Flush with cash from record oil revenues, Middle East crude producers have spent billions on economic development and now find themselves short of another energy source needed for growth--gas.
The Middle East holds around 40 percent of the world’s gas reserves, but produces only around 10 percent of global supply.
The gap points to the potential for a jump in future production that the United States and consuming countries in Asia and Europe hope would mean higher exports.
But regional demand growth of up to 10 percent per year is eating into export potential. Widening supply deficits are forcing governments to emphasize meeting domestic needs.
’Demand growth in the region for natural gas is unprecedented anywhere else in the world,’ said Rajnish Goswami, gas and power consultant for Wood Mackenzie.
’Governments are quite rightly prioritizing the domestic sector before anything else.’ Qatar and ExxonMobil cited rising costs when they dropped plans for a multi-billion dollar gas-to-liquids export plant in February. But Qatar also had an eye on its burgeoning power needs, Tradearabia.com said.
“We need the gas,“ Qatar’s Energy Minister Abdullah Al-Attiyah has said. “The country is one big workshop. We cannot just export gas when we need it ourselves. We have to give domestic supply priority.“
Qatar expects domestic gas demand to nearly triple in 2010 to 4.7 billion cubic feet, from around 1.6 billion cubic feet in 2006.
Qatar’s liquefied natural gas export plans are not under threat. The tiny country is the world’s largest LNG exporter and has projects under way to boost shipments to 77 million tons a year in 2010 from 31 million tons this year.
But domestic and regional demand will likely be the focus of any later Qatari output increase, experts say.
“There will still be export projects,“ said Giacomo Luciani, senior consultant at the Gulf Research Centre. “But the regional gas market makes much more sense than say exporting LNG to the United States.“
Egypt, the world’s eighth largest gas exporter, is also experiencing such rapid gas demand growth that it may have to slow down plans to boost exports, analysts said.
The UAE and Kuwait are two of the states in the Persian Gulf Arab region struggling with the largest gas deficits.
The UAE’s gas demand is growing at around 10 percent per year. It will begin importing supplies from Qatar through the Dolphin pipeline this summer, and is also hoping for supplies from Iran’s offshore Salman gas field this year.
Even with these import projects and plans to boost domestic supply, the UAE will still be short.
“In ten years’ time you could easily be looking at a deficit of a 1.5 billion cubic feet per day in the UAE,“ said one executive from an international oil and gas company.
Politics, sanctions and construction delays have slowed Iran’s gas development. The country holds the second largest reserves in the world, but is unlikely to become a major exporter for a decade and will not provide a quick fix for the Middle East’s shortfall.
“Getting incremental gas supplies from Iran and Qatar will be very challenging for different reasons,“ Goswami said.
Measuring the gas supply deficit for the Persian Gulf region is difficult as countries without enough gas are using alternatives. In Kuwait and Saudi Arabia, for instance, much more expensive crude and fuel oil are burnt at power plants.
“The problem is there is a lot of repressed demand,“ said Luciani. “It is absurd to burn crude or fuel oil in domestic power plants.“
BP estimates the supply deficit to Persian Gulf Arab countries could reach 7 billion cubic feet per day by 2015.
Kuwait, which faces a repeat of last summer’s power outages this year, could consume another 500 million cubic feet per day just to substitute oil liquids it is burning at power plants, the industry executive said.

The controversial pipeline has been a hard sell for Nord Stream, and the success of this five-billion-euro project hinges on the approval of Finland, Sweden and Denmark.

The German-Russian consortium planning a major gas pipeline in the Baltic Sea said it would investigate alternate routes for the project amid concerns that construction could disrupt the environment.
Sweden in particular has complained that the pipeline could disrupt the Baltic Sea’s sensitive flora and fauna. Other Baltic Sea states, including Finland, Denmark and Estonia, also worry that the construction work could stir up toxic material on the seabed and even disturb unexploded chemical weapons left over from World War Two.
Nord Stream, the Russian-German consortium building the pipeline, seeks to alleviate these concerns and “has decided to launch additional studies to investigate areas where the route of the pipeline through the Baltic Sea can be further optimized in a reasonable way to minimize environmental impacts,“ according to a statement, Dw-world.de reported.

Rerouting the Pipeline
Nord Stream first proposed building the pipeline across the Gulf of Finland and down the middle of the Baltic Sea, passing just below the Swedish island of Gotland. But following lengthy consultations with affected Baltic Sea states, the consortium is now looking into three alternate routes.
“Further optimization“ of the route might be necessary in the Gulf of Finland, Nord Stream said, where the pipeline could be built along a more southern route near of Estonia. Other options include laying the pipeline 10 kilometers further south of Gotland, bypassing Swedish wildlife reserves, or running it along a route north of the Danish island of Bornholm.
Nord Stream, which appointed former German Chancellor Gerhard Schr?der to its executive board shortly after he left office, says it is “determined to make sure that the new pipeline meets high environmental standards.“
The controversial pipeline has been a hard sell for Nord Stream, and the success of this five-billion-euro project hinges on the approval of Finland, Sweden and Denmark.

Hard Sell With High Stakes
In accordance with the European Union rules, Nord Stream is required to furnish an environmental impact assessment (EIA) to those countries whose territorial waters would be affected.
Nord Stream is expected to submit an extensive EIA in the early autumn of 2007, and hopes to begin construction of the pipeline by 2008, following final approval of the impact assessment.
The consortium has also submitted reports to Poland, Latvia, Lithuania and Estonia. Polish officials have expressed fears that the project could threaten Poland’s energy security, as the new pipeline would allow Russia to sell natural gas to Western Europe without the need for Polish transit lines.
In April last year, Polish Defense Minister Radoslaw Sikorski even went so far as to compare the project to the Hitler-Stalin pact of 1939, which divided Poland among Russia and Germany. But Poland has no veto power over the project.
Sweden has also cited security concerns: officials there have expressed fears that an offshore platform near the Swedish coast could be used as a venue for Russian intelligence gathering.
Baltic Sea states are also uneasy about Russia’s plans to increase its military presence in the Baltic Sea, ostensibly to protect the project and assist in the removal of unexploded ordnance from the seabed.

Satisfying European Energy Needs
Nord Stream is a Russian-German joint venture created solely for the construction of the Baltic Sea pipeline. Russian energy giant Gazprom own a majority stake in the consortium, and Germany’s E.ON Ruhrgas and Wintershall hold 24.5 percent shares each.
If completed by 2010 as planned, the 1,200-kilometer pipeline would pump 27.5 billion cubic meters of natural gas per year from Vyborg, Russia to Greifswald in northern Germany. In a second phase, a parallel pipeline would double that transport capacity, and Nord Stream estimates that will meet about 25 percent of the additional gas needs of the European Union.

With the aviation industry coming under increasing scrutiny from governments and environmentalists for its greenhouse gas emissions, aircraft makers are cranking up their search for greener planes. One technology holding out promise is the replacement of oil-based fuels with a fuelcell. Aerospace company Boeing has just announced that it is preparing to carry out test flights on an aircraft propelled solely by a fuelcell.
Fuelcells generate electricity from an electrochemical reaction in which oxygen from the air and a fuel, usually hydrogen, combine to form water. There are several different kinds of fuelcell, some of which are suitable for particular applications. These range from power stations to power sources for motor vehicles and electronic gadgets. However, all are based on a similar design, consisting of a stack of individual electrochemical cells. By directly converting hydrogen into electricity and heat without combustion, fuelcells are emission-free and quieter than hydrocarbon fuel-powered engines, Bahraintribune.com reported.
Hydrogen can be easily extracted from hydrocarbon fuels such as natural gas or petroleum. This can be done on board a vehicle in a processor attached to the fuelcell, or alternatively in a refinery or chemical plant, and then delivered to and stored aboard the vehicle. The best solution for the environment, though, would be to generate hydrogen from renewable sources, such as solar or wind power, to provide a zero carbon energy source.
Boeing and a number of its European collaborators from several countries have just completed the first phase of the Fuel Cell Demonstrator Airplane research project, which began in 2003. This resulted in the development of a Proton Exchange Membrane (PEM) fuelcell, linked to a lightweight lithium battery, capable of powering a conventional propeller. PEM fuelcells operate at relatively low temperatures so can reach their optimum operating temperature quickly. Added to this, they are compact, able to respond rapidly to varying power demand, and are twice as efficient as internal combustion engines, making them the best option for cars, buildings and small planes at present.
The first flight tests of Boeing’s project, scheduled to take place in Spain, will attempt to show that a fuelcell can provide sufficient power for a small piloted motor glider with a wingspan of 16.3 metres (53.5 feet), to cruise at 100 kilometers per hour (62 miles per hour). However, the plane will draw from the lithium battery during takeoff and ascent when additional power is required.
Eventually the research could lead to the production of fuelcells suitable for powering commercial passenger aircraft, although Boeing admits this is some way off at the moment. It is exploring other types of fuelcell that might be suitable for larger aircraft, like the Solid Oxide Fuel Cell (SOFC).

The shallow waters of the Gulf of Mexico, once a hotbed for natural gas exploration, are starting to look a little empty.
In recent months, dozens of jack-up drilling rigs, which sit atop retractable legs that stand on the seafloor, have shipped out of the area. Left behind is the lowest number of the rigs seen in the Gulf in 28 years.
The rigs, which generally operate in 400 feet of water or less, are leaving for more favorable contracts in the Middle East, West Africa and Latin America, where rig supplies are tight and demand is high, Rigzone.com reported.
The decision to relocate has been made easier by a decline in US natural gas prices, smaller returns from wells in the shallow waters of the Continental Shelf, and a huge rise in rig insurance costs following the 2005 hurricanes, analysts and rig operators said.
Even with the migration, however, analysts said there are still too many jack-up rigs in the Gulf, and more may need to leave before daily rental rates move back in line with other regions. Until then, rates could keep falling and operators with a big presence in the shallow Gulf could remain under pressure, they said.

Staying Away
Industry watchers had expected the jack-up market in the Gulf to be soft in early 2007 after a sharp drop in natural gas prices late last year reduced the incentive to drill. But even when winter cold snaps boosted prices this year, drillers stayed on the sidelines, according to Rigzone.com.
“Frankly, a lot of the customers just haven’t returned to the shelf,“ said Ian MacPherson, industry analyst with Simmons & Company International in Houston.
The situation has created some anxiety for rig operators who believed the jack-up market in the Gulf would have come back by now.
“Most of the oddsmakers two months ago would have said where the rig count was going to be today was the magic number. And that obviously hasn’t been the number,“ said Dan Rabun, CEO of Ensco International, a Dallas-based jack-up operator, in a conference call in late February. Ensco, which over the last three years has cut its jack-up rig count in the Gulf from 22 to 14, still views the Gulf as an important market. But the company said it will “continue evaluating international opportunities“ for jack-ups in its Gulf fleet.
Over the past five years, roughly 50 jack-ups have left the region--many of which are technologically advanced rigs that can drill in more than 300 feet of water, he said. And rig operators have announced they will remove at least nine jack-ups from the Gulf in the first half of 2007.
Even so, some daily rental rates--a closely watched gauge of demand--have still been down or flat, making the shallow waters of the Gulf one of the only offshore exploration sites in the world where that is true.
MacPherson said the day rate for a middle-of-the-road jack-up in the Gulf has slipped by about 30 percent since last year. It now stands at around $70,000 to $90,000 a day, he said.
While that is high by historical standards, it is lower than many rates being offered in international regions. And customers in places like the Middle East are agreeing to lock in higher rates in multiyear contracts. The Gulf is better known for short-term contracts that create more uncertainty for drillers.
Whether rates in the Gulf will rebound will depend in part on customers’ willingness to contract rigs before another hurricane season, which begins in June.


Insurance Factor
Also here to stay may be sky-high rig insurance rates.
Ensco said in its 2006 annual report that the cost of insuring its rig fleet last year “was almost five times the pre-storm level even after we assumed more of the risk of certain losses.“ The company’s competitors tell similar stories.
The many challenges of operating in the Gulf’s shallow waters have led many major oil companies to leave in search of larger fields in the Gulf’s deep waters or in international locales.

Juwi solar GmbH has put the final touches on a 90,000 thin-film module “Rote Jahne“ solar power plant in Saxony, Germany. Connection to the electricity grid last week finalized construction of the large-scale photovoltaic (PV) project.
With total output capacity of six megawatts (MW), it is the fifth largest PV installation operating in the world. Built at a former military airfield, its module surface area comprises approximately 6.7 hectares and will produce approximately 5.7 million kilowatt-hours (kWh) of solar electricity every year.
As the general contractor, juwi installed the entire turnkey project. Investment amounted to around Euro 21 million [US $28 million]. The “Rote Jahne“ PV power plant is based on First Solar thin-film technology, Solaraccess.com said.
“Thin-film modules have stood the test in many projects, are cheaper than crystalline modules and produce more energy per unit of installed capacity. We can clearly see that the skepticism that reigned two years ago has given way to higher demand. So its part in the overall market will increase distinctly in the future,“ said Lars Falck, managing director of juwi solar GmbH.
Near the “Rote Jahne“ solar park juwi recently began construction of the world’s biggest PV power plant. In the Muldentalkreis district the juwi company is installing a 40 MW solar park at a former military airbase in the townships of Brandis and Bennewitz. More than 550,000 First Solar thin-film modules will be used in an area comparable to 200 soccer fields. That project is due to be finished by the end of 2009.
Germany is a leader in the use of solar energy, with 300,000 solar power arrays installed, amounting to a capacity of some 2,300 MW (status end of 2006). In 2006 PV power production rose 60% to about two billion kWh.