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Margins Under Pressure as Natural Gas Shortage Grows Acute

This study examines the evolution of the shale gas boom in the United States and its impact on the Middle East countries. Furthermore, it explores how the GCC petrochemical industry is placed to address this renewed competition. It provides insights into the challenges faced due to shortage of natural gas and rising electricity consumption in the GCC. Recommended measures are provided that can help the GCC respond to the challenge to its position as the lowest-cost global petrochemical producer.

Where it All Began
During the decade stretching from the late 1990s until the mid-2000s, the US oil and gas industry witnessed a gradual decline in conventional natural gas production, leading to a corresponding increase in US natural gas prices.

Meanwhile, in the Middle East, new projects with large capacities that promised large supplies of liquefied natural gas (LNG) were coming on-stream. They would be able to supply the needs of consumers in Europe and Asia, as well as help redress the growing supply–demand gap in the United States. This was the widely held perspective at the time and little expectation existed on the possibility of a black swan event that might alter this outcome.

However, a new force emerged that completely altered the energy landscape initially in the United States and then globally, both literally and figuratively. This revolutionary development was the discovery that huge volumes of natural gas lying trapped in hard-to-access shale rock formations across the United States could be tapped economically.
The use of a combination of two different technologies, i.e., hydraulic fracturing and horizontal drilling started the shale gas revolution in the United States. Despite both technologies having been in use for decades, they had never been utilized in conjunction. The successful implementation of these technologies provided a strong incentive for energy companies to explore “unconventional natural gas sources”.

The use of horizontal drilling and hydraulic fracturing in conjunction opened up potentially vast reserves of previous unutilized natural gas reserves in the United States
The first discovery and successful extraction of shale gas was from the Barnett Shale, which was a source of tight gas—an unconventional natural gas resource. Mitchell Energy began its quest to find an economic alternative to extract natural gas from shale at the Barnett Shale formation in North Central Texas in 1981. It drilled hundreds of wells with the aim of fine-tuning hydraulic fracturing—a process of injecting large volumes of water mixed with sand and other chemicals into the earth—which it achieved in 1997.
In 2002, another technology development called horizontal drilling was successfully combined with hydraulic fracturing. Instead of drilling straight down as in conventional vertical wells, which require drilling more than feet to bend, horizontal drilling can take a 90-degree turn after only a few feet. In the same year, Devon Energy bought over Mitchell Energy and began a large-scale implementation of horizontal drilling in combination with hydraulic fracturing. The result of the application of these technological developments has been astounding in the years since.

The combination of hydraulic fracturing and horizontal drilling allowed companies to create fissures in the reservoir rock surface to extract the trapped gas over much greater lengths of the horizontal shale layer. Multiple wells originating from the same wellhead further enhanced the economic viability of the endeavor. Rising natural gas prices and continued federal aid for development of natural gas resources created a welcoming environment for other participants to join a process that was just about to get off the ground.

These technologies not only enabled the reclassification of previously discovered gas reserves considered uneconomical, but have also helped make newer, larger discoveries contributing to this shale gas boom.

Rather than a revolution, one can say that the development of shale gas was more of an evolutionary process, which took decades to refine and make viable rather than a single disruptive development.

Table Of Contents

Impact of US Shale Gas Boom on Middle East Petrochemical Feedstocks
Table of Contents
Introduction 3
Where it All Began . 3
Natural Gas Composition: The importance of NGLs 4
Unconventional Gas . 7
Technology behind the Shale Gas Revolution 8
Location of Shale Gas Deposits .. 11
Impact on US Petrochemical Industry 14
How it changed the Status Quo 14
Downstream Implications of Increased Shale Gas Exploration .. 17
Reversal of Trade Flows .. 22
Re-emergence of US Petrochemical Sector . 23
The GCC Scenario .. 24
Natural Gas at Crossroads in the GCC Countries . 24
The Downside of a Booming Regional Economy 25
Looming Natural Gas Demand-Supply Gap . 27
Impact on GCC Petrochemical Industry .. 31
Outlook .. 35
Addressing the Challenges, and Possible Solutions . 35
Legal Disclaimer 38

List of Exhibits

Exhibit 1: Henry Hub Spot Natural Gas Prices, US, 2003-2013 . 5
Exhibit 2: Natural Gas Import Prices, US, 2003-2013 . 5
Exhibit 3: Henry Hub Spot Natural Gas Prices Forecast, US, 2013-2018 .. 7
Exhibit 4: Typical Composition of Hydraulic Fracturing Fluid . 10
Exhibit 5: Shale Gas Reserves, Global, 2012 11
Exhibit 6: Shale Gas Plays and Remaining Reserves, US, 2012 . 13
Exhibit 7: Natural Gas Prices, Global, 2002-2013 .. 15
Exhibit 8: Cost of Ethylene Production by Region, Global, Middle East and US, 2012 .. 16
Exhibit 9: Composition of Natural Gas (Marcellus Shale). .. 18
Exhibit 10: New Ethane Cracker Capacities Slated to Come On-Stream, US, 2016-2020 .. 19
Exhibit 11: Ethylene Value Chain 21
Exhibit 12: Comparison of Prices Paid by Power Producers with the International rates, KSA, 2012 . 25
Exhibit 13: Actual versus Paid costs for Electricity, GCC, 2012 26
Exhibit 14: Natural Gas Scenario, Qatar, 2008-2012 28
Exhibit 15: Natural Gas Scenario, KSA, 2008-2012 .. 29
Exhibit 16: Natural Gas Scenario, UAE, 2008-2012 .. 29
Exhibit 17: Natural Gas Scenario, Kuwait, 2008-2012 . 30
Exhibit 18: Natural Gas Scenario, Oman, 2008-2012 .. 30
Exhibit 19: Natural Gas Scenario, Bahrain, 2008-2012 31
Exhibit 20: Expected Ethylene Feedstock Sources, KSA, US and China, 2012-2016 33
Exhibit 21: Ethylene Production Capacity Expansions, GCC, 2012-2016 34

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