| Kippreport.com

Cheap Middle East gas era is over

October 5, 2011 12:52 by Reuters

Middle Eastern consumers who have long enjoyed subsidised gas must come to terms with paying much more for the increasingly popular power generation fuel, a Bahrain Petroleum Company (Bapco) executive told an energy conference in Dubai on Tuesday.

The International Energy Agency (IEA) warned on Tuesday that hundreds of billions of fossil fuel subsidies “encourage wasteful consumption” and discourage investment, pointing to Iran and Saudi Arabia as the world’s biggest fuel subsidisers.

In what could prove a watershed in a region where industry has swelled on artificially-low gas prices for years, Bahraini industry faces a 75 cent price increase to $2.25 per million British thermal units (mmbtu) from January 1, 2012, ordered by the government and to be collected by state-run Bapco.

Analysts and western energy executives at the conference said the subsidy-trimming move, although small, is a long-overdue step towards reducing waste and encouraging investment in new discoveries to meet future needs in the region.

“The era of cheap gas prices in the Middle East is behind us,” Dawood Nassif, head of strategy and business development at Bapco told the Middle East Petroleum and Gas conference in Dubai. “We need to move on to real market pricing.”

The 75-cent rise in Bahrain’s industrial gas prices planned for the start of 2012 is equivalent to the total cost still enjoyed by industrial consumers in neighbouring Saudi Arabia — where prices still reflect the negligible cost of producing gas from Saudi oil fields.

The $2.25/mmbtu cost now faced by Bahrain’s biggest gas consumer Aluminium Bahrain (Alba) is still only a fraction of price over $15/mmbtu being paid in Asia for the liquefied natural gas (LNG) that Bahrain is likely to need within a few years.

Bahrain’s gas production has struggled to keep up with buoyant demand for power generation and heavy industry, forcing the non-OPEC minor oil producer to look further afield for its future gas needs.

Any gap between domestic and future import costs would have to be paid from government funds and Bahraini energy minister Abdul Hussein bin Ali Mirza said last week more subsidy cuts may be needed to narrow the gap between domestic and international prices.

GAS IMPORT TO COPE WITH FUTURE DEMAND

To meet future demand, which is rising rapidly across the Middle East, Nassif said that Bapco was in talks over several possible gas import pipeline projects and looking to sign short term LNG supply deals to compliment spot LNG purchases.

“We are looking still at pipeline gas… But LNG is your insurance policy,” he told the conference that was dominated by calls by global gas giants for Middle Eastern governments to cut subsidies.

“We are talking with a number of suppliers,” he said on the sidelines of the conference, declining to give names but adding that the first deliveries were expected towards the end of 2014 or early 2015.

“Whatever makes business sense we will do it. It could be next door or it could be 5,000 miles away,” he told Reuters.

Bahrain sits next to leading gas supplier Qatar. But, like other gas-strapped countries in the Gulf, it has not agreed long term supply deals because…

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Tags: Bahrain, Bapco, cheap gas, IEA, International Energy Agency, subsidy