Adding Value to Methane: Strategic Opportunities for the Middle East

OVERVIEW

The Middle East has been endowed with over a third of the world’s proven natural gas reserves and both State and private sector companies are currently evaluating means of exploiting this gas optimally. Natural gas is predominantly methane, which has a number of potential uses and this strategic analysis thus aims to provide an insight into ways of adding value to methane. It should be essential to all planners involved in the industry, as well as for those who perceive this as a potential opportunity to expand into the region/industry.

The region will represent a significant investment opportunity for many, and a potential threat to others. How this region develops and how it takes advantage of its sources of competitive advantage, is of prime importance to planners globally. The challenge of how best to exploit the considerable reserves of methane in the Middle East has created the need for this strategic analysis. This study has been designed to be of benefit to all such organisations in meeting the challenges they face in participating or dealing with the fast‑developing industries based on methane. It provides the necessary insight required by:

States and companies with substantial methane resources
Regional Producers and Consumers of methane derivative products
Global companies intending to invest in the region
Banks, Financial Institutions, and Agencies responsible for addressing regional policy issues.

In this environment of change and opportunity, Nexant ChemSystems and Gulf Organisation for Industrial Consulting (GOIC) have developed this in-depth analysis of issues relating to adding value to methane in the Middle East, and their impact on the overall global industry.

DEVELOPMENT OF MIDDLE EAST METHANE VALUE-ADDED INDUSTRIES

The Middle East has been endowed with tremendous availability of hydrocarbons, and has been a major player on the global oil industry since the early sixties. However, the industrial base underwent a radical transformation in the early eighties, when the industry, which had relied entirely on the exports of base hydrocarbons, started exploring value added opportunities. Associated gas, which was produced with crude oil and was reinjected or flared at the well-head, was transformed as the main feedstock for production of basic petrochemicals. Owing to an essentially zero alternate value, corresponding pricing structure for this feedstock was based entirely on the cost of extraction from the associated gas. This low feedstock cost base, aided by a number of fiscal incentives, acted as a primary impetus towards development of a robust petrochemical industry in the region.

The use of natural gas as feedstock to applications beyond re-injection and domestic demand for power and heating in the region is presented below.

Adding Value to Methane in the Middle East - By Derivative

Each of these development phases had certain drivers and features as shown below.

Evolving Middle East Use of Methane Beyond

Reinjection, Domestic Power and Commercial Uses

Prior to 1996, most recovered gas was used for fertilizer production (beyond that used for domestic power and commercial uses) and most fertilizer production was used within the region. During the first phase, use for Middle East methane beyond reinjection and domestic power and commercial uses grew at an average of 8 percent per year.

In 1976, Saudi Arabia had begun to plan an integrated petrochemical industry in the region in an attempt to move away from being reliant entirely on oil and gas revenues. SABIC was established to enter into joint ventures on behalf of the state, produce and market products, Saudi Aramco (then Aramco) was asked to develop the “Master Gas System” to gather associated gas and separate the entrained Natural Gas Liquids (NGLs), while the Royal Commissions of Al‑Jubail and Yanbu were established to develop industrial sites and associated facilities. This was the first time in the region that a country had attempted to ensure that the required “enablers” were in place before promoting investment opportunities in petrochemicals. This resulted in the tremendous growth in Saudi Arabia in the ten years since the first project started up in 1983 (methanol).

Although the Adgas LNG facility started up in 1977, LNG did not become the major means of adding value to methane until the second phase in 1996. Crude oil price booms increased the international value of refined products including fuel oil, driving up the value of natural gas in the developed economies of North America, Europe and Japan. As well as making LNG projects more attractive, this led to high prices for methanol and ammonia and increased the attractiveness of Middle Eastern projects based on low cost gas, which was independent from oil pricing. This change in cost drivers also led to the increased attractiveness of GTL, and the facility in the region started up in 2006 in Qatar. Overall during the second phase, use for Middle East methane beyond re-injection and domestic power and commercial uses grew at an average of some 17 percent per year. Owing to substantial capacity addition, export volumes increased dramatically, with the Asian region continuing to remain the primary market.

Adding Value to Methane in the Middle East - By Location

These drivers are expected to continue strong growth into Phase 3 with strong growth in LNG and GTL in particular, as well as developments exploiting large-scale methanol and ammonia technologies. The aggressive plans being proposed by Qatar, Iran and Egypt are based on the realisation that their true strength lies in valorising their substantial non-associated gas reserves. As shown below, Qatar has grown to dominate the regional methane adding value industries, and indeed is expected to continue its position as the leading global player.

COVERAGE

Analytical Coverage

The report provides detailed analysis and insightful conclusions and recommendations regarding:

Macroeconomic considerations
Feedstock issues
Supply/demand balance
Impact on global trade
Technology options
Delivered cost competitiveness
Strategic Implications

Geographic Coverage

The report considers the market dynamics of feedstock and products within the following Middle Eastern countries:

Saudi Arabia
Iran
Qatar
Kuwait
Turkey
Egypt
United Arab Emirates
Oman
Iraq
Bahrain
Others

In addition, the impact of Middle East production on global trade and on net importing regions is examined as is the drivers for global growth. Delivered cost competitiveness analysis reflects the delivered costs of Middle East products to Asian and European markets, and compares these costs with those of Asian and European domestic producers as well as those of other potential exporters to these markets.

Product Coverage

The report reviews the major existing or potential uses for methane. The main products covered are outlined in the table below:

Ammonia and Derivatives
- Ammonia
- Urea
- Ammonium Nitrates (AN, CAN, MAN)
- Ammonium Phosphates (MAP, DAP)
- Compound Fertilizers (NPK)
Methanol and Derivatives
- Methanol
- Formaldehyde
- Acetic Acid
- Methyl Tertiary Butyl Ether (MTBE)
- Methanol to Olefins (MTO)
- Methanol to Propylene (MTP)
- Methanol to Gasoline (MTG)
Energy and Fuel Applications
- Power
- Gas to Liquids (GTL)
- Di-Methyl Ether (DME)
Exports
- Liquefied Natural Gas (LNG)
- Pipelines