coal and oil-burning power plants. As a result of growing global demand, governments and industry across the Middle East are now expanding natural gas production infrastructure in order to extract and monetize the region’s extensive supply.

In its most recent annual World Energy Outlook, the International Energy Agency predicts natural gas will increase from its current 21 percent share of the world energy mix to 25 percent by 2035. It is the only fossil fuel whose share is growing.

We spoke with Colin Elcoate, Vice President, Business Development and Suresh Kumar, Manager, Business Development at SPX Power and Energy about the Middle East’s increased focus on natural gas and the impact this might have on the global energy market.

Is the production and use of natural gas on the rise in the Middle East?

Yes, the use of natural gas, which is abundant in the region, is increasingly being used as a fuel to generate electricity in the Middle East.  For example, the Oil & Gas Journal reports that the Middle East houses one of the world’s largest concentrations of natural gas. Qatar is leading the way next to Iran in its extraction. The global rate of natural gas production has increased by 39 percent — from 2,410bcm (billion cubic meters) to 3,369bcm — since 2000. During the same period, production in the Middle East more than doubled from 207.5bcm to 568.2bcm — the largest growth rate of any region.

In fact, the rising use of natural gas around the world is coming at the expense of other fossil fuels, according to the British Petroleum energy outlook.  It predicts that by the year 2035, the use of natural gas will roughly be on par with other fossil fuel sources. This will be the first time since the advent of the Industrial Revolution that no single fuel dominates the market.

Additionally, the World Energy Outlook predicts that the Middle East will emerge as the second-largest gas consuming region by 2020. Beyond that, demand in the region is expected to grow by more than the entire gas demand of the Organization for Economic Co-operation and Development (OECD) states by 2035. This will likely redefine the Middle East’s role in the energy market.

What’s driving this growth?

The biggest jump in consumption comes from the power sector. In Saudi Arabia, increasing electricity demand is primarily the result of population growth and the continual drive to meet its existing supply gap. The investment underway in the country eclipses investment in all other segments. Natural gas-based power plants are one of the most attractive solutions to meet this demand due to their relatively lower carbon emissions, higher efficiency and shorter lead time to commission.

Beyond the Middle East, global demand for natural gas is also driving the need for increased production. Japan, for example, has become the world’s largest liquid natural gas importer as a result of the Fukushima nuclear incident. Australia and Qatar are currently the two largest suppliers of natural gas to Japan.

The Middle East’s increased focus on natural gas has also been driven by the economics of oil. The region is attempting to diversify its power supply and become less reliant on oil in order to be less susceptible to market volatility. Compared to the world’s other top oil producers — the United States and Russia — the Middle East’s energy supply is considerably less balanced and is seen as relying too heavily on oil products.

Which countries are producing/exporting the most natural gas?

Qatar has the third-largest proven reserve of natural gas in the world next to Russia and Iran. Its gas production has increased more than 300 percent in the last decade from 45bcm in 2005 to 158bcm in 2013. The Dolphin pipeline in this Gulf Country has signed long-term contracts with neighboring Oman and the United Arab Emirates (UAE) to supply gas for its power plants and other needs. Qatar is also the world’s largest exporter of liquefied natural gas (LNG). More than 60 percent of its exported gas goes to Asia, while most of the balance ends up in Europe.

Saudi Arabia and the UAE also have large proven gas reserves. With more gas-based power generation projects planned in Saudi Arabia, the production of gas there is expected to rise significantly.

How does increased natural gas production in the Middle East impact the broader global market?

Currently, the Russian Federation leads the natural gas export market by a large margin. Most of it is exported to Europe via pipelines. If the current trade embargo with Iran is ever settled, Iran will likely play a much bigger role in the European gas market and counter Russian dominance.

With Iran out of the picture, Qatar remains the largest exporter of gas in the Middle East. Qatar transports most of its gas in the form of LNG to Japan. In fact, QatarGas has a 10 vessel fleet just for that purpose. QatarGas has five more vessels supplying LNG to Spain and the rest of the fleet supplies other global demands. Additionally, as discussed previously, the Dolphin pipeline supplies gas to the UAE and Oman and, in the near future, Qatar’s increased production is likely to be distributed to Europe and other Middle East countries.

While the UAE also produces a considerable volume of gas, a large portion of it is used to extract more oil through the Enhanced Oil Recovery process. The result is that the UAE is a net gas importer.

Meanwhile, the focus in Saudi Arabia has mostly been on oil and is likely to remain so in the near future. However, the demand for electricity generation and the economics of selling oil has increased the Kingdom’s focus on tapping gas although the increase in Saudi production is likely to address local demand more than global demand.

What are the opportunities for SPX in the Middle Eastern natural gas market?

SPX Flow Technology has focused its strategic growth in the Middle East region around the Power and Energy end market, which provides solutions that play a role in both the production and consumption of oil and natural gas. Many of our American Petroleum Institute (API) compliant products, such as pumps, valves, filtration and mixers, are incorporated into larger systems in the production fields.

One of the segment’s key initiatives moving forward is to build off our huge global installed base and take our extensive experience of providing products to the gas-fired power station market globally to support the growing demand in the Middle East, with a particular emphasis on Saudi Arabia.

Flow Technology products feature right across typical gas fired power plants for which there are significant opportunities per plant, not to mention the aftermarket opportunity for the subsequent 25-years-plus of operation.  Products offered include individual pumps, valves, heat exchangers and filtration, as well as skidded solutions that incorporate a number of SPX products to service a particular application.

With the growing demand, our extensive experience, an environment that features limited local competition and a strong desire for Western-designed product, SPX has a strong position and is confident about developing its business in line with the market.  Our strong local presence in the Middle East, combined with our experienced global manufacturing base and supply chain, puts SPX in a very favorable position in this buoyant market place.  This initiative complements those already in play in the U.S. where low gas prices and concerns over carbon emissions continue to drive a shift towards gas-fired technology.