This is the 3rd instalment from a special serialisation of extracts from the inaugural research report by The Abdullah Bin Hamad Al Attiyah Foundation for Energy & Sustainable Development, which will be published in its entirety on November 1
Power generation growth in the GCC countries has been nothing short of dramatic, given that most of the region was un-electrified as recently as 1960. In Oman, large-scale electrification did not even unfold until well into the 1970s.
Many residents can remember the difficult days before refrigeration and air conditioning. Residents of the richer states of Kuwait, Qatar and the UAE now consume more electricity, on average, than do those in the United States.
Power generation growth averaged 10% per year since 1973, slipping to 7% per year between 2000 and 2010, which was slightly faster than average GDP growth that decade of 6.5%. About 60% of power generated in the GCC countries flows from natural gas-fired plants, versus 40% for liquid fuels such as crude oil, diesel and heavy fuel oil. Overall, about a third of all natural gas produced in the Gulf states is consumed in regional power generation. Gas demand is exacerbated by its use in producing desalinated water, often in co-generation plants that use waste heat to produce electricity.
In recent years, growth in electricity demand has outstripped domestic supply of natural gas in five of the six GCC states. Only Qatar commands sufficient supply for the foreseeable future.
This shortage leaves Gulf states facing higher marginal costs for new power generation and production of desalinated water. In the past, governments had to cope with the cost of building plants, while surplus feedstock was made available as a byproduct of oil production. Now, policymakers must contend with market-priced imported fuels, expensive production of unconventional gas or the opportunity cost of burning crude oil and other costly liquid fuels. Oil demand has risen across the GCC by an average of 9% per year since 1973, growing faster than GDP, on average. Aggregate oil consumption in the six GCC states was less than 500,000 bpd in 1973 and more than 4mn bpd in 2014.
Although power demand has been problematic in all GCC states outside Qatar, Saudi Arabia and Kuwait face highest demand pressure because of their reliance on liquid fuels – crude oil, heavy fuel oil and diesel fuel – for most of their power generation feedstock. Hence, while oil consumption in the remaining GCC states is weighted more heavily toward the transport sector – where oil is considered most valuable – burning of liquid fuels for power generation is still dominant in Saudi Arabia and Kuwait.
Saudi Arabia consumed more than a quarter its overall production in 2013. Direct burn of crude oil for power generation reached an average of 0.7mn bpd from 2009 to 2013 during the months of June to September, with peak month power sector consumption rising as high as 900,000 bpd. While Kuwait is gradually shifting toward natural gas via imported LNG, Saudi crude burning looks set to top 1mn bpd by 2020. Low domestic prices for crude oil – roughly $5/bbl in Saudi Arabia – are a major factor encouraging crude oil demand.
Intensifying domestic crude burning coupled with a 1.4mn bpd increase in crude shipments to Aramco refineries inside and outside the kingdom signal that Saudi Arabia is moving beyond its long-held role as the world’s market-balancing supplier of crude oil. Recent data show slipping Saudi crude exports, alongside flat or rising production. Assuming that Saudi crude production remains constant at around 10mn bpd, the amount of crude available for export could fall below 5mn bpd by 2020.
The GCC also holds major reserves of natural gas, but, in contrast with oil, most production is consumed domestically. Only Qatar is a major exporter.
The UAE and Kuwait have been net gas importers since 2008. The region has no gas market pricing mechanism, such as an index based on trade at a hub. In similar fashion to the electricity sector, low prices (of around $1 to $2 per MMBtu) are driving demand. But underpricing is also stifling production from known reserves – some of which are comprised of high-cost non-associated gas – which has encouraged imports. Despite these difficulties, the US Energy Information Administration (EIA) projects that gas consumption in the Middle East’s generating sector will grow by nearly 150% by 2035.
In Oman, rising domestic demand and depleting conventional gas reserves have forced reductions in LNG exports. Unconventional reserves are under development, but lifting costs are expected to run beyond the state-fixed selling price for bulk gas. In Saudi Arabia, a $9bn gas investment campaign aims to slow the growth of crude oil and diesel in the power sector by substituting with gas.
Saudi Aramco hopes to increase gas output by 50% above 2011 production of 280MMcm/day, but, like Oman, most of its non-associated reserves consist of difficult formations.
These assertions form the central argument of the first research report by The Abdullah Bin Hamad Al Attiyah Foundation for Energy & Sustainable Development to be published on November 1, 2015, which examines the energy demand growth in the GCC countries, the factors contributing to that growth, and the implications of continuing these trends – and of successfully reversing them.
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