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Gas replacing crude oil in regional power generation

January 7, 2018

Kuwait is the latest among countries in the region looking to replace crude oil in domestic power generation with the less expensive and more environmentally friendly Liquefied Natural Gas (LNG).

Kuwait Petroleum Corporation (KPC), the state-owned company responsible for all upstream and downstream oil and gas operations in the country, announced in the last week of December that it had inked a 15-year deal with Royal Dutch Shell to import LNG to meet the country’s growing domestic demand for energy.

The sales purchasing agreement which was signed with Shell International Trading Middle East Ltd. will start in 2020, said a statement released by KPC on 24 December. Though no official figures were given for the amount of gas, or the price at which it was being purchased, analysts estimate that the contract involves around 2 to 3 million metric tonnes of LNG each year and is priced at 11 percent below a Brent benchmark. Shell, which has been supplying Kuwait with LNG since 2010, also declined to confirm how much gas was covered under the new deal.

Even though KPC subsidiaries are working on increasing domestic production of gas, the amount currently being produced is insufficient to meet the country’s growing demand. Kuwait is looking to steadily replace its old crude-oil burning power stations to more environmentally friendly LNG. The fuel transformation also has the added advantage in that it would leave the country with more profitable crude oil for export in the current OPEC-mandated production-cut scenario.

Plans to substitute oil for gas in domestic markets have also been gathering pace in other countries in the region. In 2017, the region’s largest crude oil burner, Saudi Arabia, recorded its lowest use of crude oil in power generation for the last five years. According to analysts, the need to burn crude in the future will be further eroded as many of the Kingdom’s planned gas projects come online.

The substitution of oil for gas domestically is also evident in Iraq, which began importing natural gas from Iran in June. Gas imports from Iran have enabled the country to increase oil exports on a year-on-year basis, despite being involved – but not 100 percent compliant – with the OPEC cut. Deliveries via a second pipeline from Iran are slated to begin by the end of the year or early 2018. This would largely supplant the use of crude oil in the domestic power sector, increasing volumes available for export.

The move to replace crude oil with gas in energy production is attractive to oil producing countries as it not only allows them to cut down on their carbon emissions, but also makes more crude oil available for exports, while maintaining their production quotas at mandated OPEC levels. However, this could prove counter-productive to OPEC’s stated goal of cutting production levels to drain excess oil stocks from the international marketplace.

At their last meeting in late November, OPEC and non-OPEC states decided to further extend production cuts by member states to the end of 2018. The decision was seen by many analysts as an admission that production cuts had so far not been sufficient to deplete global oil inventories to the level expected by OPEC.

Meanwhile, the decision to extend cutting production is not equally endurable by all OPEC members. Many of them cannot sustain production cuts over extended periods as they do not have the export volume maneuverability that large producers such as Saudi Arabia have.

In addition to being the world’s largest oil producer, Saudi Arabia also has huge oil tank farms and offshore storage facilities, as well as an estimated 2.7 million barrels per day refining capacity that allows the Kingdom more flexibility when it comes to managing its excess productions.

However, the same cannot be said of Iraq, which has only 12 days of oil storage capacity and a 700,000 barrel per day refining sector. This increases pressure on Iraq, and other small oil exporters in similar predicament that need to export their production in order to consolidate and not lose their share in the global marketplace. These countries are also aiming to increase the volumes available for exports by offsetting domestic consumption of crude by their energy sector with LNG. The regional beneficiaries in the current scenario are clearly Qatar and Iran, both of which have huge gas reserves and are only limitedly impacted by OPEC mandated production cuts.

timeskuwait