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

Qatar's race to LNG primacy|~|Qatar-LNG1.gif|~|Indonesians may end up pushing carts of imported Qatari gas.|~|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 ||**||Qatar Gas|~|Qatar-LNG2.gif|~|Qatar's Energy Minister, Abdullah bin Hamad Al Attiyah.|~|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.
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