Qatar's race to LNG primacy

Qatar is leaving other liquid natural gas exporters in the dust as it becomes the world's dominant player. A tiny country sitting on the planet's largest gas bubble.

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By  Nicholas Wilson Published  September 6, 2005

Sometime before the end of this year, perhaps as soon as next month, a major event will take place in the fast-growing liquefied natural gas (LNG) industry. Qatar, a small emirate in the Gulf, will overtake Indonesia as the world’s largest producer. It will be like a Formula One racing car passing a lumbering old lorry. By 2012, Qatar expects to produce more than three times Indonesia’s current output. Indonesia, for decades the dominant force in LNG, has lost much of its momentum. The radical re-organisation in recent years of Indonesia’s upstream production had unfortunate consequences for what was previously a well-functioning LNG business. The nation’s next major LNG project – Tangguh in Papua – has been much delayed. The original anticipation when its reserves were proved up in the latter half of the 1990s was that it might start up as early as 2003; it is now due to come on stream in 2008. Moreover, by today’s standards Tangguh will be relatively small – its two natural gas liquefaction trains will have combined production capacity of 7.6 million tonnes per annum (mtpa), about the same as one of the multiple mega-trains that Qatar is developing. Meanwhile, Arun, one of Indonesia’s two existing LNG complexes, is in terminal decline because of the depletion of the reserves in the field that supplies most of its gas. In July, Indonesia announced its intention to negotiate mid-term supply contracts with Qatar and Oman to help meet its long-term commitments to Japan, South Korea and Taiwan. Qatar, on the other hand, is in a period of phenomenal LNG growth. If all goes to plan – and most of the signs are that it should – by 2012 it will be producing 77.5 mtpa, an astonishing leap from last year’s 17.6 mtpa. Last year, Indonesia’s output was 24.4 mtpa. It is not just Indonesia that Qatar will see receding in its rear-view mirror. Malaysia and Algeria, the number two and number three LNG producers in 2004, have nothing like Qatar’s momentum. Malaysia, which for years has been a rising star of the LNG industry, would like to continue growing its LNG output but faces the constraint that it will first need to prove more gas reserves. With all its firmly proposed trains now operational, its output in 2004 was 20.2 mtpa. Debottlenecking will squeeze more capacity out of its existing plants, but without new trains the ceiling is likely to be around 26 mtpa. Last year, Algeria produced 18.8 mtpa, down from 21.0 mtpa in 2003. Its production capacity took a severe blow in January 2004 with the explosion at the Skikda complex on the Mediterranean coast; the 3 mtpa of lost capacity will be more than offset by a new 4 mtpa train – but that is unlikely to come on stream before 2007. The nation’s next major LNG scheme will be the much-delayed 4 mtpa Gassi Touil project, not due on stream until mid-2009. Still on the starting grid are two nations which, though they have huge reserves of natural gas, have been slow to grasp the opportunities presented by the metamorphosis that the LNG industry has been undergoing during the past five years: Russia and Iran. Russia, Iran and Qatar are the world’s three largest holders of natural reserves and it is interesting to compare their vital statistics: * Russia, which has 150 million people living on a land area of 17 million square kilometres, has proved gas reserves of 48,000 bcm (27% of the world’s total); * Iran, with 65 million people on a area of 1.6 million square kilometres, has 28,000 bcm (15%); * Qatar, with around 600,000 people (two-thirds of whom are immigrants and ex-pats) living on an area of just 11,000 square kilometres, has 26,000 bcm (14%). Almost all this gas is in the world’s largest non-associated gas field: the North Field in the Gulf. In an increasingly gas-hungry world, this lucky accident of geology and geography gives Qatar a geopolitical importance that belies its size. But geology and geography are only part of the story. Amazingly, Russia’s Gazprom, the world’s largest gas producer by far, still has no firm involvement in LNG. It has been talking to numerous western energy majors about co-operating in LNG development but has yet to sign anything more binding than a memorandum of understanding. Ironically, Gazprom has no involvement in Russia’s only LNG development to date: the environmentally controversial Sakhalin Energy project on the far eastern island of Sakhalin. It has been in talks with Shell to take a substantial stake, but nothing definite has yet been agreed (and recently announced cost over-runs of US $10 billion will not make reaching agreement any easier). Meanwhile, Iran, which at one time had four proposals for LNG development, has yet to construct any of them. It has been looking enviously across the Gulf at Qatar’s LNG successes, and is concerned that it will lose out on its share of the gas in the huge undersea gas formation that it shares with Qatar (what the Qataris call the North Field is part of the same geological structure that the Iranians call South Pars). So why is it that Qatar is doing so well in developing its LNG industry, while others around it are struggling? One factor, of course, is that it has plenty of gas – cheap to produce and with plenty of liquids to help project economics. But so do Iran and Russia. Another major factor has been the way that the nation has developed politically over the past decade. In June 1995, the then ageing emir, Sheikh Khalifah bin Hamad Al Thani, left Qatar for a holiday in Switzerland. His son Hamad had carefully prepared the ground to assume power while his father was away. Educated at Sandhurst and Cambridge in the UK, Sheikh Hamad went on to declare a series of social and political reforms that, in a remarkably short time, have transformed Qatar, giving it wealth and clout out of all proportion to its size. Crucially, Qatar went out of its way to co-operate with the energy majors, notably ExxonMobil and Total, convincing them to invest billions of dollars in developing the North Field. According to one senior executive, ExxonMobil now has more capital invested in Qatar than in any country outside the US. More recently, Qatar has attracted other energy majors, such as ConocoPhillips, which has invested in Qatargas 3, and Shell, which is involved in the new Qatargas 4 joint venture. Qatar has also managed to attract investment from Japanese and South Korean companies. A third factor has been Qatar’s attitude to planning. An hour’s drive north from Doha it has established a huge industrial area called Ras Laffan Industrial City, with its own large port and utility infrastructure. It is here – in a sprawl of pipes, breakwaters, stacks, cranes and desert – that the nation is constructing one of the largest concentrations of industry on earth. Along the way, Qatar has been responsible for major LNG innovations. Train three at RasGas (II), commissioned early in 2004, is the largest ever constructed. But its 4.8 mtpa capacity will be dwarfed by the mega-trains that the nation is planning for its later projects. Each will have production capacity of close to 8 mtpa. Qatar’s ambitions have also led to a sea change in LNG shipping. Last year, Qatar formed a shipping operation called Qatar Gas Transport Company (QGTC), which is in the process of ordering more than 60 LNG carriers, many of which will be enormous 215,000 cubic metre (cm) Q-Flex or 260,000 cm QMax vessels. Today’s biggest LNG ships have capacities of around 150,000 cm. So what constraints could Qatar face to its development plans? Well, such is the scale of the construction that will be going on over the coming five years that there are concerns as to whether the nation will be able to manage the resources, logistics and manpower that will be required. Along with its hugely ambitious plans for LNG, Qatar is working on several major gas-to-liquids (GTL) complexes, as well as chemical, petrochemical and other industrial projects. In April this year, Qatar’s Energy Minister, Abdullah bin Hamad Al Attiyah, announced that because of such concerns, his nation was applying a brake to further LNG development for the time being. “We are very happy with [current production] and we don’t want to create any logistical problems with contractors. After 2012, then we will look again at what should come next.” Soon afterwards, the minister announced that three major proposed GTL projects were to be put on hold because of concerns over logistics, and over the rate at which gas could be produced from the North Field. Before that, Qatar was working not just on becoming the world’s biggest LNG exporter but also “the world’s GTL capital”. While the western partners in these projects may find this slowdown disappointing, Qataris will hardly be wringing their hands. If Qatar is not already the richest nation in the world on a per capita basis, it soon will be – thanks largely to its turbocharged development of natural gas.

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