Natgas Exports Force Persian Gulf N Producers to Import

October 8, 2013 09:22 AM

The Gulf Cooperation Council (GCC) is a union between six Persian Gulf nations including Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates. The body has recently announced it plans to increase fertilizer production in the region by 47% by 2018. But natural gas rates may be a problem as increasing demand forces the once gas rich region to import natgas and LNG.

Factors leading to imports include increased power consumption, pressure on supplies from natgas uses related to crude oil production, long-term export commitments for LNG and natgas and a growing emphasis on the aluminum, steel and petrochemical sectors. All this as gas exploration and production struggle to keep pace with sharply higher natural gas demand.

A 47% rise in fertilizer production -- specifically nitrogen -- would bring the GCC's total production capacity up to 46.4 million tons by 2018. But with GCC already struggling with natgas supply constraints, imported natural gas as a feedstock for commercial fertilizers could get expensive in a hurry, trimming margins for producers. The key, they say, is to divert natural gas use with an increased reliance on renewable energy sources. This would free up hydrocarbons that could then be used to produce ammonia, urea and UAN.

Analysts agree, saying the region would gain a competitive advantage over other producers if power demand could be satisfied with renewables. But to me, it seems like a stretch. Increased nitrogen production in response to low natural gas prices is one thing, but increased nitrogen production amid lagging supplies could be a dangerous recipe. However, if import tenders on natural gas and LNG can be minimized and the GCC is able to rely on domestic feedstocks, profit margins would swell.

Much of the nitrogen produced by the GCC services demand in India and other Asian countries, and given the supply situation remains balanced, should have little overt impact on U.S. fertilizer pricing. However, as GCC looks to capitalize the best they can on imported natgas, we could see a reversal with natural gas exports leaving U.S. Ports en route to the once gas rich, Middle East.

Perspective --

The current GCC gas constraints highlight the potential downfall of long-term natural gas export contracts. The Persian Gulf region was once thought to have enough petroleum and hydrocarbon reserves to keep the moon lit forever. As exports continue to crimp supplies there, GCC member nations may find they prefer to keep their natgas at home where it can be used as it is needed most... a lesson we in the U.S. would do well to consider.

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