* Gas demand in Gulf rising rapidly
* But politics hinder regional pipeline project
* Countries forced to ship in LNG from across world
* Qatar moratorium on additional exports may last years
* Governments losing money on domestic gas subsidies
By Daniel Fineren
DUBAI, March 7 Countries neighbouring the
world's biggest natural gas field in the Gulf face years of
importing fuel by ship from distant suppliers, after plans to
share the gas through a pipeline were stifled by political
rivalries and haggling over price.
Qatar has become one of world's richest countries by selling
gas from the vast North Field under its waters to Europe, Asia
and the Americas -- bankrolling its preparations to host the
2022 World Cup soccer tournament with some of the profits.
Long before Qatar spent billions of dollars on building the
world's biggest liquefied natural gas (LNG) plants to export the
fuel, it began discussing with the other five countries in the
Gulf Cooperation Council (GCC) -- Bahrain, Kuwait, Oman, Saudi
Arabia and the United Arab Emirates -- the idea of creating a
gas sharing grid to drive economic growth in the region.
But over a decade later, only one under-used leg of the grid
has been built. And Qatar has now committed itself to selling
nearly all its gas to countries outside the Gulf, until it lifts
a self-imposed moratorium on further export projects.
"The perception across the Gulf in the early part of the
last decade was that there was not a gas shortage, and by the
time a number of countries realised that they would be short,
Qatar had called the moratorium and committed its gas," a senior
source in Qatar's gas industry told Reuters.
"Until the middle of the last decade, people were still
expecting to get gas at very low prices," said the source, who
declined to be identified because of the political sensitivity
of the issue.
"People realise now that if they are going to have gas
traded across (the Gulf), then it's not going to be at low
prices...For Qatar it's not really a price issue -- until the
moratorium is lifted, there isn't any gas."
For decades, Gulf countries saw natural gas largely as a
byproduct of their oil production, with much of it burned off or
sold cheaply to local industries. Gas became eagerly
sought-after in the region over the past decade as a population
boom drove up demand for electricity and industries such as
petrochemicals and aluminium smelting developed.
Saudi Arabia continues to burn large quantities of its oil
reserves in power plants, but its less well-endowed neighbours
want to burn more gas so they can keep oil for export. As a
result, the International Energy Agency expects the Middle East
to account for a fifth of the growth in global gas demand
between 2011 and 2016.
Sharing Qatar's huge gas reserves could have provided the
GCC with a convenient solution to its supply problems and helped
the integration of its economies, one of the organisation's
stated goals. Instead, politics intervened.
According to diplomatic cables from the U.S. embassy in
Manama on Feb. 16, 2005, released by Wikileaks, Bahrain's King
Hamad complained to the U.S. ambassador that Saudi Arabia was
blocking a proposed pipeline from Qatar to Kuwait via Bahrain.
Manama appealed to Washington to pressure Riyadh to let
Kuwait and Bahrain link to the North Field. But the project was
dead in the water, leaving Kuwait no choice but to find global
suppliers to ship LNG into the Gulf from as far afield as
Meanwhile, Bahrain is in talks for Russian gas giant Gazprom
to supply the tiny island, which is located just 100 km (60
miles) from the North Field, with LNG from around the world.
In one of great oddities of world trade, cargoes of Qatari
LNG have even been delivered to northwest Europe, then reloaded
and shipped back to the Gulf in a round trip of over 26,000 km,
because prices on offer in the Gulf were higher at the time.
"Politics is a big part of it," said Robin Mills of
Dubai-based Manaar Energy Consulting.
Analysts believe Saudi Arabia, which had already decided to
look for its own gas under the sand dunes of its Empty Quarter
rather than rely on Qatar, probably blocked the GCC pipeline
from running alongside its east coast because it would have
given Doha too much power over GCC countries.
"They don't want Qatar to increase its regional economic and
political influence, possibly to the detriment of their own,"
said Jonathan Stern, director of gas research at the Oxford
Institute of Energy Studies.
"The reason they don't import Qatari gas themselves -- a
highly sensible idea for them -- is partly because they don't
want to give the Qataris any power over them."
According to U.S. embassy cables released by Wikileaks,
Bahrain and Kuwait at one stage began supply negotiations with
Iran in the hope that Saudi Arabia would see the proposed Qatari
pipeline as less threatening than a deal with Tehran, which is
Riyadh's biggest rival in OPEC.
That tactic failed, however. Iran's own appetite for its
reserves, including a share in the North Field which Tehran
calls the South Pars, and international sanctions against Iran
have slowed production growth, limiting the country's exports.
Bahrain's energy minister Abdul Hussein bin Ali Mirza told
Reuters that talks with Iran fell apart because of "recent
events" in the region. Bahrain accuses Iran of fomenting a
February 2011 uprising against the government.
The only gas pipeline that Iran has laid, to the UAE, has
remained closed for years since it started leaking gas at the
bottom of the Gulf during initial tests.
In the absence of a pipeline, Gulf countries could still
import Qatari LNG by ship. But with the exception of the UAE,
they have generally failed to agree on terms, generating some
ill feeling in the region.
"Qatar has continued to rebuff Bahraini requests to open
negotiations on long-term contracts for North Field gas, which
irks King Hamad -- first, because Bahrain needs additional
energy supply, and second, because it is taken as a personal
slight," read a January 2010 U.S. embassy cable sent after
another meeting with the king.
"Qatar is seen as turning its back on a GCC partner in need
while at the same time concluding new gas supply contracts with
a host of other non-Arabs."
On the east side of the Qatari peninsula, and beyond Saudi
Arabia's territorial waters, the Dolphin Energy pipeline -- the
only cross-border gas line that the GCC countries have been
cooperative enough to build -- carries some 2 billion cubic feet
a day of gas from Qatar to the UAE.
Half of the gas is burned within metres of its arrival in
the UAE, in order to boil brine into drinking water, power the
world's biggest aluminium plant and generate electricity to keep
Abu Dhabi residents cool during the searing summers.
The remainder of the gas is pumped to other plants in the
desert. Some even makes it as far as Oman, an LNG exporter which
is struggling to cope with soaring domestic demand for the fuel.
But the Dolphin line is still only used at two-thirds of its
capacity because buyers in the UAE would not agree to Doha's
price demands. It is now too late for further price negotiations
because of Qatar's moratorium on further export projects.
"The pipeline still has extra capacity, but we have no plans
to increase" supply, Dolphin Energy's Qatar General Manager Adel
Ahmed Albuainain told Reuters. "As soon as we have more gas
available, we will be more than happy to do that...There are
lots of demands in the UAE...but we can only provide what we
Qatar has frozen further development of the North Field for
export to conserve it for future generations, out of concern
that over-exploitation could cause long-term damage. The
moratorium is not expected by industry experts to be lifted
until 2014-15 at the earliest.
So for the foreseeable future, gas-hungry Gulf countries
will have to scrape by on a diet of Dolphin pipeline gas
supplemented by LNG shipped in from far-off sources. They may
also buy any electricity that Qatar offers from its growing
gas-fired power plant capacity.
Thanks to the U.S. shale gas boom and weak economic growth
in Europe, the LNG market is a lot better supplied than it was
before the financial crisis of 2008. But Qatari gas exporters
have found eager buyers outside the Gulf since Japan's tsunami
disaster in March 2011 shut nuclear power plants there; this has
pushed up prices paid by Gulf consumers.
As they rely on shipped-in LNG for an increasing share of
their gas, Gulf countries are competing with buyers in Asia
currently willing to pay about $15 per million British thermal
unit. But Gulf governments typically fix gas prices for their
industrial users at well below $5 per mbtu; they have to absorb
heavy losses in subsidising the difference.
One solution would be for Gulf countries to raise their
domestic gas prices. But this would be politically sensitive and
with the minor exception of Bahrain increasing gas prices for
its Alba aluminium smelter to $2.25 per mbtu at the start of
this year, governments have been reluctant to do so.
(Additional reporting by Regan Doherty in Doha; Editing by