Mena Gas Investments Hold Steady: Apicorp

The coronavirus pandemic which has been raging since the beginning of the year has had a severe impact on the global oil and gas investments. The year is witnessing one of the sharpest contractions in gas demand. According to the International Energy Agency (IEA), the gas market in 2020 is experiencing the largest demand shock on record with an estimated year on year reduction of 4%, compared with the 2009 crisis when demand fell by 2%. This is in contrast with 2019 which was a record year for LNG final investment decisions.

Dammam-based Arab Petroleum Investments Corporation (Apicorp) in its Middle East & North Africa Gas & Petrochemical Investment Outlook 2020-24 report, published early October, said that despite the present market turmoil, committed gas investments in the region held steady compared with the forecast in its Gas Investment Outlook 2019-23 report, while planned investments actually increased by 29%.

“Although the IEA forecasts a considerable reduction in global oil and gas sector in their World Energy Investment 2020 outlook, our analysis suggests a different outlook for Mena in the period 2020-2024,” Apicorp said. “Committed gas investments for 2020-2024 maintain their levels from our Gas Investment Outlook 2019-23 ($85bn for 2020 vs $87bn in 2019 outlook), while planned investments actually increased 29% based on 2019 outlook figure to reach $126bn, thanks mainly to Qatar’s North Field Expansion project ($50bn) and the strong ongoing regional drive for cleaner power generation and improved monetisation of gas as a feedstock for the industrial and petrochemicals sectors.”

Saudi Arabia, Iran and Iraq are the top three countries in terms of committed gas investments. This is due to the gas-to-power drive in Saudi Arabia, Iran’s South Pars development programme and petrochemicals feed, and Iraq’s gas-to-power development programme. Iraq is looking to cut reliance on Iranian gas imports, via Diyala pipeline, amounting to about 11.5bn m³ in Q1 2020 (peak import was 14.4bn m³ in July 2019). Progress on the Basra gas project will be critical for this to happen, Apicorp said.

The planned Qatar North Field Expansion (NFE) is accounted for with $22bn in 2020-24. This is almost the same figure allocated to UAE’s continued gas development masterplan realisation, Apicorp added.  The NFE project will help bring Qatar’s LNG output from 77mn metric tons/year to 110mn mt/yr. The second phase, called the North Field South project, will further increase Qatar's LNG production capacity from 110mn mt/yr to 126mn mt/yr.

The current downturn has put extreme fiscal pressures on both government and private sectors. Therefore, despite a relatively optimistic investment outlook, Apicorp warns that a few committed projects may still face strong headwinds in terms of payments and/or supply chain issues which may lead to delays. “Planned projects will be further scrutinised owing to the expected prolonged energy commodities’ oversupply and a slow global economic recovery. Regardless of the different economic drivers and impact of the crisis on each country, proceeding with planned developments nonetheless requires a bullish view on global gas prices and domestic demand,” it said.

Top 20 planned and committed gas projects

Source: Apicorp

Slower gas demand growth

Gas demand is expected to grow by about 3.8%-4% on average in Mena compared with 6% in 2019. This year, the impact of Covid-19 on Mena gas demand and the petrochemicals sector will accelerate the industrial share of domestic demand, the report said.

“This downward revision is due to slower GDP growth and industrial output, the effect of price reforms, nuclear power projects coming online (UAE and potentially Saudi Arabia) and increased share of renewables,” it said. “A prolonged depression of LNG prices will put additional pressure on a few LNG exporters in the region during a time when pipeline exports were already taking a hit due to economic slowdown in Europe.”

Pressure on some LNG exporters

A prolonged depression of LNG prices will put additional pressure on a few exporters in the Mena region. Algeria whose GDP growth in 2020 sits at -6.4% is entering a renegotiation of some of its contracts in a buyer’s market and a period of declining pipeline exports. Egypt’s LNG plants could remain heavily under-utilised until 2022. Qatar on the other hand continues to benefit from economies of scale and high liquids yield, further boosting its LNG project economics.

In Algeria’s case, Apicorp said, it may be difficult to negotiate its expiring LNG contracts on favourable terms. The country will also need to boost investments in the upstream sector given its rising domestic consumption. Gas production has been on a steady slide since its record 94.8bn m³ in 2016, with output in January-May 2020 totalling 35.1bn m³. Surging domestic gas demand, which reached 63% of output, is putting pressure on export capacity.

As for Egypt, the government relented to the pressure to cut domestic gas prices for local heavy industries, reducing them in October 2019 to $5.5/mn Btu and again in March 2020 to $4.5/mn Btu as a result of the Covid-19-related economic slowdown.

“Combined with its inability to resume LNG exports given the depressed global prices in H1 2020, it is now expected that Egypt’s LNG plants will remain heavily underutilised until around 2022, exporting under 4mn metric tons/year of its low-priced onshore feedstock gas only, a quantity which represents roughly 35% of the country’s gas production capacity in 2020-2021. The region’s other LNG exporters, Qatar and Oman, also have a wave of LNG contracts expiring in 2020-24,” Apicorp said.