Gas substitution to support Middle East oil exports in 2018, research shows

Gas projects will allow oil exports to increase exports and maintain production levels while adhering to an extension of OPEC cuts
By Bernd Debusmann Jr
Wed 22 Nov 2017 10:33 AM

Plans to substitute oil for gas in regional domestic markets may help support Middle East oil exports in 2018 despite an anticipated extension of OPEC cuts, according to a new outlook from BMI Research.

So far in 2017, Saudi Arabia – the largest traditional direct crude burn market – has recorded the lowest use of crude oil in power generation for the last five years.

According to BMI, progress with upcoming gas projects will further erode the need to burn crude domestically in the near future.

The substitution of oil for gas domestically is more evident in Iraq, which began importing natural gas from Iran in June.

According to the BMI research, Saudi Arabia has “a lot more flexibility” in how it manages its oil sector than other oil producers, given its oil storage capabilities and the kindgom’s traditional role as a swing producer. Additionally, it has an approximate refining capacity of 2.7 million barrels per day of refining capacity, which it can ratchet up or down depending on requirements.

BMI notes that since the November 2016 OPEC agreement, there has been a strong correlation between decrease in exports and increases in refining throughput, which has minimised the impact of lower oil exports.

Iraq, on the other hand, has only 12 days of oil storage capacity and a 700,000 barrel per day refining sector. Gas imports from Iran have enabled the country to increase oil exports on a year-on-year basis, despite being involved – but not 100 percent compliant – with the OPEC cut.

Deliveries via a second pipeline from Iran could begin by the end of the year or early 2018, which BMI says “would largely supplant the use of crude oil in the domestic power sector, increasing volumes to export.”

Such a move allows Iraq and other oil exporting countries to increase oil exports and maintain production levels while adhering to the expected extension of OPEC cuts through 2018 and increasing market share globally. 

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