The Gulf has gas, gas everywhere and not a drop to burn, to paraphrase Coleridge's poem. How can it be that the world's premier hydrocarbon producers suffer gas shortages that damage industry and cause infuriating power cuts in the heat of midsummer?
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Mark Carne, Shell's vice president for the Middle East and North Africa, covered some of the challenges at the Dubai School of Government last week, and again in Istanbul yesterday.
Mr Carne's exposition was, of course, constrained by his position. He stressed it was not Shell's role to take sides in the delicate debate over domestic gas pricing. Yet the problems are clear.
There is no shortage of gas resources in the Gulf. The region holds 40 per cent of global reserves, yet produces less than 15 per cent of world output. This disparity shows something is wrong with policy.
Kuwait and Dubai sit adjacent to some of the world's largest fields in Qatar and Iran, but have to import costly liquefied natural gas (LNG) from as far afield as eastern Russia and Australia. Just across the Kuwaiti border, huge volumes of unwanted Iraqi gas are burnt off. Kuwait, Jeddah and Sharjah have all suffered summer power cuts in recent years.
Oman's LNG export plants are running well below capacity as gas is diverted to domestic use. Growing use of oil for power eats into Saudi export capacity, a worrying issue for policymakers.
Low domestic prices mean that investment in new gas supplies is limited. Electricity and water are doubly subsidised in most countries - firstly through cheap fuel, then by tariffs that do not cover the cost of generation. Electricity prices in Kuwait have not increased in 30 years.
The dominant incumbent national oil companies face a heavy burden. They have to develop increasingly challenging fields while gas prices still reflect the cost of yesterday's cheap "associated" (by-product) gas. Meanwhile, the costs of everything from drilling rigs to pipelines have more than doubled just over the past five years.
When international oil companies from other countries are brought in to assist with their expertise, they face gruelling, often politicised, negotiations, a pattern seen in Saudi Arabia in the early 2000s, and repeated more recently in Iran, Iraq and Kuwait.
In 2008, ConocoPhillips won a US$10 billion (Dh36.7bn) deal to develop toxic "sour" gas reserves at Shah, near Liwa in Abu Dhabi, yet withdrew two years later. This was ConocoPhillips's fault for bidding too aggressively and underestimating the project's difficulties, yet it also illustrates the problems of inflexible contracts and searching only for the cheapest offer.
These kinds of policy challenges have been met, and solved, elsewhere, and Gulf countries must benefit from this experience.
In the late 1970s, the US was undergoing a gas crisis. Supplies were slumping, just at the time that the first oil shock was making oil-based fuels ruinously expensive. Extravagant plans were laid for costly synthetic fuels plants and LNG imports from Algeria, and the construction of new gas-fired power stations was banned.
Yet the crisis was entirely self-inflicted. A bewildering maze of price controls and restrictions, designed for an earlier era of low-cost associated gas, made it impossible to develop new supplies profitably. The Carter administration took the first steps in 1978 towards dismantling this system, but not until 1993 was the gas price fully determined by the market. From the early 1980s, a wave of new developments ensured two decades of abundant gas at affordable prices.
Similarly, from 1986 onwards, the UK dismantled its national gas purchasing monopoly. As a result of the "dash for gas", the UK was for some time the world's fourth-largest gas producer despite modest reserves. Many polluting coal plants were closed, and the UK enjoyed cheaper gas and electricity prices than its major European neighbours.
There are solutions for the inevitable side-effect of such policies: compensating energy-intensive industries based on their output, not gas consumption; and protecting lower-income groups with direct financial handouts or graduated tariffs.
The question is: if Shell and the other international oil companies do not actively advocate gas-sector reform in the Gulf, who will? Consumers, industries and utilities are not going to ask to pay higher prices, however beneficial for the government budget and wider economy. There is a lack of strong think tanks focused on energy or free-market economic reform, groups which made the economic case for the US and UK reforms.
National oil companies might at first sight benefit from higher gas prices. But they have their own interests: Saudi Aramco was strongly opposed to the involvement of international companies in the early 2000s "master gas initiative".
The first Gulf country to cut this Gordian Knot of gas reform and embark on such bold reforms will benefit hugely. The prize: improved efficiency, uninterrupted energy supplies, environmental protection, regional economic leadership, and cuts in costly gas imports or increased exports. Cautious, incremental steps are not enough; what the region's gas markets need is a comprehensive new vision.
* Robin Mills is an energy economist based in Dubai, and the author of The Myth of the Oil Crisis and Capturing Carbon
