The natural gas resources of the Arab World present the region with an important opportunity to enhance the sustainable energy policies through reducing both energy costs and carbon emissions while boos ting regional economies and employment. But realising this potential will require the correct policies to be put in place by regional governments, most especially encouraging the role of the private sector through improving the investment framework for exploration and production and tackling wasteful and distorting subsidies in the market for gas.

 

 

The Arab World has only just begun to develop its natural gas resources. The region contains over 40% of the world’s proven gas reserves, and in fact most of this was discovered in decades past by accident when looking for oil. It is only relatively recently that natural gas has been a sought after energy resource in exploration activities – and the potential for finding more gas is still considerable. For example in Qatar the North Field, now recognised as the world’s largest gas field, was left undeveloped for over 20 years when it was first discovered.

 

Today however it is clearly recognised worldwide that if coal was the fuel for the 19th century and oil for the 20th century, then natural has is clearly the fuel of choice for the 21st century, especially for electricity generation and to fuel industry. This is especially so in the Arab World, with developing economies and fast-growing populations with rising energy needs.

 

It should also be recognised that natural gas is a clean fuel, with a third of the carbon emissions of coal and none of the dangerous pollutants of nitrous or sulphur oxides. It is also a more affordable fuel, enabling substantial fuel budget savings, and can play an important role as a transition fuel from solid and liquid fuels to renewables and a more sustainable energy mix – a transition that usually takes many decades.

 

When looking at the developing economies, it is interesting to compare the United States with Europe. The United States, thanks to the shale gas revolution which has enabled a boost in US gas reserves and production and reduced local prices of gas, has also ended up reducing carbon emissions to the lowest level in over 20 years, far exceeding the Kyoto targets to which it had previously refused to commit. And in the process the lower energy costs has also made the US more economically competitive, with heavy industries such as petrochemicals now re-establishing and rivalling GCC production. The US may soon even become an exporter of gas in fact, and all this has been due to a vibrant private sector with many small companies exploring and developing this important sector with the latest technology.

 

Europe on the other hand, following a policy of subsidising costly and inefficient renewables, has ended up suppressing the proper development of its natural gas sector, and is now forced to import coal from the US to burn for power generation – an irrational policy that has seen energy costs rising fast and carbon emissions increasing instead of decreasing in major economies like Germany. It is therefore very important than the Arab World learns from the experiences of other regions and establishes the best policies from the outset to develop and properly utilise its large energy sources.

 

The historic state-driven development of the upstream exploration and production sector for natural gas has left the Arab World with the combination of large reserves but relatively low production - with over 40% of proven global gas reserves, but only 20% of global gas output. Consequently, the region has the longest gas ‘reserve life’ in the world, able to produce at current levels for at least 130 years, compared to the global average of 64 years.

 

The investment challenge to achieve this energy transformation will be great, and the International Energy Agency (IEA) estimates that this region will need to invest over US$2.2 trillion in the next 25 years to keep oil, gas and power infrastructure up to the required level. Ensuring energy policies most conducive to delivering this investment will better place the region to build on its competitive advantage in sustainable energy policy for the long-term.

 

The nature of the natural gas industry makes the private sector is uniquely well-placed to play an important role in the development of this crucial industry for the Arab World: the large investment requirements in midstream and downstream sectors such as pipelines and processing equipment, the complex project management requiring commercial as well as just technical skills, and the natural linkages to heavy industry and petrochemicals. All these call for an enhanced role for the private sector and especially regional companies.

 

But governments in the region need to urgently make the correct policy choices to encourage private sector investment in this crucial industry, or it will remain unfulfilled potential and the sustainability of economic development will be put at risk. Already we see signs of these risks – with every Arab country today apart from Qatar suffering from gas shortages. Looking at three important regional examples: Egypt’s gas production has been declining for the past 4 years while its demand grows 10% annually due to local subsidies, meaning its exports of gas may soon disappear and it may be forced to import expensive gas from abroad. Saudi Arabia burns crude oil in power stations at a cost of over $100 per barrel and causing pollution and damage to turbines, while it natural gas is sold at the equivalent of $4 per barrel. And Iraq flares over 1 billion cubic feet of gas per day while most of the country still has only a few hours a day of electricity and homes are forced to consume expensive liquid fuels in generators.

 

The key requirements are to enhance the investment regulatory regime for the upstream sector to create the proper incentives for the exploration and production of natural gas. These need to recognise the higher capital-intensity of gas investments and the significant infrastructure required in the midstream in terms of processing and pipelines, and the longer payback needed. And better incentives for upstream investment will of course also necessitate a market-related gas price high enough to justify the needed investment over the long-term. This in turn will require tackling subsidies to ensure proper market pricing in the downstream sectors, such as power and industry which utilise this important fuel.

 

The entire gas value chain needs to therefore be recognised and the correct incentives and regulations implemented at each stage to ensure overall success in encouraging the much-needed investment from the private sector in this manner. By doing so, Arab countries will ensure affordable long-term fuel supply for power and industry while achieving more rapid economic growth and employment, and at the same time reducing carbon emissions and facilitating the transition to a more environmentally-sound approach. All these form the basis for a more sustainable energy policy, for which the proper development of the regional gas industry by the private sector is a fundamental pillar.