Will shale shake the Middle East?

The debate over shale’s impact on the GCC continues. Will this be the end of low-hanging fruits and high margins?

Innumerable articles have been published around the world on the US shale boom. In addition, its immediate consequences for GCC countries such as reductions in LNG exports from the GCC to the US have frequently been discussed in the Middle East. Yet there is always a need to consider the less obvious interdependencies between the US shale boom, the GCC’s oil and gas businesses, and the implications on chemical sites in the GCC including an assessment of possible risk factors.

Does the US shale boom threaten the business of chemical players in the GCC?

Attendants at recent oil and gas conferences in the GCC countries were generally well aware of developments in the US, but diverse opinions on this rather new phenomenon from the US were voiced. Some experts tended to be rather relaxed, seeing their business affected but not seriously threatened. Others were more alert to the topic and mentioned various risk factors that could have considerable negative effects on GCC countries’ oil, gas and chemical businesses. But Stratley AG, a specialised consultancy focused on the refiing, petrochemicals and chemicals industriesm, believes that there is no need to panic. Taking interdependencies between the US shale boom and other risk factors into account does, however, reveal possible consequences such as growth obstacles and margin squeezes in GCC countries.

Risk factor: LNG exports

Ethane is commonly a by-product in many gas fields and is consequently extracted at a higher rate if methane production is high. As an example, the ethane feedstock used in the Ras Laffan cracker (Qatar) with a capacity of 1.3 million tons of ethylene per year is extracted from the North Field, one of the world’s largest conventional gas fields. Only five fields. Only five to ten years ago, Qatar had planned to export large amounts of LNG to the US and to eastern Asia, and constructed LNG export terminals as well as large vessels to do so.

Then the US shale gas boom started, and the forecasted US methane self-sufficiency by 2020 forced Qatar to change export plans. Qatar’s new plan is to increase export volumes to Asia accordingly, mainly to China and Japan, where demand increases are considered high enough to absorb the additional LNG supplies.

While China’s and Japan’s demand extrapolations based on 2013 economic figures might sustain this plan, risk factors remain.

China featured impressive economic growth – until recently, when first signs of a fading dynamic hit the headlines. This effect might be temporary and does not allow conclusions for future development, because China is large, complex and features a unique political and economic system that is difficult to predict.

One risk factor is that mid- to long-term economic development may turn out to be below expectations. Another risk factor is that political decisions limit LNG imports from Qatar – for instance, by import supplier diversification (gas from Far Eastern Russia, LNG from Australia or US), by domestic shale gas production and by driving or even subsidising other forms of energy production.

Post-Fukushima Japan has presumably left an energy gap that Qatar might fill by supplying additional LNG. One of the main risk factors concerning Japan is that Japan might operate its nuclear power plants longer than planned.

Furthermore, Japan is actively evaluating methane hydrate extraction off its shores. As yet, commercial production is a distant prospect, but it could become one option of hydrocarbon supply in the future.

Risk factor: oil production

Large amounts of gas, especially in Saudi Arabia, are produced as associated gas in oil production.

As by-products, ethane and other gases are produced in volumes tightly correlated to the oil volumes produced. This also means that constraints in oil production limit the ethane gas supply.

The shale/tight oil boom in the US has reduced, and will further reduce, the demand for light oil imports. Upstream companies in the GCC are well aware of this and argue that, firstly, they can still supply heavy crude to the US (shale/tight oil is mainly light oil) and that, secondly, East Asian demand will grow fast enough to more than compensate the US demand reduction.

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