A boon to U.S. natural-gas supply

Construction is now under way on the new QatarGas IV project, to produce and supply liquefied natural gas (LNG) to the U.S. market for 25 years beginning in 2010.

The deal, signed on July 13 with Royal Dutch/Shell, is the latest in a series of joint venture and sale-and-purchase agreements aimed at converting Qatar’s massive gas reserves into cash. Soaring global consumption of natural gas has encouraged international oil companies to invest tens of billions of dollars. For the West, such investment provides an alternative source of energy supply, away from Russia and Iran. For Qatar, it generates huge wealth, underpins economic diversification and boosts its diplomatic clout.

Qatar holds the world’s third largest gas reserves, after Russia and Iran. Natural gas has been the architect of its growing prosperity since the turn of this century and is expected to overtake crude oil as the principal contributor to GDP by 2010:

• In energy terms, Qatar’s gas reserves of 910 trillion cubic feet in the North Field — the largest single reservoir of non-associated gas in the world —- are equivalent to over 164 billion barrels of crude oil, more than Kuwait’s 90 billion and even the United Arab Emirates’ reserves of 160 billion barrels.

• At current and anticipated rates of production, these reserves are expected to last more than 300 years, whereas Qatar’s crude oil is expected to last only about 20 years.

Gas opening

In the early 1990s, while oil production was plummeting, Qatar denationalized its energy sector and invited foreign investors to invest in oil and gas fields:

They proved a magnet for oil companies to invest more than $60 billion during the last 12 years in oil, gas and petrochemical industries, bringing in their latest technology to explore for oil and gas and produce under production-sharing agreements.

Qatar’s oil reserves have soared from 3.7 billion barrels in 1997 to 15.2 billion now. Oil production has risen from around 400,000 barrels per day (b/d) in 1997 to 840,000 b/d now, and should increase to 1.05 million b/d by 2010.
In 2006, Qatar overtook Indonesia as the world’s largest exporter of LNG, with exports reaching 31 million metric tons a year (t/y).

LNG projects

QatarGas and RasGas are the key components of the country’s gas strategy. Together, the two projects are expected to increase production to 80.4 million t/y by 2012:

• QatarGas started operations in 1997 as a three-train project and is now known as QatarGas I. It is 65 percent owned by Qatar Petroleum (QP), 10 percent each by ExxonMobil and Total and 7.5 percent each by Mitsui and Marubeni.
• QatarGas II is designed to produce LNG for the U.K. market. The first train is scheduled to go on stream in 2008 and the second train in 2009. The first train is 70 percent owned by QP and the remainder by ExxonMobil, while their share-split in the second train has been diluted to accommodate a stake for Total.

• QatarGas III is a single-train project, designed to produce for the U.S. market. The project is expected to go on stream in 2010. It is 70 percent owned by QP and 30 percent by ConocoPhillips.

• In July, Royal Dutch/Shell and QP set up QatarGas IV to produce LNG. Like all foreign partners in Qatari ventures, Shell has signed a sale-and-purchase agreement to buy the entire production and sell it in North America and Europe. The project is expected to go on stream in 2011.

• RasGas started as a two-train LNG company in 1999. The company is basically 70 percent owned by QP and 30 percent by ExxonMobil and is now called RasGas I.

• In 2001, QP and ExxonMobil set up RasGas II, which now comprises three trains.

• In 2005, construction began on RasGas III, whose entire output is dedicated to the U.S. market. The first train will start up in 2008 and the second in 2009.

Diversified exports

In addition to exporting gas in liquid form, Qatar has started exporting by pipeline as well as converting it into gas-to-liquids (GTL):

• In March, Qatar started pumping gas to Abu Dhabi through the 350-kilometer underwater pipeline operated by Dolphin Energy, which is 51 percent owned by Abu Dhabi’s Mubadala and 24.5 percent each by Occidental and Total. The Dolphin project is the region’s first gas pipeline.

• A similar project to transport Qatari gas to Kuwait was blocked by Saudi Arabia, which refused to allow the pipeline to traverse its territorial waters. However, Qatar and Bahrain plan to build a similar pipeline in their waters to supply Qatari gas to Manama.

• Qatar’s first GTL project, Oryx GTL, has gone on stream. The project, with South Africa’s Sasol, is designed to produce 24,000 b/d of “green” diesel, 9,000 b/d of naphtha and 1,000 b/d of liquefied petroleum gas.

• Shell is planning to build a GTL plant to produce 140,000 b/d of GTL products, but ExxonMobil and ConocoPhillips have dropped their plans to build GTL plants, due to the rising costs of construction.

Lately, the government has imposed a hiatus on new gas projects until 2012. The decision reflects a lurking fear that it may have gone too far and too fast to exploit the reserves. After having built a booming economy, based on gas, Doha is now reassessing the prudent rate of extraction.

Gas benefits

Benefits accruing from the development of gas span both economic and political spheres:

• Qatar is one of the fastest-growing economies in the world, with GDP growth estimated to average 7.5 percent a year during the last five years.

• GDP per capita has risen to $57,350 in 2006 — also one of the highest rates in the world.

• The arrival of gas onshore has triggered the establishment of a spate of ancillary industries, especially petrochemical, fertilizers and aluminum, in which foreign partners have invested tens of billions of dollars. It has also encouraged the establishment of several medium and small industries, based on locally available petrochemical products.

• Politically, the emirate has used gas to strengthen ties with the United States, Europe and Japan by allowing companies from these countries stakes in energy projects.

Qatar has recently been using its financial clout to spread its influence among Muslim nations, such as Yemen, Lebanon, Palestine and Pakistan.

Political risks

Qatar’s maverick policies and growing clout have aroused jealousies in the region:

• Saudi Arabia, which views itself as the foremost Gulf power, is especially sore at Qatar’s growing U.S. military ties and has effectively blocked its ambitious plan to build a trans-Gulf gas pipeline with its nodal point in Qatar.

• Qatar shares a part of the North Field with Iran, which also views the U.S. military bases in the emirate as a threat to its ambitions in the region.

Oxford Analytica is an international consulting firm providing strategic analysis on world events for business and government leaders. See www.oxan.com.