GCC Should Remove Gas Subsidies: Report

With looming power cuts in a number of countries in the GCC states, the region is obliged to free up the subsidies in the energy sector, a US energy statistical and analytical, said. Despite significant growth in natural gas production over the past decade, The US Energy Information Administration (EIA) said several countries in the Middle East still experience domestic supply shortfalls due to growing demand in the electric power and industrial sectors.

To address this, the Middle East and North African region is now developing various approaches to phasing out price subsidies to align domestic natural gas prices with export prices, the agency in its International Energy Outlook 2010 (IEO), said. According to media sources, natural gas consumption in the region was stimulated by increased economic activity, large investments in new infrastructure and domestic price subsidies. "As a result, some of those countries have established policies assigning priority to domestic natural gas use over exportation," it said.

Several countries in the region have already opted to import natural gas in the form of LNG. Kuwait started importing LNG In 2009 while Dubai plans to begin in 2010, the report said. According to EIA, natural gas consumption in the Middle East will nearly double between 2007 and 2035, growing at an annual rate of 2.4% ent over. This is four times the OECD countries' growth rate of .6 per cent per year and 26% higher than its fellow non-OECD countries growth rate of 1.9%. Booz & Company projects this demand growth will exacerbate the gas shortage.

The consulting firm envisages that over the next five years, the shortage will become "more acute". In a prolonged recession scenario, it said gas shortage is expected to increase from about 19 Bcm in 2009 to about 31 Bcm in 2015. In case of growth returning to pre-recessionary levels, the current shortage is expected to increase to more than 50 Bcm in 2015.

The gas shortage is further compounded by the increasing economic emphasis on the steel, aluminium and petrochemical sectors. Low gas prices provide a competitive edge for GCC businesses to increase investment and add significant new capacity within the next few years. As a result, production of polyethylene and polypropylene in the Middle East will more than double between 2008 and 2012 and steel and aluminium production may increase as much as six-fold in the same period, Booz & Company, said.

"In the longer term, utility firms have to increase the tariff because the fuel price will not be cheap anymore," a Dubai-based gas operations manager, said. The gas price will not be cheap for sure and besides, this is also an environmental concern. People should start paying more than what they are paying now." He said subsidy for residences is somewhat acceptable but subsidy for the industrial sector is not.

"Because gas prices are subsidised for aluminium companies, for example, they are able to offer their products at far lower prices compared to international peers," he said. "This not only creates uneven competition, these companies would have been running at a loss if the energy prices were not subsidised. I don't think this is sustainable."

The EIA says the region's industrial and electric power sectors remain the most important natural gas consumers, with shares of about 50 % and 40% of total use, respectively in 2035. Growth in industrial consumption is driven by the petrochemical industry, primarily in Saudi Arabia, Iran, Qatar, and the UAE. Natural gas use in the region's electric power sector is set to nearly double from 2007 to 2035 with an overall increase of 3.9 Tscf, the report said. Natural gas remains a key energy source for industrial uses and for electricity generation because natural gas produces less carbon dioxide when it is burned than does either coal or petroleum.- Zawya