MENA – Jul 2018

Published at 13:16 31 Aug 2018 by . Last edited 11:18 22 Aug 2019.

Regional imports have risen seasonally with the onset of peak summer temperatures but remain lower on a y/y basis. Egypt’s modest y/y growth looks to be one-off, and by year-end, domestic supply will have entirely displaced LNG imports. The start of Bahrain’s LNG terminal in March 2019 will add a new source of demand, but volumes will ramp up gradually as industrial projects start up. On the export front, new supply is boosting Omani volumes while the UAE will have to decide where to send its LNG in future as Japan is cutting contracted volumes by 90% when the current 25-year deal expires in April 2019.  

LNG imports by countries in the Middle East and North Africa (MENA) region rose m/m to 1.60 Mt in July amid peak summer demand. While this was still lower y/y by 0.36 Mt, that is the smallest decline so far this year—over H1 18 the reductions averaged 0.70 Mt per month. All importers apart from Jordan registered m/m gains, although most were still down y/y.

Egypt was notable because it registered a y/y increase for the first time since April 2017, although only a modest 0.03 Mt gain to 0.44 Mt. This does not signal a slowdown in Egypt’s surging domestic production as various fields start up and ramp up. Instead, it reflects a combination of a relatively low reading in July 2017 and high utilisation of gas-fired capacity, including the recently completed 14.8 GW Siemens Megaproject, to fulfill previously unmet summer power demand (CDDs were 5% above the five-year average, but 4% lower than during last July’s heatwave). Indeed, Egyptian LNG demand likely returned to y/y declines in August. We expect it to decline rapidly to year-end, by which time domestic supply will completely displace LNG. UAE exports rose somewhat in July, as we anticipated, but at 0.21 Mt they were still lower y/y.

The 6 Mtpa Bahrain LNG regasification terminal is still on track for commercial start-up in March 2019 according to an early-August update from Teekay LNG, a partner in the JV. Gas demand growth will be linked to the industrial sector, specifically expansion projects at the Aluminum Bahrain (Alba) smelter and Bapco’s Sitra refinery. The former is due online in early 2019 with power supplied by an under-construction 1.79 GW CCGT, while we estimate the refinery project will only be completed in 2022. Meanwhile, the Al Dur 2 gas-fired power and desalination plant is due to come online in two phases—800 MW in June 2020, rising to 1.5 GW in June 2022.

Bahrain’s LNG demand is likely to gradually ramp up as these various projects start up, only partially offsetting the losses from existing LNG buyers in the region. Bahrain plans to buy LNG on a spot- or short-term basis for two to three years before signing any longer supply contracts.

LNG exports from the MENA region were 0.50 Mt lower y/y at 8.45 Mt in July. Qatari LNG exports were lower both m/m and y/y at 6.30 Mt, suggesting the maintenance that we highlighted last month may have impacted July loadings more than June. The other notable y/y decline was in Algeria, 0.23 Mt lower y/y at 0.74 Mt. Unlike April-May, when maintenance at Skikda reduced loadings, this drop appears to be linked to competition from pipeline exports. Algerian pipeline exports to Spain and Italy were higher y/y by around 0.21 Mt to help offset lower LNG imports and Nord Stream maintenance that reduced Russian gas flows during the month.

Meanwhile, Omani LNG exports hit 0.87 Mt, higher y/y by 0.25 Mt, the third successive month of solid growth. This reflects the additional supplies from BP’s 1 bcf/d Khazzan Phase 1 project, which started in September 2017 and hit full capacity in April. While much of this supply goes to the domestic market a share is also directed towards the export terminal. We therefore expect Omani exports to remain higher y/y through to Q2 19. In April, BP took a final investment decision on Ghazzer, the second phase of Khazzan, which is scheduled to come online in 2021 and will produce an additional 0.5 bcf/d. At most this may offset declines at existing fields and rising domestic demand, but it will not be enough to significantly boost total exports.

A significant announcement in August was that Japan’s JERA will sharply reduce its purchases of LNG from the UAE when its current 25-year contract for 4.7 Mtpy ends in March 2019. Japan has historically been the destination for almost all Emirati LNG, although volumes have started to decline in the last few years as Japanese buyers have increased Australian volumes and started to pick up US cargoes. JERA has signed a new three-year contract for up to eight cargoes per year from 2019, amounting to a 90% reduction in volumes, and stated the new agreement is on a delivered ex-ship (DES) basis and consistent with the 2017 Japan Fair Trade Commission ruling that banned Japanese buyers from accepting destination clauses. As a result, the UAE will need to find a home for around 5 Mtpy of LNG from April 2019 onwards, which is likely to be achieved through a combination of meeting rising domestic gas demand, contracts with non-Japanese buyers and potentially trying to capture some of the strength in spot LNG markets. Whatever combination it opts for, this will represent a major shift for a veteran LNG exporter.

Fig 1: Egypt gas production and imports, Mt Fig 2: Japan LNG imports vs 2015 average, Mt
Egypt gas production and imports Japan LNG imports
Source: CAPMAS, Bloomberg, Energy Aspects

Source: METI, Energy Aspects

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