Growth by association
Associated gas can be an important component of future fuel supplies if new gathering pipelines and tighter regulations come into play.
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Most wells that are drilled for oil also yield a mixture of other hydrocarbons, such as condensates, natural gas liquids, and natural gas. The latter is associated gas, essentially a by-product from an oil well or field, while non-associated gas comes from a well or field that is primarily intended for gas production. In its latest World Energy Outlook, the International Energy Agency (IEA) considers the future for associated gas. The IEA’s analysis is based on two options for government policies that will determine its prospects: the Current Policies Scenario assumes that governments make no changes to their existing policies, while the Stated Policies Scenario adds current policy intentions and targets to measures that are already in place.
Associated gas is often seen as an inconvenient by-product of oil production: it is generally less valuable than oil per unit of output and is costlier to transport and store. It is often used on-site as a source of power or heat and can also be reinjected into oil wells to create pressure for secondary liquids recovery. Under the right conditions, it can also be stored and sold to the market at a later stage. Associated gas is usually collected via a network of gathering pipelines for further processing or direct injection into gas grids. When the gas is rich in natural gas liquids (NGLs), extra processing is required to separate out the heavier hydrocarbons such as ethane, butane, and propane.
When there is no on-site use for the gas and a lack of infrastructure prevents it from reaching nearby markets, it is vented or flared. Associated gas can also be unintentionally released to the atmosphere as methane emissions. Together, such non-productive uses of gas have significant environmental consequences, making up around 40% of the indirect emissions associated with oil production. They also represent a wasted opportunity: the 200 billion cu m that was flared or escaped to the atmosphere or vented in 2018 was greater than the annual LNG imports of Japan and China combined. Globally, only 75% of associated gas is used or brought to market (see Figure 1).
Routine flaring occurs when there is a failure to put associated gas to productive use. This may be because of the remoteness of fields or the topography of the surrounding area or because the local price of gas discourages operators from developing costly gas transportation infrastructure to reach existing or potential new markets. Associated gas also often comes with a combination of water vapour, hydrogen sulphide, nitrogen or carbon dioxide, and the cost of separating out these unwanted elements may be higher than the potential profits from the gas. Although several countries have imposed regulatory measures to restrict flaring, these are often not enforced. Even in countries with well-developed gas markets, around 10% of associated gas extracted today is flared or vented.
The US is the largest producer of associated gas, accounting for over a third of the global total. In most countries, associated gas constitutes less than a fifth of total marketed gas production, but in some large scale oil- and gas-producing countries, such as Mexico, Saudi Arabia, Brazil, and Nigeria, it has a much larger share. On average, gas makes up around 10% of the energy content of an oil field, but this is subject to wide variation depending on geological conditions, well design, and production method (see Figure 2).
Middle East supply
The Middle East holds nearly 40% of global proven gas reserves, but these are not spread evenly across the region. In the two largest gas-producing countries, Iran and Qatar, natural gas and condensate resources have been developed independently of oil. However, more than 80% of the gas in Saudi Arabia and Kuwait is associated gas, and there are also significant volumes in Iraq and Oman. Associated gas has underpinned the rise of demand for gas in many of these countries since it has largely been available at close to zero cost as a by-product of oil production. It has also provided a basis for economic diversification away from oil.
In recent years, associated gas production in the Middle East has struggled to keep pace with soaring domestic demand, which has tripled since 2000. Gas has been used as a substitute for oil in the power sector in producer countries because it frees up additional volumes of crude for export. It has also become an important fuel for water desalination plants. These applications cause peaks in consumption during summer months and, in the absence of significant storage capacity, associated gas has struggled to supply this seasonal variation, hence Kuwait and the United Arab Emirates have resorted to seasonal LNG imports, while Oman has had to cut back LNG exports to redirect supply to the domestic market.
The shortfall in associated gas, combined with the pace of demand, has driven several oil-rich countries to develop non-associated gas fields, particularly those containing NGLs. Since 2000, the Middle East has quadrupled non-associated gas production. This has supported the development of new gas value chains and has underpinned Qatar’s rise to become the world’s largest LNG exporter (helped by the liquids-rich North Field). It has also led to integrated gas and NGL projects in the United Arab Emirates and Saudi Arabia that have spurred the development of heavy industries and petrochemical complexes.
Some countries are facing a need to raise gas prices to support further upstream development of more complex non-associated gas projects. They face a balancing act on price given their overall macroeconomic reliance on low cost gas supply. Saudi Arabia is planning a pricing regime that differentiates associated from non-associated gas to reflect the higher development cost of non-associated gas. End user prices for non-associated gas are likely to be up to eight times those of associated gas. Even prices at the higher end of this range are unlikely to cover the long-run production costs of these resources, which are located in difficult to develop fields. The kingdom has also created incentives to Saudi Aramco for gas production, a sign of the priority assigned to domestic gas development. Oman, Bahrain, and the United Arab Emirates have put similar measures in place.
In the Stated Policies Scenario, some countries in the Persian Gulf achieve marginal gains from associated gas production, as oil output grows by a predicted 3.9 million b/d up to 2040. However, the majority of growth comes from non-associated gas resources, with production nearly doubling to reach 250 billion cu m by 2040. Saudi Arabia derives most of its incremental production from non-associated gas, which allows the country more or less to keep pace with growth in demand from the power, petrochemical, and desalination sectors.
Overall, natural gas’s share of total marketed oil and gas production in the region rises from 26% today to nearly 33% by 2040, according to the IEA. The brisk pace of non-associated gas production allows the Middle East to develop upstream oil and gas supply chains that are increasingly separate from each other. It also accelerates the displacement of oil in electricity generation. At the same time, oil and gas remain tied together by investment in petrochemical and refining complexes in several parts of the Middle East, since these require an integrated hydrocarbon processing chain consisting of gas, oil, and NGL feedstocks.
The development of non-associated gas has important implications for the region’s ability to adapt to the demands of the Sustainable Development Scenario, where oil production begins to decline very soon while gas demand continues to grow until 2030. The divergent paths in this scenario raise questions about how investment is divided between associated and non-associated gas, and about how countries in the Middle East reconcile declining crude oil exports with continued robust growth in domestic gas demand.
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