MENA – June 2018

Published at 10:04 31 Jul 2018 by . Last edited 11:18 22 Aug 2019.

MENA LNG imports continue to decline and fell y/y by 1.00 Mt in June. Peak summer cooling demand will provide some support over Q3 18, when we expect the region to import 4.6 Mt, although this will still be lower y/y by around 0.8 Mt. Imports will continue to decline structurally in Q4 18 and beyond, primarily due to rising Egyptian gas production, which is set to hit a record 6.5 bcf/d in September. On the export side, Qatar faces Australian competition for market share in expanding Asian markets while recent headlines about the Bab-el-Mandeb strait raise the spectre of geopolitical risk to supplies.

MENA LNG imports rose m/m to 1.16 Mt in June as high summer temperatures hit the region. But even with temperatures higher than seasonal norms across all of the main importers, the structural declines continued—imports were 1.0 Mt lower y/y in June and have fallen y/y by 46% across H1 18, primarily driven by lower Egyptian imports.

The declines in June were led by the UAE, lower y/y by 0.36 Mt at just 0.06 Mt, continuing a theme we have documented in recent months. We suspect this is in part because DUSUP has been using stored gas to reduce its LNG import requirement while prices were high in Q2 18. Indeed, cargo-tracking data from Kpler show July arrivals above 0.2 Mt, which coincides with some moderate softening in global LNG prices. Kuwaiti imports rose m/m to 0.54 Mt in June, but even with hot weather (CDDs 8% above the five-year average), they were 0.19 Mt lower y/y.

Egypt’s domestic supply expansion continues

Egypt accounted for the rest of the decline in LNG imports, lower y/y by 0.26 Mt at 0.34 Mt as domestic supply surged. Imports were still above those in April and May, when Egypt received just 0.13 Mt per month, as lagged official data show domestic production rose above 6 bcf/d in May, narrowing the domestic supply deficit to just 40 mmcf/d. Domestic production continues to grow, with the start-up of the fourth treatment unit earlier this month raising output from Eni’s Zohr field to 1.6 bcf/d. The fifth treatment unit will start in September, adding another 0.4 bcf/d, helping push Egyptian production above 6.5 bcf/d. On the demand side, Siemens has completed all three 4.8 GW gas-fired plants that make up its 14.4 GW Megaproject. As the last plant ramps up, it will add incremental gas demand from the power sector, but some of the new capacity will displace older, inefficient plants. In the near-term, peak summer temperatures will support LNG imports, which we expect to total 1.2 Mt over Q3 18, down y/y by 0.4 Mt. But domestic supply growth will win the race against demand and Egypt’s LNG imports will drop to zero by year-end—the oil minister stated a recent six-cargo import tender would be Egypt’s last.

We expect MENA region imports to total around 1.6 Mt in July and 4.6 Mt over Q3 18, aided by summer cooling demand and the UAE returning to the market. But MENA imports continue to decline structurally, primarily due to Egypt’s rising domestic production.

Qatar faces a squeeze in the Chinese market

LNG exports from the MENA region picked up m/m to 9.04 Mt in June, higher y/y by 0.47 Mt. Qatari exports rose m/m to 6.85 Mt, despite reports of maintenance at two Qatari liquefaction trains during the month. UAE exports also rose m/m and y/y, to 0.41 Mt, despite low imports.

MENA exporters, like most LNG producers, will keenly follow the growth of Chinese gas demand, which has led to LNG imports into China growing y/y by 8 Mt in H1 18, on top of the 12 Mt rise over 2017. Qatar supplied 7.5 Mt of LNG to China in 2017 and will want to maintain or increase its market share in the future, given it plans to raise LNG export capacity to 100 Mt by around 2024 and long-term contracts on almost a quarter of its existing supply will end by 2025 (see Global LNG Insight: LNG long-term contract expiry, July 2018). But Qatar may struggle to increase its share of the Chinese market given there has historically been a strong inverse correlation with Australia’s share (see Fig 2) and Australian supply will continue to grow rapidly over the next few years as new trains ramp up. If the correlation continues, Qatar may be squeezed in the next few years, although provided Chinese demand continues to grow, the picture may look better again by the time new Qatari trains come online in the middle of the next decade.

In the near-term, recent exchanges between Iran and the US are starting to prompt the question of how a disruption to the Strait of Hormuz would impact LNG markets. Iran’s threats have been directed at oil exports from other producers in the region, but a blockade would most likely curtail the movement of LNG tankers as well. This could disrupt Qatari supplies to the global market, which average around 1.5 Mt per week, as well the smaller volumes of LNG imports by Kuwait and the UAE. At present, we think the odds of Iran making good on its threat to try and close the Strait of Hormuz are low, as the retaliation by the US and others that would almost certainly ensue would be extremely costly for Iran.

Fig 1: Egyptian gas production, bcf/d Fig 2: Share of Chinese LNG import market
Source: CAPMAS, Energy Aspects

Source: China customs, Energy Aspects

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