Making the case for gas market liberalisation
Local companies are underselling, leading to a potential 'gas crunch'
A prominent local executive has issued a call to the GCC gas market to liberalise, or face a failure to fully capitalise on its gigantic hydrocarbon reserves. Badr Jafar, executive director of Crescent Petroleum and CEO of Crescent Investments told Utilities Middle East that the low regional price for gas, a feedstock for cheap electricity, is no longer economically sound when other issues, such as population growth, are included.
“The end-result is what happened in Sharjah over the summer,” said Jafar. “You have the population and industrialisation growth which is not slowing down, together with heavily subsidised electricity generation – approximately 65 cents per kWH. Even with the recent doubling of the tariffs in Sharjah, that subsidy is still a massive drain on the local government’s resources.”
Badr recommended that the efficient use of power should be incentivised, and that this should be matched by massive investment in infrastructure and gas resources. “But to do this we need liberalisation of the market,” he indicated. “As this issue continues to hit wallets, I can see positive signs in the greater Middle East region, with moves in the right direction taking place in Egypt.”
Needless to say, the political implications of such a move would be profound. The Middle East has been used to subsidised electricity for some time, and costly changes to tariffs would be unpopular. That’s why the issue of efficiency is becoming so important.
“A first defence against wastage is improving efficiency in buildings,” remarked Jafar. “Buildings like shopping malls and offices are far too cold during summer. By increasing the ambient temperature to 24 degrees from 18 degrees, which is perfectly comfortable, companies can save up to 30% on their power bills.”
From the industrial perspective, the Crescent executive says one solution is his firm’s Gas Cities concept.
Gas Cities Ltd is a joint venture company set up by Dana Gas and Crescent Petroleum, and explores the possibility of clustering various industries so that by-products and waste from one sector can then be used as feedstocks and energy for neighbours.
“In the Gas Cities, we would like to be able to develop the gas resources ourselves, and price that feedstock according to what the industries can afford,” said Jafar. “That would incentivise an industry to be efficient, and allow us to share in the profits of that industry.”
As an example, Jafar referred to the ammonia industry. If the price of ammonia doubles, the ammonia sector should then pay more for its feedstock. “Likewise, if the commodity price falls, we go down together, because we always want to have a happy tenant – as long as we are both able to share in the good times.”
While this concept would be admittedly difficult to establish in the more mature local markets, Jafar has set his sights on potential high-growth markets, such as Iraq. Crescent Petroleum already has a long heritage in the country, and was instrumental in the construction of a 180-kilometre gas pipeline to provide feedstock for two independent power plants (1,500MW and 750MW) ordered by the Kurdistan Regional Government.
“Iraq in this regard has huge potential, because it has an opportunity to start afresh, and build the necessary framework today,” said Jafar. “The biggest problem Iraq faces is to break out of that negative mindset and influence that is coming from some of its neighbours, who don’t want to see Iraq flourish as fast as it can.”
Studies conducted by Gas Cities indicate that there are three areas where the concept would add the most value. In each of those three areas, the company has reached beyond the preliminary discussion stage.
“There’s the Kurdistan region of Iraq, where we have identified a 42 square kilometre piece of land in the north,” said Jafar. The second Gas City is in Egypt, where we are currently identifying potential sites, and where we are now working with the Egyptian government. In addition, in Yemen we have conducted a pre-feasability study along with the Yemeni government to identify a location for the site, and signed an MoU with the government a few weeks ago.”
Jafar’s overriding belief is that ‘first mover’ syndrome is a strong driver in this region. “Gas is more efficient, cleaner, cheaper, and if producers start to set a rate that is acceptable for everyone in the region, then I don’t think you need to wait for a unified approach, it just needs to get done, and when it is successful, it will be used as the right benchmark,” he said. “All you need is a willing buyer and a willing seller – and as long as there is logic in the pricing mechanism then it will succeed.”
Gas Cities: At a glance
“The concept of Gas Cities is based on the effective utilisation of natural gas as feedstock, thereby maximising the value of industrial outputs. In the Gas Cities, available natural gas is converted into economically viable petroleum related products & derivatives by systematically utilising the operational synergies and economies of scale arising from geographically clustered industrial units.
Designed to be self-sustaining, Gas Cities offers services that will satisfy all industrial/business needs.
Highly developed infrastructure ensures smooth logistics, while service facilities like banks, financial centres, engineering and business consultancies offer increased in-house flexibility and inter-cluster synergies.”