Doha

Subsidies should be reduced and in due time eliminated in the Middle East’s natural gas industry to maintain export ambitions as well as to limit growing domestic consumption, a report has shown.

“One reform that could help to further develop the natural gas industry in the Middle East is addressing subsidies,” said the ‘Brookings Doha Energy Forum Report 2015’.

In a section titled ‘The new era of gas’ the report said that with climate and energy policies becoming increasingly entangled, natural gas has been important as a relatively clean fossil fuel.

As a result of dramatic technological advancements and innovation, in particular related to shale development, there is also increased certainty that natural gas is abundantly available.

Natural gas is the fastest growing primary energy source at around 2% a year.

This growth has been shifting east as Asia becomes the centre of future natural gas demand.

As an illustration, in 2014 close to 75% of global LNG trade took place in Asia.

The price of natural gas in Asian markets is still mostly tied to the price of oil or related products, but it is a very different commodity. Natural gas moves primarily through pipelines, which makes it a regional commodity.

A modest but rapidly increasing share is liquefied for transport and can be shipped around the world. The higher capital costs of LNG projects, though, mean that pipelines are still preferable over short to medium distances, and essential for land-based transport.

High-cost infrastructure investments often require long-term contracts with prices high enough to make the construction of these projects economically justifiable.

In the United States, new pricing formulas for LNG exports are emerging and contracts often have increased flexibility, making reloading more common than it has historically been.

It is widely believed that this trend of increased global gas trade and flexibility will continue in the coming decades, contributing to the expectation that natural gas will be the fastest growing primary energy source. One major uncertainty is whether major global polluters will employ some form of carbon pricing in the future for climate change reasons, or simply turn to gas to improve air quality in major urban areas.

Many countries in the Middle East require reforms in the way that natural gas is used and viewed. This is needed because the amount of associated gas is rising slowly while domestic demand grows quickly, and there is an increased need for injection into oil fields to maintain production.

In some countries, natural gas is increasingly used as a feedstock for electricity generation, mostly to replace oil. The domestic development of both conventional and unconventional gas is challenged by a lack of infrastructure and the right price signals.

Therefore, many countries in the Middle East, even though they are rich in natural gas, are importing it from other countries, struggling to maintain exports, or consuming large quantities of oil domestically for power (Qatar being the exception).

Cross-border infrastructure development is hindered by political tensions in the Middle East, the report said.

Several countries, such as Iraq, lack the full political and commercial framework to expand the share of natural gas.

The absence of these basic conditions in turn prohibits effective trade and the convergence of gas prices in the region, it said.