The growing importance of gas in a region dominated by giant oil reserves and high oil production capacity has been fueled by explosive population growth, urbanization, increased standards of living, and industrialization in the Gulf Arab states. Natural gas production in the region, however, has failed to keep pace with surging demand from the power generation sector, industrial development, and expanding economic activity in recent years. With the exception of Qatar, the domestic supply shortage is expected to become increasingly acute in the near term for the Gulf Cooperation Council countries. Most of the region’s new power stations burn gas, which is also the fuel of choice for water desalination plants. The rapid expansion of the region’s petrochemical sector has also led to a sharp increase in gas as a feedstock.

Gulf Arab states have increased their focus on new gas projects to meet rising demand, with Saudi Arabia, the United Arab Emirates, and Oman pushing ambitious development plans. However, the long lead times needed to bring new gas production online means much of the new capacity will not be operational until around 2020. Plans on the drawing board also fall short of meeting long-term demand projections and this trend may worsen as the countries aim to diversify economies away from oil toward gas-intensive industrialization. As a result, gas imports are set to rise as robust demand outpaces rising domestic supplies in the medium term.

Indeed, surging demand and limited domestic production growth threaten to derail economic reform plans unless countries increase imports of gas via pipeline or shipments of liquefied natural gas (LNG). With the GCC’s per capita gas demand ranked among the highest in the world, the onus is on supply-side solutions to bridge the gap, “notably the securing of LNG imports for the short to medium term,” according to a recent report by Apicorp.

A number of Gulf Arab states are already importing gas, and others will soon need to supplement their own production. Though Saudi Arabia and Bahrain are currently self-reliant with their gas reserves, ambitious plans to expand natural gas-based industries such as petrochemicals will tip the countries into a deficit. In a departure from its previous insistence on relying exclusively on domestic gas production, Saudi Arabia is also reportedly considering imports of LNG to close its future supply gap. The UAE and Oman are both gas importers and exporters while Kuwait is the one state that is solely an importer of natural gas. The only regional gas pipeline, the Dolphin network, takes gas from Qatar’s huge North Field via subsea pipeline to the UAE, including the Fujairah port, and then on to Oman. Absent any other regional gas pipeline network, imports of LNG remain the most cost-effective option. Kuwait and the UAE are already major buyers of LNG, importing supplies from as far as the United States.

Energy consumption, both oil and gas, has been on a steady ascent in the GCC states for decades. According to a study by The Abdullah Bin Hamad Al-Attiyah Foundation for Energy and Sustainable Development, “energy consumption in the GCC states has grown by 8 percent annually since 1972, compared to 2 percent annually for the world.” Saudi Arabia is now the world’s number six oil consumer, using nearly as much as Russia and more than Brazil or Germany, countries with far larger economies and population.

One of the most significant drivers of rising gas demand is the Gulf region’s massive population surge. The GCC’s population is estimated to have increased from around 8.2 million in 1971 to 44.8 million in 2011, an annual growth rate of 4.3 percent, according to the World Bank’s World Development Indicators.

The sharp decline in oil prices, and decreased revenue, since mid-2014 has forced governments to focus attention on reining in exorbitant rates of domestic energy demand growth. GCC governments have implemented modest reductions in gasoline and electricity subsidies but little short-term impact on demand is expected. Apicorp estimates that GCC power capacity needs to rise at an average annual pace of 8 percent between 2016 and 2020 to meet growing demand, with the bulk of the new plants expected to run on natural gas. The new capacity will require an investment of $85 billion to add 69 gigawatts of new generation over the next five years. Cash-strapped governments are looking to private Independent Power Producers to play an increasing role in developing new power generation capacity.

Cheap natural gas has fueled the spectacular growth of the region’s petrochemical industry but going forward, companies will have to adapt to higher feedstock costs as the governments gradually raise prices to international levels. Despite these challenges the region’s petrochemical sector is projected to expand further in the coming decade as governments implement plans to shift their oil-based economies to industry.

The Rise of Gas in the GCC

Natural gas was historically a neglected fuel among the hydrocarbon resources of the GCC states. Associated gas, which is produced along with crude oil, was burned off since gas was barely used in the mid-20th century, globally and in the Gulf Arab states. Unlike low-cost oil reserves, much of the region’s gas resources are relatively difficult and expensive to develop given their highly corrosive sour, high-sulfur content. Technical difficulties of separating the sulfur from the gas posed a major impediment in the past but advances in technology have improved the economics of processing. Moreover, increased use of associated gas production for reinjection at enhanced oil recovery projects at maturing fields, coupled with the relentless rise in demand for natural gas use in power generation, desalination plants, and the petrochemical sector, has meant that development of nonassociated sour gas fields has taken on a greater urgency.

Among the GCC states, natural gas has long been synonymous with Qatar, which has limited oil resources but has the third largest gas reserves in the world. The focus of Qatar’s energy policy is the giant North Field. Shared with Iran, where it is called South Pars, it is the world’s largest offshore gas field with recoverable reserves of more than 900 trillion standard cubic feet. Qatar has succeeded in building the largest LNG industry in the world with a production capacity of 77 million tons per year. State-owned Qatar Petroleum, which owns the largest LNG shipping fleet globally, partnered with international oil companies ExxonMobill and Total to develop the LNG industry. Qatar’s massive production capacity makes it the global LNG swing producer. Qatar sells around 75 percent of its LNG under long-term oil-indexed contracts and the remaining on a spot basis. In 2015, approximately two-thirds of Qatar’s LNG exports went to Asia, where prices are relatively higher.

Rising LNG supplies from Australia and U.S. shale gas fields over the past few years, however, have led to a glut of global supplies and reduced Qatar’s dominance of the industry. As expected, increased supplies have also led to sharply lower prices over the past year and forced more competitive pricing for both spot sales and new contracts. Qatar placed a moratorium of further development of its North Field, officially so it can assess ways to maintain output levels. Unofficially, the government may be treading carefully not to upset Iran, whose development of the shared field lags far behind Qatar given the constraints of international sanctions, financial resources, and technology.

Gas Key to Economic Growth and Diversification

Saudi Arabia has adopted different policies for its gas, and its oil. Crude oil is primarily destined for export while gas is a major source of energy for the domestic economy. Saudi domestic gas consumption is ranked among the highest worldwide, growing around 5 percent annually and projected to rise to around 14 billion cubic feet per day by 2025.

As part of Saudi Vision 2030, the National Transformation Program unveiled in June calls for the increased use of natural gas in power generation. The plan projects the share of gas in power generation to increase from 50 percent to 70 percent by 2020. Lowering the burning of crude in electricity generation will enable increased exports of revenue-generating crude oil. To meet these new goals, Aramco plans to increase gas production by nearly 50 percent by 2020. Saudi Arabia’s Minister of Energy, Industry and Mineral Resources Khalid Al-Falih also said he was open to LNG imports to meet any domestic shortfall of gas.

Saudi Arabia’s production growth is predominantly driven by the Wasit gas program, which will process nonassociated gas from the offshore Arabiyah and Hasbah fields and is forecast to be fully operational this year. The next major project planned to come online in 2019-20 is the Fadhili gas facility, which will process nonassociated gas from the onshore Kursaniyah field and offshore Hasbah field. In addition to conventional gas projects, Aramco is also studying development of shale gas.

The UAE is taking a multipronged approach to meet rising demand for gas, with plans to expand domestic production, increase use of renewables and reduce the share of gas in power generation, raise imports from Qatar, and invest further in LNG import facilities. The UAE holds the world’s seventh largest reserves of natural gas; however, it has remained a net importer since 2010 because of robust demand. Domestic gas production is the primary source of power for electricity generation and an increasing amount of domestic supply is needed for reinjection into its aging oilfields to maintain crude output. Moreover, the country’s development of its gas resources has been hindered by the high level of sulfur in its gas, which makes it expensive to produce. Several ongoing projects – the Onshore Gas Development, Integrated Gas Development, and Offshore Associated Gas – are expected to increase gas production.  However, Shell pulled out from Abu Dhabi’s complex Bab sour gas project in January.

Dubai began importing LNG several years ago and volumes are expected to steadily increase in the medium term. There were plans to install an LNG-regasification and storage facility in Fujairah but they have been shelved in favor of chartering a floating storage and regasification unit to meet domestic gas demand. The floating storage and regasification unit at Ruwais enables Abu Dhabi to take advantage of cheaper spot LNG prices to meet demand for power generation in the medium term while the emirate’s four nuclear reactors are being completed, which is expected in the early 2020s.

Kuwait’s gas industry has been stymied by chronic project delays and as a result was the first GCC country to start importing LNG to meet its runaway domestic demand, and is currently the largest Middle East importer of LNG. However, after decades of delays, a political détente between the country’s Parliament and executive branch in 2015 opened the door to more development. New projects aimed at reducing the country’s gas deficit include the development of the giant Jurassic Non-Associated Gas Reserves in the northern region, according to Kuwait National Bank. At the same time, Kuwait awarded a $2.9 billion contract in the first quarter of 2016 for the Al-Zour LNG Import Terminal Project.

Oman’s gas industry is set to expand significantly in the medium term as it targets an increase in exports from its LNG complex at Qalhat as well as meeting rising domestic demand, especially for the growing petrochemical sector and new industrial complexes on the coast. The country currently imports a small amount of gas from Qatar. Oman has more than doubled its gas production over the past decade and has advanced plans to increase capacity to 165 million cubic meters per day by 2020. The BP-led Khazzan gas project, one of the largest unconventional tight gas reservoirs in the Middle East, will be a major source of gas supply for Oman for decades. The first production is expected on stream in late 2017.

Bahrain is currently self-sufficient in natural gas, with approximately one-third of its output dedicated for use in domestic electricity generation. An increase in power generation capacity to meet rising domestic demand and plans for a new aluminum plant will lead the GCC’s smallest producer to start importing LNG in the very near term. A contract is already in place for an LNG-import terminal, which is slated to be operational in the second half of 2018.

The lower oil price environment has curbed near-term economic growth rates in the region, making economic diversity and reform a more urgent priority for the region. Indeed, expansion of natural gas resources is critical for fueling the power, water, transport, and mega-industrial projects embedded in the region’s medium- and long-term economic growth prospects and diversification strategies.