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Low gas prices to be a major challenge for GCC, says report

Low gas prices to be a major challenge for GCC, says report


Asif Iqbal
Doha
The development of new sources of gas production will not be sustainable at current prices which are typically significantly below and, if not addressed, will lead to a potential gas supply gap of over 300 billion cubic meters by 2030, according to a recent study by management consultancy Strategy&, formerly Booz & Company, part of the PwC network
"Maintaining the GCC's low gas prices, which are set considerably below international prices, is unsustainable and will create significant problems for the region in the future," Strategy& said in its latest report released on Sunday.
The report said that while keeping GCC gas prices low has supported local economies in the past, the cost of new gas production is set to rise significantly in the future.
It said that the average weighted costs of new gas production across the GCC could rise by a factor of one-third to two-thirds by 2030 as technology requirements necessary for accessing and successfully extracting gas becomes greater - from $1.50 to $4.50 per thousand cubic feet in 2015, to $2 to $7 per thousand cubic feet in 2030.
Advising GCC countries on the need to adopt gas pricing reforms, George Sarraf, Partner with Strategy&, said:"If the cost of gas does not start to reflect its true market value and appropriate investment in the oil and gas sector is not allocated soon, the GCC will be unable to meet demand for gas in the future.
"Reforms should define a mechanism that prices natural gas closer to its true value and that in some manner reflects the global and regional dynamics of supply and demand. While abundant and cheap gas has played a critical role in the development and diversification of GCC economies, the current system is not sustainable."
The best approach to setting gas prices is to use market mechanisms such as"oil indexation" and"gas hub pricing."
Oil indexation requires gas prices to be linked to a basket of commodities including crude oil and oil products. Gas hub pricing, also known as"gas-to-gas competition," is when gas is traded based on spot prices set by the market in a liquid trading hub to better reflect the true price of gas to consumers.
According to David Branson, an executive advisor with Strategy& in Dubai and a member of the energy, chemicals and utilities practice in the Middle East,"Many markets around the world are becoming increasingly liberalised and are gradually moving from oil indexation to gas hub pricing as the preferred pricing method."
He said in 2014, 43 percent of all gas sold was subject to gas hub pricing and 17 percent was indexed to oil.
"However, the Middle East is yet to adopt market-based gas pricing with almost all prices regulated by national governments," David added.

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