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Cheap Gas Sales Will have to stop soon

Unrealistic gas prices cannot continue for long, warn producers as gas deals result in a loss

Unrealistic pricing of natural gas must end, said experts gathered at a conference in Abu Dhabi. The delay in the supply of Iranian gas to UAE, via Dana, was an example of the impractical price of regulated natural gas, they argued.

The experts also said the region is set to experience a massive increase in demand for gas, driven by population and economic growth as well as the establishment of energy-hungry industries.

GCC states should partially liberalise natural gas prices to accelerate non-associated gas development in the energy-producing region while maintaining industrial sector growth, experts said.

Martin Trachsel, vice-president Middle East, Shell International Gas and Power, said producers will not repeat low priced inter-regional natural gas contracts as they seek to maximise sales prices for new projects.

“Low prices are clearly not sustainable, people will not develop gas at low prices,” he said. “Future prices will be higher and will give signals that we need to develop more gas resources.”

The Dana project has been a case in point, as the Sharjah-based company apparently agreed to buy gas at a rate, which is equivalent to US $18 per barrel of crude, based on which Dana had drawn up contracts with its customers.

So, when prices today are over $70, not all lawmakers in Iran are favouring the deal.

Christophe de Mahiue, managing partner at McKinsey & Co, said regulated, low, gas prices, which are disconnected from global crude and LNG prices, provide limited incentive for gas exploration and development. He said prices should be partially liberalised and linked to export parity prices for liquid natural gas (LNG).

De Mahiue said industrial projects could remain competitive even if natural gas prices are partially liberalised.
“Regulated prices are great at the beginning of the development of an economy and its industrial side, but at a point in time you need to partly liberalise prices,” he said.
Dolphin Energy, a $3.5 billion project to pipe Qatar gas to the UAE and Oman, has also told Reuters that it does not make any money because it was committed to delivering gas at the price it buys it in Qatar, plus a transport tariff to customers.

Dana Gas, currently embroiled in a price row, also said there was scope to revisit prices for industrial and commercial use, but that it would be much harder to do so for the power and water desalination sectors where prices are highly regulated.

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