This document is a statement of originality for a research paper submitted by Zaid Mahayni for their LL.M program. The research paper is titled "What are the Challenges Facing Middle East LNG Exports?" and is 4,931 words long. The statement includes Mahayni's name, student ID, program of study, paper title, abstract, word count, and date. Mahayni signs to affirm they have read and understood the university's plagiarism policy and are aware of the consequences of breaching that policy.

1. CENTRE FOR ENERGY, PETROLEUM AND MINERAL LAW AND POLICY
STATEMENT OF ORIGINALITY
FOR RESEARCH PAPERS
NAME OF STUDENT: Zaid Mahayni
MATRICULATION NUMBER: 009943036
PROGRAMME: LL.M. in Petroleum Law and Policy
TITLE OF THE RESEARCH PAPER:
What are the Challenges Facing Middle East LNG Exports?
ABSTRACT OF THE RESEARCH PAPER:
Most experts agree that the demand for LNG will rise significantly in the near and distant future.
This is primarily due to a restructuring of the electricity sector. In order to satisfy this rise in
demand, LNG will have to cross more international borders and will certainly travel distances,
which were not imaginable just a few years ago. The Middle East, through various projects,
mainly in Oman, Qatar, Abu Dhabi and Yemen, has fuelled the LNG trade industry with an
important source of LNG. This paper will examine what obstacles LNG from the Middle East
will have to face both on the Asian and European markets.
WORD COUNT: 4,931
PRESENTED TO: Professor Paul Stevens
TITLE OF THE COURSE: Petroleum Policy and Economics
I, Zaid Mahayni, have read the Code of Practice regarding plagiarism contained in the Students’
Introductory Handbook. I realise that this Code governs the way in which the Centre for
Petroleum and Mineral Law and Policy regards and treats the issue of plagiarism. I have
understood the Code and in particular I am aware of the consequences, which may follow if I
breach that code.
Signed:________________
Date:__________________

2. 1
Table of Contents
Table of Abbreviations ----------------------------------------------------------------------------- 3
1. Introduction ---------------------------------------------------------------------------------------- 4
2. LNG Outlook: Bigger Role in the Future------------------------------------------------------ 4
2.1 LNG: “The Premium Fuel” -------------------------------------------------------------------- 4
2.2 The Growing Demand in Europe and Asia -------------------------------------------------- 4
2.3 The Growing Interdependency Between Gas and Electricity ----------------------------- 6
3 The New LNG Complexes in the Middle East ------------------------------------------------ 7
3.1 Average Capital Costs of LNG Projects------------------------------------------------------ 7
3.2 Abu Dhabi ---------------------------------------------------------------------------------------- 8
3.3 Qatar----------------------------------------------------------------------------------------------- 8
3.3.1 Qatargas----------------------------------------------------------------------------------------- 8
3.3.2 Ras Laffan (RasGas) -------------------------------------------------------------------------- 9
3.4 Oman ---------------------------------------------------------------------------------------------- 10
3.5 Yemen--------------------------------------------------------------------------------------------- 10
4. Problems with LNG Exports in General ------------------------------------------------------- 11
4.1 Transportation Costs ---------------------------------------------------------------------------- 11
4.2 Inflexible Contractual Obligations ------------------------------------------------------------ 12
4.3 The Weather Problem and Insufficient Storage Facilities --------------------------------- 13
4.4 Political Instability------------------------------------------------------------------------------- 13
5. Problems with the Asian Markets--------------------------------------------------------------- 14
5.1 Competition from within Asia ----------------------------------------------------------------- 14
5.1.1 Infrastructure Expansion of Asian Gas Suppliers----------------------------------------- 14
5.1.2 Indonesia---------------------------------------------------------------------------------------- 15

3. 2
5.1.3 Malaysia ---------------------------------------------------------------------------------------- 15
5.1.4 Brunei ------------------------------------------------------------------------------------------- 15
5.2 Non-Asian Competitors------------------------------------------------------------------------- 16
5.2.1 Australia ---------------------------------------------------------------------------------------- 16
5.2.2 Russia ------------------------------------------------------------------------------------------- 16
5.3 Risk of Another Asian Economic Crisis ----------------------------------------------------- 17
6. Problems with the European Market ----------------------------------------------------------- 17
6.1 The Middle East as a Secondary Supplier---------------------------------------------------- 18
6.2 Competition Facing Middle East LNG Sales in Europe ----------------------------------- 18
6.2.1 Competition from Within Europe----------------------------------------------------------- 18
6.2.2 Competition from Russia--------------------------------------------------------------------- 19
6.2.3 Competition from Algeria-------------------------------------------------------------------- 19
6.2.4 Competition from Projects in Iran, Trinidad and Nigeria ------------------------------- 19
7. Conclusion ----------------------------------------------------------------------------------------- 20
Bibliography ------------------------------------------------------------------------------------------ 22

4. 3
Table of Abbreviations
Adnoc ------------------------------------ Abu Dhabi National Oil Company
bcf/d -------------------------------------- Billion Cubic Feet Per Day
bcm --------------------------------------- Billion Cubic Meters
BTU -------------------------------------- British Thermal Unit
cm----------------------------------------- Cubic Meters
GAIL------------------------------------- Gas Authority of India Ltd
IGCC ------------------------------------- Integrated Gasification Combined Cycle
KOGAS---------------------------------- Korea Gas Corporation
LNG -------------------------------------- Liquefied Natural Gas
Mbtu-------------------------------------- Million British Thermal Units
mt/yr-------------------------------------- Million Tonnes Per Year
PGN -------------------------------------- Perusahaan Gas Negara
QGPC ------------------------------------ Qatar General Petroleum Co.
tcf ----------------------------------------- Trillion Cubic Feet
tcm---------------------------------------- Trillion Cubic Meters
Tepco------------------------------------- Tokyo Electric Power Co.
.

5. 4
1. Introduction
LNG’s future, according to many experts, seems very promising. LNG will be able to
seize a larger market share, especially due to increased environmental concern, the restructuring
of the electricity sector and the rapid development of countries in the Former Eastern Block and
in Asia.
The Middle East, with its large natural gas reserves, will certainly try to take advantage
of these new markets. New LNG facilities being constructed in Oman and in Yemen have
already been able to secure long-term supply contracts in India and in South Korea. Confident in
its ability to sell, Qatar and Oman even purchased 20 new carriers to deliver their LNG.1
However, what obstacles could reduce the Middle East’s LNG sales? This paper will
argue that first of all, LNG from the Middle East will have to face the traditional problems in the
LNG trade. This would include high transportation costs, in addition to risks of warm weather
and political instability.
Secondly, this paper will examine further potential difficulties characterising the Asian
and European markets. In a first paragraph, the Asian markets will be discussed and especially,
the risks of currency devaluation, LNG over-commitment and competition. In a second
paragraph, the European markets will be studied with a special focus on the competition that the
Middle East will have to face.
Finally, our conclusion will try to predict what share of the Asian and European markets
the Middle East could expect to obtain.
2. LNG Outlook: Bigger Role in the Future
2.1 LNG: “The Premium Fuel”2
In comparison to other fuels, LNG, “the Cinderella of fuels”, has proved to be the fastest
growing. Indeed, LNG benefits from many different advantages. First of all, it is available in
1
Middle East Challenges Asia LNG Suppliers, 21 AGR 2, p. 3.
2
P., Stevens, Natural Gas: The Fuel of the Next Century, 6:3 CEPMLP EJ, Visited on December 1, 2000,

6. 5
considerable quantities. As of January 1st
, 1997, proven world natural gas reserves were
estimated at 4,945 tcf. This is actually 11.6 tcf more than the 1996 estimate.3
Secondly, gas is also believed to be an environmentally friendly fuel. Tighter
environmental policies aiming for the reduction of carbon dioxide and other greenhouse gas
emissions will discourage the use of fuels such as coal.4
Recently, Japan’s Kyoto Protocol
expressed the commitment of participating States to cut carbon dioxide emissions by 6% below
the 1990 level by the year 2012.5
To be exploited in a cleaner way, one alternative for coal is to be commercialized as
integrated coal gasification combined cycle technology (IGCC). This process essentially
requires a high temperature gasification of coal with gas, which is then used in a gas/steam
combined cycle turbine.6
However, since it is quite expensive, such technology is rarely
implemented and will only be developed if environmental policies become tight enough.
When it comes to nuclear energy, it is the fear of potential accidents that makes gas more
attractive. Not further than September 30, 1999, Tokaimura, Japan, was the victim of a nuclear
accident rated a four on an industry scale of nuclear accidents. Just as a point of reference, the
Chernobyl accident was ranked with the maximum rating of seven.7
Tokaimura is unfortunately
Japan’s third serious nuclear incident in four years. The result is a massive public opposition
against the nuclear sector and the annulment of a project to build 20 new nuclear plants.8
Actually, the German government has pledged to enact legislation by 2002, laying the
framework for the phased, and irreversible, abolition of nuclear power.9
Such an objective is
well under way in Sweden where two units have already been ordered to shut down by 2001.10
http://www.dundee.ac.uk/cepmlp/journal/html/vol6-3.html.
3
International Energy Outlook, Natural Gas, Visited on November 26, 2000,
http://www.seninte.upc.es/Interno/Energia/gas.html.
4
Coal: Challenging Gas on the Supply Side, 28 AGR 9, p. 10.
5
Nuclear Accident May Mean More LNG for Japan, 38:41 PIW 3, p. 4.
6
Coal: Challenging Gas on the Supply Side, supra note 4, p. 10.
7
Nuclear Accident May Mean More LNG for Japan, supra note 5, p. 4.
8
Ibid.
9
Gas Sector Set to Gain as German Government Turns against Nuclear, 9:21 WGI 4, p. 4.

7. 6
Both in Asia and Europe, gas liberalisation has become a main objective on the agenda
of governmental bodies. In 1998, The European Parliament and Council have passed the “Gas
Liberalisation Directive”11
and similar goals will gradually be set all throughout Asia. Presently,
Korea is planning to privatize the state company KOGAS; Indonesia will privatize PGN; and
India has initiated the sale of state-owned GAIL equities.12
It is important to add, that private
ownership of pipelines is also a common objective.
Consequently to this increased liberalisation, terminals used for the liquefaction of
natural gas or the offloading, storage and re-gasification of LNG are being built all-throughout
Europe, Asia and the Middle East. For example, just eight of the many different Greenfield LNG
proposals in the Asia-Pacific region, could represent an increased capacity of 70 mt/yr.13
Some
of these new projects will be discussed in more detail further in this study.
Moreover, with the highly volatile prices of oil and its present high prices, countries are
striving more and more to diversify away from it.14
This inevitably makes LNG a more favoured
option. In fact, following the 1973 oil shock, Japan was one of the first to opt for diversification
and a larger LNG market share.15
2.2 The Growing Demand in Europe and Asia
All scholars agree that there will be a significant increase in gas consumption over the
next two decades. During this time frame, gas is projected to rise at more than three times the
10
Ibid. Please see also, Scandinavian Market to Grow as Sweden Switches From Nuclear, 8:3 WGI 5, p.
5.
11
Directive 98/30/EC of the European Parliament and of the Council Concerning Common Rules for the
Internal Market in Natural Gas, June 22, 1998.
12
R. Jones, LNG Markets – Historical Developments and Future Trends, in, Conference Papers,
presented in the Seminar Liquified Natural Gas: The Process of Project Development, (Saint Andrews,
Scotland, Centre for Energy, Petroleum and Mineral Law and Policy, 18-19 September, 1997), p. 20.
13
Analyzing the Outlook for LNG Costs and Prices, 17:11 IPF 1, p. 3.
14
R. Jones, supra note 12, p. 5.
15
Ibid.

8. 7
rate of oil use with an expected overall increase in annual gas use of around 66 tcf.16
Just in
Western Europe, gas consumption should increase from 280 mt to about 340-360 mt in 2010.17
In Central Europe, gas consumption is expected to increase by 50% by 2010.
On the other hand, natural gas demand in Asia is expected to grow at a rate of about 6.4
percent annually over the next decade.18
The annual growth rate will even be as high as 8% in
countries such as China, India, Thailand, South Korea, Taiwan and Indonesia.19
This would
equate to a consumption of 26.4 tcf in 2015 for Asia as a whole.20
In response to this growing demand, both LNG producing and importing countries are
developing new projects and are both engaging themselves in long-term contractual obligations
toward each other.
2.3 The Growing Interdependency Between Gas and Electricity
The repeal of the 1991 ban by the European Commission on the use of natural gas for
new power generators has allowed natural gas to earn a larger market share of the power
industry.21
It is indeed expected that the percentage of power generation in Europe fuelled by
Natural Gas will more than double to 40% by the year 2020.22
Actually, it is believed that by the
year 2015, European gas prices will no longer be indexed according to those of oil but will use
electricity prices instead.23
The Asia-Pacific region will face this same movement, as power
generators become the main buyers of gas.
3 The New LNG Complexes in the Middle East
3.1 Average Capital Costs of LNG Projects
16
International Energy Outlook, Natural Gas, supra note 3. Please see also, T. P., Ehrahrt, LNG Enters
the New Millennium, presented to the International Bar Association Seminar on Oil and Gas in the Next
Millennium, May 20, 1997, p. 5.
17
W. F., Hoffman, The Changing face of Europe’s Natural Gas Markets, in, Petroleum Economist, The
Fundamentals of the European Gas Industry, p. 11.
18
International Energy Outlook, supra note 3.
19
Ibid.
20
Ibid.
21
Ibid.
22
Power “to Overtake Oil by 2015” in European Gas Pricing, 10:16 WGI 10, p. 10.

9. 8
It is important to understand what the capital costs of LNG projects can represent in
practice.
“The cost of field development, liquefaction, plant and harbor facilities, which is always the LNG
supplier’s responsibility, depends largely on location and the operating environment, however
capital requirements can run above 5 billion dollars.
The buyer generally has the responsibility to make arrangements for acquiring new LNG tankers
and, assuming an electric utility, for construction of both a receiving terminal and power plant,
together these can add from 5 to 10 billion dollars to the overall costs.”24
Therefore, the costs of a new LNG venture ranges from 10 to 20 billion dollars.25
In this part of
our research, we will concentrate on the Middle East LNG suppliers, which are essentially
located in the Gulf.
3.2 Abu Dhabi
LNG from Abu Dhabi’s Das Island became available for export in 1977. It is operated by
the Adgas consortium, composed of Abu Dhabi National Oil Company (Adnoc) 51%, BP
16.33%, Total 8.17%, and Mitsui 24.5%.26
The Plant had originally two trains but due to greater
demand by its sole contractor (buyer) Tokyo Electric Power Co. (Tepco), Das Island
inaugurated a third train in 1994. In 1995, Adgas produced 5.3 mt of LNG, of which 4.5 mt was
purchased by Tepco. Surplus production was shipped to Belgium, France and Spain.27
3.3 Qatar
3.3.1 Qatargas
The Qatargas project consists of Qatar General Petroleum Co. (QGPC) owning 65%,
Mobil 10%, Total 10%, Japan’s Marubeni 10%, Mitsui 10%. It has been active since November
1996.28
Qatargas presently supplies Chubu Electric’s Kawagoe terminal in Japan with 4 mt/year
and will continue to do so for another 22 years. This same project sells other Japanese power
23
Ibid.
24
T. P., Ehrahrt, supra note 16, p. 13.
25
Ibid.
26
R. Jones, supra note 12, p. 34.
27
Ibid.
28
Ibid, p. 36.

10. 9
and gas utilities another 2 mt/yr in accordance with a 25-year contractual obligation that started
in the mid-1998.29
Qatar had thoughts of developing another LNG project but declared the abandonment of
the idea in a statement made by Qatar’s Energy Minister in March, 1999.30
This came as a
disappointment to US Enron, which wanted to seize the opportunity of unmet demands in Israel
and India. Qatar’s policy was justified by depressed oil prices at the time the statement was
made. It is important to stress that the gas to be used in a new Qatar LNG venture would mostly
be composed of non-associated gas. Since flows of such gas are too constrained by potential
OPEC oil cuts, Qatar decided to use this surplus non-associated gas only towards the needs of
UAE and Oman.31
It will not be surprising, however, to see Qatar’s decision to open this third
liquefaction project after all.
As a point of interest, just recently in April 2000, Enron and Franco-Belgian Total Fina
Elf signed an agreement with the United Arab Emirates Offsets Group to construct an $8bn-
$10bn Middle Eastern gas network. The first phase of the plan (a.k.a. Dolphin) aims for the
pipeline delivery of up to 3 bcf/d from Qatar and running through Abu Dhabi, Dubai and on to
Oman. A second phase of the agreement aims for the delivery of 1.5 bcf/d of Qatari gas to
Pakistan and India under a 25-year commitment.32
3.3.2 Ras Laffan (RasGas)
Ras Laffan or RasGas is a 70/30 joint venture between QGPC and Mobil.33
According to
a recent agreement with India’s Petronet, RasGas will be supplying 2.5 mt of LNG to Cochin, in
the South Indian state of Kerala, and another 5 mt to Dahej, in the west Indian province of
Gujarat, starting around 2002.34
RasGas has also agreed to supply Korean Kogas with 4.8
mt/yr.35
29
Ibid.
30
Qatar Rules Out Grassroots LNG; Pushes for Line to UAE, 10:6 WGI 3, p.3.
31
Ibid.
32
In Brief, 35 AGR 22, p. 23.
33
R. Jones, supra note 12, p. 36.
34
RasGas Snares First Big Slice of Indian LNG Market, 9:17 WGI 1, p.1.
35
Ibid, p. 10.

11. 10
With these numbers, RasGas needs to supply a total of 12.3 mt/yr. Does it have that
capacity? In a statement made at the end of 1998, RasGas Managing Director, Neil Kelly,
declared the following:
“Our main vision has been to be a plant of 10 million tons a year plus. That vision remains. The
capacity of the plant currently being built is two times 2.5 mt/yr [a total of 5 mt/yr], though you
would expect to get more out of it than that. Regarding expansion [beyond 10 mt/yr], those are
unknowns.”36
3.4 Oman
Oman LNG is a joint venture of the government of Oman holding 51%, Shell 30%, Total
5.54%, Mitsubishi 2.77%, Mitsui 2.77%, Itochu 0.92%, Partex 2% and five different South
Korean companies (South Korea Gas Corporation, Samsung, Hyundai, Daewoo and Yukong)
with a total of 5%.37
The two-train project, expected to generate LNG at a rate of 6.6 mt/yr38
, is
to be built along with two 120,000 cm storage tanks.39
The consortium has contracted to supply the South Korea Gas Corporation with 4.1
mt/year of LNG between 2000 and 2025. It has also signed an agreement with Enron to export
1.2 mt/yr of LNG into India mainly for its Dabhol power plant.40
A third contract with Japanese
Osaka Gas will be able to secure another 1.7 mt/yr of Oman’s LNG production.41
3.5 Yemen
The start-up of a proposed Yemen LNG plant was to take place in 2001 but has been
postponed for another three years since more time is needed to secure supply contracts to India.
Actually, both Total Fina Elf and the Yemen Gas Company are developing this project. This
project will involve the construction of gas pipelines and a liquefaction plant that will only be
36
Ibid.
37
R. Jones, supra note 12, p. 36.
38
What’s Around the World, 9:15 WGI 12, p. 12.
39
What’s Around the World, 10:6 WGI 11, p. 12.
40
Enron Signs Agreement with Oman LNG, 17 AGR 14, p. 14.
41
What’s Around the World, supra note 39, p. 12.

12. 11
awarded in 2001.42
The Yemen LNG project is a two-train venture that should yield some 2.65-
5.3 mt/yr.43
4. Problems with LNG Exports in General
4.1 Transportation Costs
It is important to note that there are fundamental differences between the oil and gas
industries. First of all, it is much more expensive to transport gas than oil. In the case of LNG, it
has to be liquefied before transportation at a temperature of minus 160 degrees in ships.44
These
operations are actually cheaper than long distance pipeline transportation. Therefore, if the price
of gas is low, the final consumer price might be unable to cover the price of the production and
transportation of gas.45
On the other hand, transportation experts are predicting a serious shortage of gas carriers.
Makato Iwata, general manager of Mitsui OSK Lines’s liquefied gas carrier division, the
world’s largest operator of LNG tankers foresees a shortfall of 27 tankers by the year 2005.46
Recently, towards June 1999, RasGas had difficulty in booking a tanker for its LNG
sales.47
It appeared that out of nearly 90 LNG tankers that exist worldwide, only four were not
booked on long-term supply contracts. This shortage actually placed constraints on LNG spot
sales by Middle East producers Qatargas, RasGas and Adgas.48
In response, Qatar and Oman
complexes both ordered more than 20 new ships, presently being built in Japan and Korea.49
As
for the new complexes in Trinidad and Nigeria, they have decided to use second hand vessels,
some of which should have already left the Asian LNG trade.50
Actually, it is interesting to note
42
Yemen LNG Project Postponed, 35 AGR 21, p. 21.
43
Enron Signs Agreement with Oman LNG, supra note 40, p. 14.
44
Analyzing the Outlook for LNG Costs and Prices, supra note 13, p. 2.
45
Ibid. Please see also, J. T. Jensen, Gas Supplies for the World Market, 15 The Energy Journal 237, p.
238-239.
46
Suez Canal Seeks Rise in LNG Traffic to Europe, 10:6 WGI 4, p. 4.
47
LNG Spot Market Finds Customers, Lacks Tankers, 38:26 PIW 3, p. 3.
48
Ibid.
49
Middle East Challenges Asia LNG Suppliers, supra note 1, p. 3.
50
Ibid.

13. 12
that the price of a newly built tanker fell in price to around $190 million in 1998 from a $250
peak in 1992.51
Iwata suggested five ways to reducing transportation costs: swapping spare capacity,
standardizing vessel sizes, extending their lifetime to possibly 35 years, innovative financing,
and improved technology.52
However, transportation costs are believed according to some
experts to remain high for at least another five years.53
4.2 Inflexible Contractual Obligations
LNG trade is thought to be extremely inflexible. For instance, since LNG projects are
characterized as being capital intensive, long-term supply contracts often have to be secured
prior to the commencement of construction. This is to guarantee a return on investment. These
contracts might easily reach a 20-year term if not more. Moreover, obligations such as the take-
or-pay clause make LNG sales contracts seem very unattractive to buyers that generally lack
storage capacity. Another example of inflexibility is the indexation of gas prices to oil. This
indexation represents a difficult investment risk to both the buyer and the seller since they
cannot estimate accurately the extent of their obligations. Inevitably also, low oil prices will
mean less profit to LNG Middle East suppliers. Not surprisingly, Sheikh Yamani, in a speech
delivered to the Institute of Petroleum in London on November 1999, described the price of oil
as the greatest uncertainty the LNG suppliers face.54
The President and Chief Executive of Kogas, Kap Soo Han, summarized the inflexibility
of gas sales contracts in the following statement made in a recent conference in Bali, Indonesia:
“It is my belief that current long-term LNG sales and purchase contracts, based on take-or-
pay conditions, can not accommodate these rapidly developing market needs…LNG contracts with
exporters will have to be more flexible particularly in regard to contract periods, quantities and
pricing. The current pricing formula which is linked to crude oil prices, needs to be changed to be
more market-driven. The downward quantity tolerance should be expanded from the current level
of 5-10% to the level of 15-20% to help LNG buyers effectively deal with increased uncertainty of
demand.”55
51
Suez Canal Seeks Rise in LNG Traffic to Europe, supra note 46, p. 4.
52
Ibid.
53
Middle East Challenges Asia LNG Suppliers, supra note 1, p.3.
54
Low Oil prices Test LNG Industry, 21 AGR 20, p. 21.
55
Industry Restructuring Sparks Call for LNG price cuts and Flexible Contracts, 29 AGR 2, pp. 3, 6.

14. 13
4.3 The Weather Problem and Insufficient Storage Facilities
A third problem with LNG trading is the weather factor. Indeed, weather is an important
aspect to consider since warm weather decreases considerably the demand for gas. As a matter
of fact, global warming will be more and more of an issue in the years to come. In 1999, Europe
has witnessed its thermometers reach record temperatures. For instance, most of the UK has
experienced spring-like temperatures in January 1999. It had actually some of the warmest
temperatures since records began 120 years. As a result, just between December 24, 1998 and
January 3, 1999, national demand fell to about 59.7% of peak.56
On the other hand, storage capacity of the importing countries is growing more and more
insufficient with demand growth.57
If we take the example of an LNG importing country hit by
warm weather and suffering from a lack of storage capacity, it would most probably have over-
committed itself. In this scenario, a take-or-pay clause, if existent, would most probably have to
be exercised. The problem for LNG suppliers is when there is no take-or-pay clause in the
contract. LNG suppliers take more risk in countries where there is insufficient storage capacity.
In Europe, storage capacity is lacking, especially in countries such as Spain, Portugal and even
the UK. One reason behind this inadequate infrastructure is the high construction costs of new
storage. Mobile Europe Gas’ Vice President, Donald Woods, says it can cost up to $800 million
to build a new 2 bcm site.58
However, it is important to understand that producers too cannot neglect the importance
of adequate storage. For instance, Indonesia’s state Pertamina, was faced with a shortage of
storage facility due to the 1998 reduced Korean LNG consumption, despite its 10 storage tanks
of a total 28 mcf capacity.59
4.4 Political Instability
56
Warmest January Day keeps Prices Low, 10:1 WGI 4, p. 4. Please see also, Gasunie’s 1998 Sales Hit
by Warm Weather, 10:1 WGI 5, p.5.
57
Storage Capacity Fails to Grow in Europe’s New Competitive Markets, 8:18 WGI 6, p. 6.
58
Ibid.
59
Korea Cuts Spot Deals; May Defer Long-Term Deals, 9:1 WGI 1, p. 1.

15. 14
Political Instability is a major concern to any trade industry. It is no secret that the
Middle East has more political instability than most regions of the world. Political instability in
the Middle East mainly comes from Arab-Israeli tensions, Islamic movements and even from
totally unexpected events such as the 1990 invasion of Kuwait by Iraq.
Obviously, in case of political instability, one of the most strategic targets would be the
gas liquefaction plants and infrastructure. The effects of acts of terrorism on gas infrastructure
can have very expensive repercussions on both the LNG suppliers and importers.
One recent example of political instability is Algeria. In February 1998, bombers have
sabotaged two gas pipelines from the Hassi R’Mel field supplying liquefaction plants at Arzew.
An earlier attack, in November 1997, was aimed at a gas pipeline to Italy.60
Due to the properties of gas, outage costs are likely to involve: time for the reconnection
of the gas structures, lost contracts, lost reputation and of course, money.
5. Problems with the Asian Markets
5.1 Competition from within Asia
5.1.1 Infrastructure Expansion of Asian Gas Suppliers
Middle East LNG’s most fierce competitors will be located within Asia itself. Upstream
exploration is very active in Asia and giant finds may lead to new Asian LNG facilities. Even
more threatening for Mideast LNG is a proposed plan for a regional pipeline network. The
realisation of such a scheme would greatly jeopardize the Middle East’s share in the Asian
market. It is even fair to say that it will reduce LNG’s market share altogether.61
Actually, in the
present time, gas pipeline options are numerous and include Myanmar, Gulf of Thailand, and
even Exxon’s Natuna structure.62
Moreover, possible extension of existing Asian LNG facilities is another worry for the
Middle East. Such extended facilities will probably have, through lower prices, the upper hand
60
Hitting Algeria Where It Hurts, 9:4 WGI 1, p. 1.
61
Mideast LNG Fights to Keep Asian Window Open, 7:13 WGI 1, p. 9.

16. 15
on new grassroots projects. Actually, this advantage would hold even against new grassroots
projects within Asia itself.63
At this point, it is essential to determine who are the Asian LNG producers that have a
capacity to compete with the Middle East. Due to proximity, these competitors are probably
better able to supply their Asian neighbours at lower costs. LNG from the Middle East will only
penetrate the Asian market if it can be offered at competitive prices or if Asian suppliers stop
satisfying consumer demand.
5.1.2 Indonesia
Indonesia benefits from 19 years of experience in LNG trading. It has grown to become
the world’s largest supplier of LNG with a 40% market share. It currently dominates the Asia-
Pacific LNG market.64
Just in 1995, it exported, through its state company Pertamina, over 25
mt to importers in Japan, South Korea and Taiwan.65
At its two main sites, Arun and Bontang,
Indonesia also holds the greatest concentration of LNG trains. Indonesia has 12 trains and a
further 2 were planned for the year 2000.66
Unfortunately for Indonesia, the Arun LNG plant is facing a decline in output as a result
of depleting reserves. Trains from that site are expected to be shut down somewhere within the
next ten years. Indonesia still has a total of around 103 tcf of proven and possible gas reserves.
This includes 46 tcf in its unexploited Natuna field and another unexploited 7.5 tcf from its
Wiriagar Deep Field. However, if development does not come in time, Indonesia would
probably have to lose some of its contracts.67
5.1.3 Malaysia
Malaysia’s main producing plant is the Bintulu LNG plant, commissioned in January
1983. In 1995, the completion of a major expansion raised LNG output from 8.1 mt/yr to some
62
Ibid.
63
Mideast LNG Fights to Keep Asian Window Open, supra note 61, p. 9.
64
R. Jones, supra note 12, p. 28.
65
Ibid.
66
Ibid, p. 30.

17. 16
16 mt/yr. Another expansion that should have been completed in mid-2000 would raise output
even higher to 22.8 mt/yr.68
Bintulu’s main customers are in Japan, South Korea and Taiwan.69
5.1.4 Brunei
Brunei has one main LNG plant which is the Lumut plant. The Lumut plant has five
trains, each with a capacity of 1.24 mt/yr of LNG. Lumut’s main customers are in Japan and
account for 5.54 mt/yr. This actually represented 14% of total Japanese LNG consumption in
1997. The supply contract between Lumut and its Japanese customers expires only in 2013.70
5.2 Non-Asian Competitors
5.2.1 Australia
Australia constitutes one of the Middle East’s main competitors on the Asian market.
Australia is searching for a market share in India and China for some 15 mt/year of new LNG
output, which comes mainly from its expanded North West Shelf facilities.71
As for the Indian market, LNG from the Middle East benefits from lower transportation
costs than those of Australia. Indeed, it has been advanced by experts that LNG from Qatar to
India will be at least 40 cents – 50 cents per MBtu cheaper than that from Australia.72
5.2.2 Russia
The development of Russia’s infrastructure and projects would
“…not only recast today’s matrix of Asia-Pacific energy flows but could also reshape the existing
pattern of geopolitical relationships in the region”.73
In a forecast of the year 2020, it was found that Russia’s Far East on its own could
supply 40 to 60 bcm a year of natural gas in the year 2020 to neighbouring Pacific countries.74
67
Ibid, pp. 29-30.
68
Ibid., p. 31.
69
Ibid.
70
Ibid, p. 34.
71
RasGas Snares First Big Slice of Indian LNG Market, supra note 34, p. 1.
72
Ibid, p. 2.
73
Prospects for Russian Gas Supply to East Asia, 24 AGR 2, p. 2.
74
Ibid.

18. 17
As a point of interest, the Former Soviet Union as a whole, holds 40% of the world’s total
natural gas reserves.75
One of Russia’s most promising projects would be that of Sakhalin. Sakhalin designates
a Russian Island, which is located to the North of Japan. Sakhalin is composed of four different
projects, each having a different consortium.
Sakhalin benefits from proximity to the Chinese and Japanese markets. However, the law
on resource extraction has long been regarded as unattractive to investors. It was only in January
1999 that the appropriate amendments to the Production-Sharing Law were made.76
Another
point of concern is that the Sakhalin region is seismically active and prone to shearing ice.77
5.3 Risk of Another Asian Economic Crisis
Between early 1997 to approximately mid-1999, the Middle East LNG suppliers were
faced with two dilemmas. First of all, Asia was hit with an economic crisis that weakened its
currencies by 20% to 30%. Second of all, the Middle East LNG suppliers also had to confront
low oil prices, which consequently reduced LNG prices by 35% in US dollar terms.78
If we take the South Korean example in 1998, it’s GDP growth was faced with a 5.8%
contraction in that year.79
In addition, energy demand had a contraction of 8.1%, with a reduced
LNG consumption of 3.8%. Actually, LNG imports to South Korea fell by a significant 9%,
to10.58 mt.80
Not surprisingly, Kogas had to cancel 15 cargoes from Indonesia’s Pertamina for
1998, amounting to about 600,000 tons.81
Equally, Kogas also had to cancel a 1-mt spot deal
with Abu Dhabi.82
6. Problems with the European Market
75
International Energy Outlook, supra note 3.
76
Prospects for Russian Gas Supply to East Asia, supra note 73, p. 2.
77
R. Jones, supra note 12
78
Low Oil Prices Test LNG Industry, supra note 54, p. 20.
79
Industry Restructuring Sparks Call for LNG Price Cuts and Flexible Contracts, supra note 55, p. 2.
80
1998 – The Year of Negative Growth, 10:3 WGI 1, p. 1.
81
Korea Cuts Spot Deals; May Defer Long-Term Deals, supra note 59, p. 1.

19. 18
6.1 The Middle East as a Secondary Supplier
At the present time, Europe perceives the Middle East as a secondary source of LNG and
not as a primary one. It is only if European demand for LNG exceeds the supply capacity of its
present exporters, that Europe will turn to the Middle East.
“The west European gas industry mainly receives supplies under long-term contracts. About 48%
of gas supplies come from domestic sources, and the other 52% are traded internationally. A large
part of this international trade, some 20% of west European gas supplies, comes from sources from
within western Europe, most notably the Netherlands and Norway. This means that only 32% of
supplies are based on sources outside Western Europe. Russia and Algeria are the two main
suppliers outside Europe, accounting for 20% and 12 % respectively.”83
It is predicted that by 2020, Europe will be importing 57% of its gas from external
producers.84
This constitutes an increase of 10% a year. However, it is going to be difficult for
the Middle East to supply countries in Europe through long-term contracts. It is more likely for
the Middle East to sell its LNG to Europe through the spot market. On the other hand, if the
Middle East gets any important long-term contracts at all, it will mainly be with the southern
Mediterranean countries of Europe or perhaps the Former Eastern Block. Then again, large
competition from Algeria and Russia might even take out such possibilities.
6.2 Competition Facing Middle East LNG Sales in Europe
6.2.1 Competition from within Europe
With the development of the Troll field and the development of the Asgard project in the
Norwegian Sea, Norway will raise its output potential to some 80 bcm/year.85
When countries in
the Former Eastern Block manifested a desire to diversify away from Russian gas, Norway was
able to secure contracts with Czech Republic. Similar contracts with Hungary, Slovakia,
Slovenia were thought to materialize but will probably remain under Russian supply.86
82
Asian LNG Producers Rein Back Output, 9:7 WGI 10, p. 10.
83
W. F., Hoffman, supra note 17, p. 11-12.
84
Power “ to overtake Oil by 2015” in European Gas Pricing, supra note 22, p. 10.
85
W. D., Hoffman, supra note 17, p. 12.
86
Norway Seeks a Foothold Into Russia’s Main Markets, 7:17 WGI 5, p.5.

20. 19
The Netherlands is another established producer. As a matter of fact, the Netherlands has
large gas reserves of around 1,952 bcm and benefits from its strategic central location in
Western Europe.87
As a whole, European Production is expected to reach 300-310 bcm in 2010, accounting
for about 55% of total demand.88
6.2.2 Competition from Russia
Gazprom, Russia’s monopolistic state company, is today the world’s largest producer
and supplier. It holds more than 210 tcm of ultimate reserves.89
Russia expects to export as
much as 140 bcm/year to Western and Central Europe. Moreover, the Yamal-Europe gas
pipeline is well under construction. With total gas reserves of 10.4 tcm in the Yamal Peninsula,
Russia is believed to have the capacity to dominate the markets in Europe.90
6.2.3 Competition from Algeria
Algeria expects to export 5.8 bcf/d of natural gas both by pipelines and by LNG sales.
Presently, Algeria exports about 740 bcf/yr of LNG. One third is destined to France and the rest
is sold to Southern European countries such as Spain, Italy and Greece. A recently constructed
Maghreb-Europe gas pipeline supplies Europe with a capacity of some 653 bcf. Actually, a
second gas pipeline to Europe through Spain is being considered.91
6.2.4 Competition from Projects in Iran, Trinidad and Nigeria
87
S., Dessens, The Netherlands: Facing the Future with Confidence, in Petroleum Economist, supra note
17, p. 90.
88
M.-F., Chabrelie, Growth and Co-operation into the Next Century, in Petroleum Economist, supra note
17, p. 41.
89
C., Skrebowski, Russia Set to Dominate Global Gas Supplies, in Petroleum Economist, supra note 17,
p. 125.
90
Ibid.
91
International Energy Outlook, supra note 3. Please see also, Greece at Sea over Algerian LNG, 10:9
WGI 1; and, Italy’s Edison Initials Major Algerian Gas Deal, 10:8 WGI 1.

21. 20
Iran would be a large competitor for the Middle East, however, it still has to assume US
sanctions. Despite this fact, Turkey has contracted to purchase 2 bcm/yr since 1999 and around
10 bcm/yr in 2003.92
The New LNG projects in Nigeria and Trinidad have already stolen a part of the
European market that, probably, would have otherwise been awarded to the Middle East. These
projects are small in comparison with the Russian or Algerian suppliers. However, they are not
negligible competitors nonetheless.
Nigeria’s new, two-train and 7.5 bcm/yr LNG project has began production in September
1999 and first shipments have headed for France.93
Actually, a third LNG train, expected for
2002 has already found customers in Spain. In fact, Spain has committed to lift between 1.7
bcm/yr to 2.6 bcm/yr of that third train.94
Spain is also set to import LNG from Trinidad by the
end of 2000.95
7. Conclusion
Despite the competition it faces, some experts believe that the Middle East will be able
to seize a good portion of new LNG demand by the year 2010.96
The Middle East Region
benefits from a strategical geographical region. It is able to supply both the west of Suez and
Asia Pacific. It will most probably act as an important ‘swing’ supplier to European and Turkish
markets.97
Directly to its east, there are large LNG markets in India and Pakistan, which can be
supplied at half the freight costs of LNG from Australia or South East Asia. As for more distant
destinations such as Japan and South Korea, the Middle East still can compete with its low
production costs. Indeed, well-head costs of natural gas in Qatar are no more than $0.50 MBtu
in comparison with average costs of production of $1.50 MBtu in the Asia-Pacific region.98
92
W. D., Hoffman, supra note 17, p. 13.
93
Nigeria’s First LNG to Head for France, 10:17 WGI 1, p. 1.
94
Spain Commits to Lift Most of Nigeria’s Third LNG Train, 19:5 WGI 1, p. 1.
95
M.-F., Chabrelie, supra note 88, p. 41.
96
Middle East Challenges Asia LNG Suppliers, supra note 1, p. 3.
97
Ibid.
98
Ibid, p. 4.

22. 21
Basically, Mideast LNG has many good cards in its hands. Even though the terrain may
seem risky in the far future, the near future certainly looks promising. Some of the future
concerns for Middle East LNG would be the realisation the Far East Russian projects or the
expansion of the already existing Asian pipeline grids.
When it comes to the European markets, the Middle East will probably have to rely on
spot sales. More significant long-term contracts will be hard to secure due to the large and
established Russian and Algerian competitors.

23. 22
Bibliography
1. Primary Sources
1.1 Legislation and Regulation
Directive 98/30/EC of the European Parliament and of the Council Concerning Common Rules
for the Internal Market in Natural Gas, June 22, 1998.
2. Secondary Sources
2.1 Books
Adelman, M. A., The Economics of Petroleum Supply, (London, England: The MIT Press,
1993).
Brown, K. C., (ed.), Regulation of the Natural Gas Producing Industry, (Washington, DC:
Resources for the Future, 1972).
David, M. R., (ed.), Upstream Oil and Gas Agreements, (London, England: Sweet & Maxwell,
1996).
Petroleum Economist, World Energy Yearbook 1997, (London, England: Petroleum Economist,
1997).
Petroleum Economist, The Fundamentals of the European Gas Industry, (London, England:
Petroleum Economist, 1996).
Jones, P. E., Oil: A Practical Guide to the Economics of World Petroleum, (New York, New
York: Peter Ellis Jones, 1988).
International Energy Agency, Natural Gas Transportation: Organisation and Regulation, (Paris,
France: OECD, 1994).
International Energy Agency, Natural Gas Distribution: Focus on Western Europe, (Paris,
France, OECD, 1998).
Stern, J. P., International Gas Trade in Europe: The Policies of Exporting and Importing
Countries, (London, England: Heinemann Educational Books, 1984).
2.2 Articles
A Risky Mideast LNG Race, 7:11 WGI 1.
Abu Dhabi Advances with Offshore Project, 9:14 WGI 9.

24. 23
Abu Dhabi LNG Finds its First US Buyer, 7:17 WGI 1.
Algeria to Supply Extra Botas Cargoes, as Tender Collapses, 9:23-24 WGI 1.
Analysing the Outlook for LNG Costs and Prices, 17:11 IPF 1.
Asia Gas’ New Era, 1 AGR 1.
Asia’s Electric Gas Prices, 7:15 WGI 1.
Atlantic LNG Launched, But Expansion Accord Still Pending, 10:8 WGI 4.
BG Call to Cut Taxes on LNG Import, 21 AGR 14.
Can Gas Unlock Saudi Arabia’s Foreign Upstream Investment?, 6:9 WGI 3.
China, Too, Finally Opens Door to LNG, 9:22 WGI 1.
Coal: Challenging Gas on the Supply Side, 28 AGR 9.
Despite Vast Reserves, Saudis only Envision Domestic Gas Use, 7:23-24 WGI 2.
Dubai’s Gas Needs Creating Multiple Import Options, 8:20 WGI 9.
East Asia’s City Gas Firms Leave the Recession Behind, 10:8 WGI 1.
ENI Agrees to Terms on Lybia Gas Project, 10:14 WGI 1.
Enron Signs Agreement with Oman LNG, 17 AGR 14.
Exxon Considers Producing Oil from Qatari Gas, 7:19 WGI 1.
European Border Prices: A Changing Picture, 7:11 WGI 5.
Fertilizer Promises To Be a Hidden Growth Area for Gas, 7:23-24 WGI 2.
Futures Make a Hot and Cold Start, 8:3 WGI 4.
Gas Sector Set to Gain, as German Government Turns Against Nuclear, 9:21 WGI 4.
Gasunie Ready To Sign Up Russian Gas, But Not Under Joint Venture, 10:5 WGI 5.
Gasunie’s 1998 Sales Hit By Warm Weather, 10:1 WGI 5.
Good Neighbor Policy Good for Qatari Gas, 38:12 PIW 2.

25. 24
Greece at Sea Over Algerian LNG, 10:9 WGI 1.
Hitting Algeria Where It Hurts, 9:4 WGI 1.
India’s Power Giant Flexes Its LNG Muscle, 10:5 WGI 1.
Industry Restructuring Sparks Call for LNG Price Cuts and Flexible Contracts, 29 AGR 2.
Is LNG In for a Shock from Electric Utilities?, 2:16 WGI 8.
Italy’s Edison Initials Major Algerian Gas Deal, 10:8 WGI 1.
Jensen, J. T., Gas Supplies for the World Market, 15 The Energy Journal 237.
Kogas Pledges as RasGas Loads, 10:16 WGI 1.
Korea Cuts Spot Deals; May Defer Long-Term Deals, 9:1 WGI 1.
Korea’s Daewoo Takes a Stab at Iranian LNG Project, 7:18 WGI 1.
LNG Oil Prices Test LNG Industry, 21 AGR 20.
LNG Spot Market Finds Customers, Lacks Tankers, 38:26 PIW 3.
Mideast LNG Fights to Keep Asian Window Open, 7:13 WGI 1.
Middle East Challenges Asia LNG Suppliers, 21 AGR 2.
Nigeria’s First LNG to Head for France, 10:17 WGI 1.
Nuclear Accident May Mean More LNG for Japan, 38:41 PIW 3.
Oman, Abu Dhabi Launch New Transmission Companies, 10:14 WGI 5.
Oman LNG Sold Out May Now Win Race into India, 9:23-24 WGI 2.
Oman LNG Signs Up Osaka Gas in Major Shift, 8:13 WGI 1.
Oman LNG Closes in On Thailand Deal, 7:16 WGI 1.
Oman Seals Financing and an LNG Contract, 7:20 WGI 1.
Poland Embraces Russia’s Yamal Gas, 7:18 WGI 1.
Power “To Overtake Oil by 2015” in European Gas Pricing, 10:16 WGI 10.

26. 25
Prospects for Russian Gas Supply to East Asia, 24 AGR 2.
Qatar Cracks Spanish Market with LNG Deal, 8:9 WGI 1.
Qatar Rules Out Grassroots LNG; Pushes for Line to UAE, March 25, 1999, p. 3.
Qatar Moves Ahead on Non-LNG Front as It Waits for India, 8:22 WGI 2.
RasGas Snares First Big Slice of Indian LNG Market, 9:17 WGI 1.
Rays of Light Emerge from EU’s Gas Directive Impasse, 8:20 WGI 1.
Russian Gas in Asia Finds Its Calling, 8:13 WGI 10.
Saudi Arabia’s Opening in Gas May Extend Upstream, 9:22 WGI 1.
Saudi Gas Plan Back on Track, with Hawiyah at It’s Heart, 9:23-24 WGI 9.
Saudi Gas Expansion Escapes Budget Ax, 9:7 WGI 1.
Saudis Hint at Foreign Involvement in Gas Reserves, 8:2 WGI 10.
Scandinavian Market to Grow as Sweden Switches from Nuclear, 8:3 WGI 5.
Spain Commits to Lift Most of Nigeria’s Third LNG Train, 10:5 WGI 1.
Spot Prices Rise Due to Weather and Producer Buying, 8:9 WGI 1.
Stagnant Japanese LNG Demand Will Extend into 1999, May Worsen, 9:23-24 WGI 3.
Storage Capacity Fails to Grow in Europe’s New Competitive Markets, 8:18 WGI 6.
Suez Canal Seeks Rise in LNG Traffic to Europe, 10:16 WGI 4.
Ties Between Gas and Electricity, 7:21 WGI 6.
True, W. R., Worldwide Gas Processing Continues to Expand, Shift Balance, June 14, 1999
OGJ 41.
Warmest January Day Keeps Prices Low, 10:1 WGI 4.
What the World Bank Does in Natural Gas, 29 AGR 10.
World LNG Fleet to Grow; Indian Terminal Advances, September 18, 2000 OGJ 74.

27. 26
Yemen LNG Project Postponed, 35 AGR 21.
Yemen LNG Close to First Buyer in Turkey, 7:23-24 WGI 1.
1998 – The Year of Negative Growth, 10:3 WGI 1.
2.3 Internet Sources
Chowdhury, N. and Paul, A.,Where Asia Goes From Here, November 24, 1997, Fortune
Electronic Edition, Visited on December 7, 2000,
http://www.fortune.com/fortune/1997/971124/whe.html.
IMF, The Asian Crisis: A View from the IMF, January 22, 1998, Visited on December 7, 2000,
http://www.imf.org/external/np/speeches/1998/012298.htm.
International Energy Agency, Visited on December 6, 2000,
http://www.iea.org/.
International Energy Outlook, Natural Gas, Visited on November 26, 2000,
http://www.seninte.upc.es/Interno/Energia/gas.html.
Ross-Flanigan, N., 20th Century Was the Warmest of the Last Five Centuries, February 10,
2000, NASA, Visited on December 8, 2000,
http://earthobservatory.nasa.gov/Newsroom/MediaAlerts/2000/200002101659.html.
Stevens, P., Natural Gas: The Fuel of the Next Century, 6:3 CEPMLP EJ, Visited on
December 1, 2000,
http://www.dundee.ac.uk/cepmlp/journal/html/vol6-3.html.
2.4 Conferences
Conference Papers, presented in the Seminar Liquified Natural Gas: The Process of Project
Development, (Saint Andrews, Scotland, Centre for Energy, Petroleum and Mineral Law and
Policy, 18-19 September, 1997).
Ehrahrt, T. P., LNG Enters the New Millennium, presented to the International Bar Association
Seminar on Oil and Gas in the Next Millennium, May 20, 1997.
Hankey, S., Competition and Regulation Developments in EC and UK Antitrust Gas Market
Liberalisation, presented in the Seminar UK Oil and Gas Law, (Saint Andrews, Scotland, Centre
for Energy, Petroleum and Mineral Law and Policy, 21-25 September, 1998).