According to the International Energy Agency (IEA), additions to global power generation capacity between 2010 and 2035 will be dominated by renewables (49%), followed by coal, gas (21% each), and nuclear (7%) with dwindling share for oil of less than 3%. Due to its technological and environmental advantages and the expected surge in world production, gas is making headway in power generation. On the other hand, in spite of its adverse environmental impact, the parallel expansion in the use of coal is reflecting such factors as the limited availability and higher cost of alternate fuels, supply security concerns, and a desire to maintain employment in coal mining.
As for Iraq, three influential reports have called for the replacement of crude oil, gasoil/diesel, and most fuel oil by natural gas in power generation. The Ministry of Electricity’s 2010 Iraq Electricity Masterplan (henceforth referred to as MoE), has concluded that natural gas is the most economical fuel to use in power generation. Accordingly, it stipulates that during 2010-30 gas should replace almost all other fossil fuels. Only a small percentage of fuel oil-fired capacity should be maintained as backup.
By 2030, gas would fuel 92% of power generation, fuel oil 3%, and 5% by hydro and other renewables (MoE pp11-15). Using MoE’s figures on capital costs and conducting its own economic analysis, the IEA’s 2012 report on Iraq (IEA-Iraq) arrives at similar conclusions (pp91, 92). The Integrated National Energy Strategy, INES, adopts the same stance (MEES, 14 June 2013). The graph depicts the three reports’ time paths of gas substitution throughout 2012-30. In 2030, the remaining small non-gas share covers heavy fuel oil, HFO, and renewables.
In deciding on the most economical (ie cheapest) fuel in power generation, MoE’s (and IEA-Iraq’s) conclusion is based on ranking fuels according to each fuel’s ‘resource cost’ to the Iraqi economy (plus capital and other operating unit costs). The cheapest fuel is that associated with the minimum cost. In this regard, resource costs are measured by world prices, which also reflect the ‘forgone revenues’ of not exporting the domestically used fuel. For 2010, “crude oil and gasoil prices used in [the evaluation] have been based on market prices of $80/B for crude oil, and a corresponding gasoil price of $585/ton. The $117/ton price of 3% HFO has been based on an export netback price… The gas price for power generation has been based on an LNG export netback price, taking into account the costs of liquefaction and transportation of the gas if it were exported, and amounts to $4.5/mn BTU” (MoE, 2010, pp11, 15).
Leaving out capital and other operating unit costs, converting these various prices into $/mn BTU in order to compare them gives:
• Natural Gas: $4.50/mn BTU
• Crude Oil: $14.70/mn BTU ($80/B)
• Gasoil: $13.80/mn BTU ($585/ton)
• Fuel Oil: $2.90/mn BTU ($117/ton)
Because the forgone revenues from using crude oil and gasoil/diesel ($14.70, $13.80, respectively) are much higher than from using gas ($4.50) it is cheaper to use the latter in power generation. However, this conclusion does not apply to fuel oil, as $4.50 is higher than $2.90. The MoE report does not indicate whether including capital and other operating unit costs would tilt the balance in favor of gas. To circumvent the possibility of a consequent surplus of fuel oil that cannot be exported, which amounts to zero price thus making it even cheaper, the MoE report recommends the conversion of heavy fuel oil into exportable lighter products (p18).
In addition to fixed and other operating unit costs, the ranking in IEA-Iraq is also based on the ‘resource cost’ of each fuel. It stipulates that “using international oil and gas prices and considering the main generation technologies and fuels available in Iraq; gas-fired CCGTs emerge as the lowest cost base-load technology… for plants operating only at peak periods, gas-fired GTs are the most economic at international fuel prices, due to their lower capital costs,” noting that unlike gas and steam turbines, which use multiple fuels, CCGTs use gas only (p91). As for INES, available documents do not refer to independent economic analysis to pick the cheapest fuel. It seems that its call for substitution is based on MoE’s findings.
Three points are in order about the figures, assumptions, calculations, and conclusions in the three reports. The first concerns the accuracy of the figures used and the possibility of exporting the oil products or otherwise (ie exportability, which is the basis of the notion of ‘forgone’ revenues). Prices used for crude oil and gasoil in the 2010 MoE report are not very far from actual ‘world’ (Iraq-border) prices. For fuel oil and natural gas the situation is different. For fuel oil the netback price of $117/ton is much lower than a netback based on Singapore/Mediterranean spot price ($651/ton for gasoil and $481/ton for HFO for 2010 based on OPEC figures). The lower price used in MoE may signify the difficulty in exporting Iraqi fuel oil, given that, as the IEA notes “[Refining in Iraq] has a large surplus of heavy fuel oil for which it has no domestic use or export possibility.”
As for natural gas, in contrast to the $4.5/mn BTU LNG netback price used in MoE, Iraq’s average border price for possible exports of dry-gas/LNG to six destinations; calculated by the IEA (2012, p127), indicates an average netback price of $10.30/mn BTU for 2011. This higher netback price implies that the forgone revenues in using gas domestically are much higher than those assumed in MoE. However, even with the higher price, gas is still cheaper than crude oil and gasoil; however its premium to fuel oil widens. As for the economic analysis in IEA-Iraq, the report does not spell out the levels of ‘international’ fuel prices used in its calculations and rankings, especially that of natural gas and fuel oil. Furthermore, it does not dwell satisfactorily on the difficulty of exporting fuel oil.
Secondly, the economic evaluation (in MoE and IEA-Iraq) is carried out for power generation in isolation of other users. Consequently, the same recommendation for sweeping substitution could emerge were the same ranking to be considered for these other users. For instance, if the economics of industrial demand alone were considered then gas could also come out as the cheapest fuel for industry. And so on for other users; leading, especially under a regime of universal low subsidized prices, to generalized shortages. Under such a regime, and short of overall administrative physical allocation or assuming unrealistic abundance of gas (as MoE seems to imply, p9), it is difficult to ensure the gas requirements of power generation against other users. Generally, in order to ensure availability of gas (and possibly other fuels) for power generation and other users, each use needs to be considered within a general balance of supply and demand (of gas, and possibly other fuels) using prices to effect equilibrium as set out by this author in an earlier MEES Op-Ed (MEES, 14 March). This economic balancing, ie equilibrium pricing mechanism, rather than MoE’s suggestion to largely avoid future exports (p16), is a better way to avoid possible future shortages. It is worth noting that although INES and IEA-Iraq do include overall balances of demand and supply, throughout the projection period (see table), these balances are drawn up without apparent equilibrating price mechanisms.
Iraqi Gas: Supply And Demand (Mn Cfd)
|Actual||2019||2030||Medium Scenario||Central Scenario|
|Crude Oil Output (mn b/d)||2.9||12.5||8.8||9.2||5.7||7.5|
|Domestic Gas Demand||1,062||3,331||7,206||3,150||6,364|
|of which for Power-Generation||625||2,680||4,180||1,879||3,855|
In conclusion, in a situation where the supply of gas is limited and there are competing demands, the target of 86-92% gas-fired power generation (Figure 1 above) by 2030 could turn out to be unsustainable.
Thirdly, the three reports vary widely in the assumed levels of future production of oil, availability of associated/non-associated gas, required gas for power generation, and possible surplus/deficit (exports/imports). The below table summarizes the figures.
For 2019, crude oil output projections range from IEA-Iraq’s 5.7mn b/d to MoE’s unrealistic, and presently abandoned, target of 12.5mn b/d. The variation is lower for 2030, but still tangible. Associated gas projections vary accordingly. On the demand side, MoE projects power generation requirement for gas in 2030 at 4,180mn cfd. By contrast, INES’ medium scenario estimates power generation requirement at 3,855mn cfd for the same year. Total demand (power, industrial, and retail) amounts to 7,206mn cfd. Compared to a forecast gas supply of 7,037mn cfd, this leaves a deficit of 169mn cfd in 2030. IEA-Iraq’s central scenario includes overall demand and supply figures for natural gas without specifying the demand by power generation. In 2030, overall demand amounts to 6,364mn cfd and supply 7,934mn cfd leaving a surplus of 1,570mn cfd for export.
These widely varying projections create a great deal of uncertainty about future demand and availability of associated and non-associated gas.
• Natural gas is technologically and environmentally superior to oil as fuel in power generation. On economic grounds, however, although it is cheaper than crude oil and gasoil/diesel, the comparison is not clear-cut versus fuel oil.
• Given uncertainty about future availability of natural gas, on the one hand, and possible tight balance of total demands (of all users) for and supply of gas, on the other, the target of 86-92% gas-fired power generation, by 2030, could turn out to be unsustainable.
• Together with surplus of possibly un-exportable fuel oil, this state of affairs requires a mix of fuels rather than near-dependence on one fuel in power generation. Therefore, a flexible system of generation that can shift from one fuel to another is better than a rigid one. A mitigating measure can be implemented through the choice of technologies that accept natural gas as well as other fuels, especially fuel oil.
*Dr. Merza had worked for the Iraqi Ministries of Oil and Planning and for the United Nations Department of Economic and Social Affairs, in the Middle East and North Africa. [email protected]