During the early years of the 21st century, the Middle East emerged as a fast-growing center not just of natural gas production and exports but also of demand.
BY: ROBIN MILLS, COLUMBIA | SIPA
Including Egypt, total growth in annual demand from 2000 to 2017 was greater than any region except Asia, a feat more surprising when considering the region’s relatively small population and economy. That’s about to change, however. After two decades of rapid expansion of natural gas consumption in the Middle East, growth should drop through 2035 due to four factors: improved efficiency, higher gas prices, slower economic growth, and alternative generation.
Demand growth was driven by low, subsidized gas prices intended to spur economic growth, encourage energy-intensive industrialization, and share some benefits with the local population. But budget deficits and unsustainably rising domestic energy consumption have encouraged regional governments to cut subsidies and introduce efficiency policies, particularly since the fall in oil prices in late 2014. Industrial demand growth is also poised to fall as the Middle East’s key competitive advantage was its low energy and feedstock cost.
The analysis undertaken in this paper to project future gas demand in the Middle East yields significantly lower estimates than forecasts by a number of international bodies (IEA, GECF, BP, ExxonMobil), especially post-2030. Important findings include:
- Gas demand in the power sector could essentially plateau during the 2020s, with the other main consuming sector, industry, also slowing sharply, based on conservative assumptions on efficiency and demand growth, and aggressive but not unreasonable projections for renewables penetration.
- Higher gas prices and shortages, along with great improvements in the costs of renewable energy, have led Middle Eastern countries to explore alternative power generation, particularly solar but also wind, waste, nuclear, and coal. After a series of false starts, renewables are now gaining real momentum.
- Increases in regulated gas prices can also spur general improvements in power plant efficiency, including upgrades and the replacement of most simple-cycle turbines with more efficient combined-cycle plants.
- For the Gulf Cooperation Council (GCC) states, heavily dependent on desalination for water supplies, there has been growing interest in reverse osmosis (RO) desalination as opposed to the traditional thermal methods, usually co-generated with thermal power plants. RO is more energy-efficient and decouples water from electricity production.
- Middle East industrial gas demand is harder to forecast than power because of its dependence on government-sponsored megaprojects. Governments may still subsidize certain sectors amid higher gas prices for reasons of employment and economic diversification. Otherwise, demand growth will have to come from a wider variety of less gas-intensive industries. Regional producers will find it increasingly important to target and create industrial gas demand.
- Lower Middle East demand growth would free up supply to increase natural gas exports from the region. However, this would depend on whether the new generation of higher-cost gas resources in the region would be competitive in international markets, and whether new production projects would still go ahead if they were not required domestically.
- Countries that move faster on curbing gas demand and boosting domestic output may find markets in neighbors if they can overcome the commercial and political problems that have hampered past intra-regional pipelines. The region is unlikely to become a major LNG demand center, although LNG imports will continue and even grow in some countries.
Read full report: Under a Cloud: The Future of Middle East Gas Demand by Robin Mills, Columbia | SIPA
