Natural gas as a fuel of choice

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The competitiveness of natural gas is improving as new opportunities for production open up and contract terms improve.

With 650,000 tonnes/year of new LNG gas exports expected to begin flowing from Qatar to Dubai soon, is this shift already beginning to boost gas role in the Gulf region?


With the recent economic crisis there have been sharp falls in gas and power sales volumes, falls primarily driven by the faltering global economy and gas peculiar pricing structure. The prices for gas main rival fuels, such as coal, are tied to liquid global markets and prices are responsive to supply and demand fundamentals. By contrast, gas prices are not tied to a liquid global market but calculated according to formulas relating to the price of oil, without reference to the gas markets supply and demand fundamentals. Hence, through the global economic crisis contractual gas prices remained high, linked to oil prices, while the prices of competing fuels, particularly coal, dropped considerably. Gas price competitiveness against other fuels weakened considerably as a result.

The unconventional gas potential of other major gas consumers, such as Europe, China and India, are now beginning to be considered. says Badr Jafar, Executive Director of the Crescent Petroleum Group. With this has come a re-evaluation of natural gas, now that it appears to be much more plentiful, and producible at much lower costs, than previously thought.

If this loss of competitiveness were to have continued then gas might have permanently been sidelined for other energy sources. However, recent trends appear to have reversed gas loss of status and pushed it to the forefront of the energy mix once again.

The big breakthrough for gas has been the realisation by the oil and gas industry in the last few years that huge volumes of gas can be produced from underground shale formations around the world for only modest capital outlays and with limited running costs. Accessing this cheap, abundant, unconventional gas was first achieved in the US earlier this decade but only now are peoples perceptions of what is possible beginning to change. Focus for the moment is on this innovations impact on the US gas market but it is only a matter of time before attention turns to its impact on gas markets around the world.

As the US gas revolution has driven down global uncontracted gas prices, gas market players have had to change their behaviour. In Europe, utilities have sought to make their gas more competitive by renegotiating contracts with their major gas suppliers. In February it was revealed that several of Europes largest gas buyers e.on, Eni and GDF Suez had successfully changed their gas supply contracts so that now part, reportedly 10-15%, of their supplied gas volumes will be priced off of Europes spot gas markets, where prices are set daily by market trading rather than by a formula dependent on historical oil prices. With this change in policy gas competitiveness has been markedly improved, allowing it to recover market share lost to rival fuels such as coal and even expand its role in Europes energy system as a low cost, clean and reliable fuel source.

In the Gulf region major gas producers and exporters, such as Qatar, have had to consider supplying markets closer to home as the option to sell to big foreign gas markets like the US have closed. The recently confirmed contract between Qatar and Dubai to supply the emirate with 0.65 million tonnes of LNG gas each year from later this year exemplifies this trend.

For those in the Gulf looking for fast economic growth the loosening of gas markets provides an opportunity. Now is the ideal time to secure new gas supplies at economic prices and build new gas-fired power plants to fuel economic development.

Gas is an ideal fuel; offering a unique combination of clean, affordable and abundant energy says Badr Jafar, There are significant opportunities for E&P companies to take advantage of the currently favourable conditions in the gas market.

If suppliers ensure that gas remains a competitive fuel on price then there is a strong future for gas, securing great economic benefits for the Middle East.

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