Production and marketing of Yemeni natural gas [Archives:2006/933/Business & Economy]
Ahmed Ali Al-Mohanny
The more human society develops and advances in scientific knowledge, the more such society benefits from its natural resources. The opposite is true as well. Oil and gas are examples of natural resources that could be a blessing or a curse, depending on the state of development of society and its political system.
Natural gas is of great importance to Yemen as a natural resource and the alternatives the state could pursue regarding its optimal exploitation. Discovering such a resource does not necessarily require its immediate development and marketing, if circumstances in terms of price are unfavorable. In this case, natural gas could remain underground until such circumstances change.
The sound alternative is using natural gas for domestic purposes. Used domestically, natural gas could become a significant key factor in Yemen's development. However, such use depends on Yemen's ability to borrow outside knowledge and funds. This in turn depends on its credit worthiness in the international financial market and the extent of international oil and gas companies to participate in projects involving developing natural gas for marketing and domestic use. Such firms seldom exhibit any degree of enthusiasm in this area regarding the developing world. The other alternative is to export natural gas, if possible.
Gas producing countries in the Gulf states used a substantial amount of natural gas for domestic purposes before they embarked on exporting it. Natural gas was used extensively in power generation, water desalination, fueling cement factories and, to a less degree, as a petrochemicals feedstock.
Before proceeding further on this subject, it is essential that the non-technical reader be acquainted with natural gas from a physical and chemical point of view. The term natural gas is applied to gas produced from underground accumulation of hydrocarbon. Natural gas can exist underground in association with oil while some can exist alone; therefore, it can be associated or non-associated.
Natural gas exists as a gas under normal temperature and atmospheric pressure, like methane, ethane, propane and butane, and others as liquids under normal pressure and temperature. Underground natural gas accumulations are due to two factors: coal decomposition, which is rich in methane, and when large oil molecules break up as a result of heat and pressure. Associated gas may be found as a solution gas and a cap gas adjacent to the face of oil.
Problems are associated with natural gas, whether for internal purposes or for export to international markets. The most important element to be considered before any action is taken to plan and develop gas resources is defining a clear market for export or internal use. The market may exist but it is limited in relation to internal reserve amounts.
Natural gas is worth developing by those countries endowed with commercial reserves only if such gas's opportunity value to that country's economy is higher than the total investment cost in terms of development, production and transport to final market. Natural gas's opportunity value is set by the fuel it is supposed to displace.
A country's natural gas investment costs include the opportunity cost for domestic resources employed in the project and compensation paid to foreign investors, lenders and contractors. It is prima-facie for any government possessing natural gas reserves to embark on tentative economic appraisal to determine whether such gas's future opportunity value is likely to be higher than the direct and indirect costs the country would incur.
Problems associated with marketing natural gas are numerous. In most potential gas markets, energy requirements currently are met by utilizing an oil product. Despite the fact that oil and gas are similar as far as being major substitutes for other fuels, there is major difference between them in marketing aspects.
Markets respond differently to oil and gas. If a country discovers oil reserves, it has a commodity it can sell readily and easily in that it can sell oil anytime and at any place. Over a wide range of markets, the normal fuel is oil and the market is sufficiently absorbent of new quantities for newcomers.
In contrast, gas can be developed and made productive only for a specific market outlet. So, if a market is identified, firm commitments can made with a client via a solid contract, sometimes running 20 or 25 years in advance of planning or implementing any gas project.
Once a firm sale contract with any buyer or a group of buyers has been made, it may take at least five years to complete the gas project, another five years before the first revenue is received and several years' effect before investment capital is repaid, followed by several more years before the project can be said to show a true return. Gas project investment is capital-intensive and the risk level combined with capital exposure normally is large, which is why multi-party participants should be involved in gas projects.
The second major difference between oil and gas is in transporting it to the market outlet. Oil is transported from the central production unit to a storage terminal normally on the sea coast and from there to a ship which, in this case, involves a pipeline and a storage terminal. Oil enjoys great choice in both transportation methods and cargo sizes, while gas requires liquidation. To liquefy natural gas (LNG) requires extensive investment if choosing the same methods of transporting oil.
Transporting natural gas from the field to a liquefaction plant normally on the seashore requires a thick steel pipeline two and half times the size of an oil pipeline to carry the same quantity with the same energy value. In other words, gas pipelines are much more expensive per BTU than oil pipelines. Additionally, the cost of transporting LNG to international markets can be five to 10 times the cost of oil shipment, depending on the distance, cargo size and other factors.
The distance between countries of use and the market outlet sometimes is important in determining natural gas prices. The further a producing country's natural gas source is from a receiving country, the less the advantage is to the producing country. This means a remotely located natural gas source will entail greater transport costs, which are higher than the market can bear or uncompetitive with more favorably situated suppliers.
Other differences in marketing natural gas versus oil include the fact that there is no spot market price in gas markets, as price is determined by the market value of related fuels (or oil products) that natural gas will replace. Additionally, there is a special relationship between producer and buyer in natural gas marketing. Due to oil's technical characteristics, a producer can deal with a multitude of buyers, whereas a natural gas producer can deal with only one buyer or a few buyers at most. Furthermore, the relationship between buyer and producer inherently is long-term because of price links between the production site and the destination market.
Yemen has been in the international natural gas market for the past few years without any sign of success. Yemen recently targeted Japan as a potential market. For decades, Japan has been a market for Indonesian and Malaysian LNG, as well as receiving LNG from Gulf states. Presently, it is extremely doubtful that the Japanese market will have any room for Yemeni natural gas.
The most irrational and economically illogical thing for any country possessing natural gas resources is to negotiate a gas sale in the international market if doing so when oil prices are at an extremely low level. In such a situation, the natural gas market normally shrinks extensively, with a good number of gas users switching to oil and oil products. Some bulk natural gas users are power generating stations equipped with dual capacities to switch from natural gas to oil fuels and vice-versa.
It now appears evident that the optimal option for Yemen at present is for the government to consider natural gas as the first priority in its economic plans and develop its internal applications. Two things must be done, the first of which is immediately establishing a Yemeni energy institution responsible for planning and identifying long-term and continuing energy needs.
This institute would be the central coordinating body for all potential government agencies participating in energy utilization. Involved ministries include: Oil and Mineral Resources, Industry, Planning, Power Generation and Agriculture. These ministries could compose the institute's board of directors.
The second step is to seek international assistance to help Yemen formulate master plans for long-term natural gas uses. In my opinion, the World Bank and the government of the Netherlands are the most useful bodies already having provided Yemen the most effective and practical assistance in this area. The Dutch government is to conduct gas utilization study via: Flourdaniel – LPG industries and household, Kema – Power Generation, Gasunie Engineering, BV – Natural Gas TNO – LPG Automotive.
Mr. Ahmed Ali Al-Mohanny is a former Minister of Oil and Mineral Wealth (1985-1990). He is currently a member of the Shoura Council.
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