Unconventional Times Ahead for Middle East

Conventional wisdom is usually right - but nothing beats an unconventional idea whose time has come.

The Algerian oil minister Youcef Yousfi, speaking at the high profile CERAWeek energy conference in Houston last Wednesday, gave the first hints of a revolution in the region's gas industry. But unless policymakers can adapt, this opportunity will be missed.

Mr Yousfi estimated Algeria has a resource of 1,000 trillion cubic feet locked in shale rocks, six times its conventional reserves and of a similar size to Qatar's North Field, the world's largest gas accumulation.

Fears of US shortages have been alleviated by the techniques for drilling horizontally and fracturing shales to release their gas. George Mitchell, the Texan shale gas pioneer and billionaire, received a lifetime achievement award at CERAWeek.

If the same methods work in Algeria, we can only imagine the unconventional potential in the Mena region overall. The region already holds almost half of the world's conventional gas reserves. As well as shale gas, there is sour gas, which is abundant in the UAE, Saudi Arabia and Iran, and high in the deadly contaminant hydrogen sulphide.

Kuwait, Oman and Saudi Arabia have large volumes of "tight" gas, trapped in impermeable rocks that similarly must be fractured to get it out.

Many Middle East countries are taking their first steps to develop these resources. Jordan reached agreement with BP in October 2009 for tight gas development near the Iraqi border. This could supply all Jordan's needs, saving it from having to burn expensive oil for power, and even allow it to export gas.

Occidental of the US won a deal to develop sour gas at Shah, in Abu Dhabi, after ConocoPhillips pulled out. Saudi Arabia is studying sour gas development, Kuwait is working on its tight gas with Shell, and Oman has projects under way with BP and the Malaysian state company Petronas to develop a variety of tight and sour fields.

Yet these projects contrast starkly with Gulf gas shortages. Kuwait, Sharjah and Saudi Arabia have had summer power cuts and have to burn valuable oil to cover gas shortfalls; Abu Dhabi is working on nuclear power; and, according to Saeed al Tayer, the managing director of Dubai Electricity and Water Authority (Dewa), Dubai expects a quarter of its power to come from nuclear and coal by 2030.

So there is no shortage of gas under the ground, but there is a serious deficiency in investment and policies to get it out.

The problem falls into two halves. The US "shale gale" was triggered by several years of high prices, promising generous rewards to those who could find new gas supplies. A generation of wildcatters such as Mr Mitchell turned their instincts to the opportunity.

Middle East national oil companies have an important role as custodians of their states' natural resources, and as the experienced and professional operators of large oilfields. But they are mostly not renowned for innovation, speed and risk-taking.

The second half of the problem is gas prices. In most Middle East countries, these remain at very low, subsidised levels: US$0.70 (Dh2.57) per million British thermal units in Saudi Arabia, and between $1 and $1.50 in the UAE. At the same time, US gas prices, despite the shale revolution, are about $3.50 and liquefied natural gas costs about $10.

There are a few early signs of change: on Dewa bills in January, residents will have noticed a surcharge covering the higher cost of imported gas. And Iran enacted a major reform of gas prices last December. But the current upheaval in the region is likely to dampen governments' appetites for exposing the populace to higher costs.

At current Gulf prices, most unconventional gas development is simply uneconomic.

The Shah deal typifies the problems. ConocoPhillips signed in July 2008, withdrew last April, and was replaced by Occidental in January.

Now two and a half years have been lost, at a time when the UAE is short of gas and when billions have been pledged for power and water facilities in the Northern Emirates. Negotiations in Kuwait and Saudi Arabia have been similarly drawn out.

Does it make sense to be squeezing the last pennies out of oil companies while paying billions to burn costly diesel fuel, or leaving factories and malls empty for lack of electricity? To adapt an old English proverb, this is fils-wise, dirham-foolish.

Unconventional times are coming to the Middle East. The region can still capitalise on its enormous resources to create a sustainable source of energy, economic advantage and jobs, but only by bold reforms in pricing, and by opening up unconventional gas development more widely.

What better way to satisfy ambitious young entrepreneurs than to give them the chance to be the Algerian, Iranian or Emirati George Mitchell?

Source: The National