MENA – May 2018

Published at 12:38 26 Jun 2018 by . Last edited 11:18 22 Aug 2019.

LNG imports by countries in the Middle East and North Africa (MENA) underperformed once again in May, totalling just 0.84 Mt, lower y/y by 0.63 Mt. Egyptian LNG demand continued to come in lower y/y, but this was outpaced by a 0.32 Mt decline from the UAE, which again received no cargoes. The Dubai Supply Authority (DUSUP) is likely using storage flexibility to avoid having to dip into the spot market while prices are high. We have revised our forecasts for MENA LNG imports in 2018 lower by 0.9 Mt from last month to 12.5 Mt. Exports were marginally higher m/m in May at 7.88 Mt.

In May, Kuwait imported 0.45 Mt of LNG, over half the MENA total but still lower y/y by 0.03 Mt. Temperatures were cooler than last year (CDDs 13% lower y/y) in Kuwait but hot in some other importing countries—CDDs were 18% higher y/y in Egypt and 21% up in Jordan. Still, Jordanian imports fell y/y by 0.15 Mt to 0.20 Mt and Egypt received just 0.13 Mt of LNG in May, flat m/m and lower y/y by 0.20 Mt. Only Israel recorded a marginal y/y gain, taking a single 0.06 Mt cargo.

Unpacking the lack of UAE imports

Last month we highlighted the importance of watching the UAE given the drop-off in LNG imports this year. There were no arrivals in May, compared to 0.32 Mt in May 2017. Cargo-tracking data show a single vessel en route from Algeria to deliver in late June, the first shipment in 2018. The UAE imported 1 Mt of LNG in Q2 17, so the sharp drop this year to just 0.06 Mt bears some scrutiny.

There are too many discrepancies, both between sources and within data from individual sources, to construct robust gas balances for the UAE, but we can look at the various components. Starting with trade flows, LNG exports have totalled around 2.2 Mt over January-May, lower y/y by around 0.3 Mt, partly due to planned maintenance, which has offset the majority of the decline in imports over April and May. But in June, exports appear to have recovered to a similar level to last year, while imports will once again be sharply lower y/y. Meanwhile, imports on the Dolphin pipeline remain steady at around 18.7 bcm per year.

Turning to supply, domestic gas production is likely broadly steady y/y as no major projects came online in recent months. Oil production was around 1.5% lower y/y over January-May. This tick-down implies slightly less associated gas production but potentially also less gas reinjection to support oil recovery. There is also no evidence of major demand weakness. Temperatures were broadly unchanged y/y in May and CDDs were up by 7% over the first five months of the year.

On the structural front, the start-up of the first 1.4 GW unit of the Barakah nuclear plant has been delayed to end-2019 or 2020, so this is not yet displacing gas-fired capacity, although it is a further cloud on the horizon for LNG demand. A 700 MW expansion to the Jebel Ali M-station gas-fired plant is due online later this year and may then add to gas demand.

As shifts in fundamentals appear not to explain the full reduction in LNG imports, particularly in June, we believe this reflects the Dubai Supply Authority (DUSUP) using flexibility at the 3.3 bcm Margham gas storage facility. DUSUP has a 1.5 Mtpa long-term contract with Shell and then relies on the spot market for additional LNG volumes. Given the high spot prices, we suspect DUSUP is trying to get through peak summer demand with a minimal amount of spot LNG purchases. Aside from the odd spot cargo—the cargo en route from Algeria appears to be a spot purchase—we expect DUSUP to try to only take volumes under the long-term contract, so we now forecast imports will average 1.6 Mt over H2 18. Storage volumes will eventually be depleted, but DUSUP will be hoping LNG prices have fallen before it needs to come back into the spot market, although a hot summer that boosts demand could put this strategy to the test.

Egypt hikes power prices again

Amid rapidly rising domestic production, Egyptian LNG imports were already underperforming this year, even before the mid-June announcement of another increase in electricity prices from 1 July. Household rates will rise y/y by 20-30% and will be more than doubled from 2015-16 levels for most consumers as the government reins in subsidy spending as part of an IMF bailout package. Commercial rates are also being increased under the same process. This will further crimp LNG imports, which we expect to dwindle to just 1.3 Mt over H2 18, lower y/y by 1.4 Mt.

Finally, MENA exports averaged 7.88 Mt in May, higher m/m but 1.40 Mt below the extremely high print for May 2017. Qatari and Algerian exports both rose m/m, to 6.04 Mt and 0.88 Mt respectively, but in both cases this was lower y/y. Exports by the UAE also rose m/m, to 0.35 Mt, but again were lower y/y, by 0.21 Mt, which contributed a large chunk of the y/y decline in exports over the first five months of 2018.

Fig 1: UAE imports and exports, y/y change, Mt Fig 2: Egypt household power prices, EGP/KWh
Source: Bloomberg, Energy Aspects

Source: Ministry of Energy, MEES, Energy Aspects

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