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Full steam ahead

Written by  Author |   Wed, 21 March 2012 09:09

Qatar is increasing oil and natural gas investments and production to sustain economic growth

Having the third largest proven reserves of natural gas in the world after Russia and Iran, Qatar is cooking! The country has a total of 894trillion cubic feet (cf) of natural gas, according to BP, with reserves concentrated in the North Gas field, the largest non-associated gas reservoir in the world. At current rates of production, these reserves will last for over 200 years. This reserve-to-production ratio will decline, given planned production increases over the next few years.

Oil and gas production is now close to the currently planned capacity and Qatar is now leading the massive worldwide increase in liquefied natural gas (LNG) production, after the country pressing ahead with expanding its LNG production capacity which has now reached 77million tons per year (t/y) earlier in 2011, up from 30 million t/y in 2008. The final LNG "super-train" (with a capacity of 7.8 million t/y) came on stream earlier this year.

Qatar's recent rapid economic growth has benefited from the success of its long term oil and gas investment program, which has greatly raised export revenues. In terms of GDP per capita, Qatar is the wealthiest country in the GCC thanks to high level of oil and gas output relative to the small population. According to the International Monetary Fund (IMF), Qatar's oil & gas sector is set to grow significantly this year, at a forecasted 29.5% rate following a 22.7% increase in 2010. The oil and gas sectors accounted for about 56% of GDP in 2010.

Gas production has risen 21% per year

Qatar has only recently discovered the full extent of its natural gas reserves. The offshore North Field was originally discovered in 1971, but its proven reserves did not rise above 300 trillion cf until 1995. It now accounts for around 99% of Qatar's gas reserves. The remaining proven reserves are associated gas as they are extracted from oil fields.

A Qatar National Bank (QNB) report indicates that the total natural gas production in Qatar has risen at 21% per year from 37million tons/year (t/y) in 2006 to 86 million t/y in 2010. In 2010, around 65% of the gas was allocated to LNG production. It is expected that this proportion will remain relatively unchanged in 2012 as Qatar ramps up production through LNG trains and also through pipeline gas for export and domestic use.

According to QNB, five new LNG trains have been commissioned since 2008. There are a number of foreign companies which are involved as joint-venture partners in the various LNG projects. For example, ExxonMobil is a prominent stakeholder in Qatargas and RasGas. It holds a 10% stake in Qatargas I, a 25% stake in RasGas, as well as stakes in other projects. LNG exports are sold through sales and purchase agreements (SPAs) that have been contracted with companies in a number of countries. The purchasing companies often take a small equity stake in the trains providing their LNG. Korea Gas Corporation, the state natural gas company of South Korea, has a 5% stake in RasGas.

The LNG market was initially characterized by long-term contracts, which locked the buyer and seller in at an agreed price. This was to cover the high investment costs required to construct LNG production, transport and regasification facilities. In recent years, more LNG infrastructure has been constructed around the world. This has included storage facilities, such as the Fluxys terminal in Zeebruge, Belgium, which can store about 0.14 million tons of LNG (about three shiploads), and a terminal under construction in Singapore with 0.25 million tons of storage capacity. The expansion of LNG infrastructure has increased the scope for flexibility in LNG contracts and allowing for a shift from long-term to medium-term agreements.

The vast majority of Qatar's LNG is still sold through SPAs, rather than on- the-spot LNG markets. However, the SPAs now include clauses with more price flexibility that allow for cargoes to be diverted if the buyer is oversupplied. This flexibility has helped Qatar to explore new markets and investment opportunities in regasification terminals, which can receive Qatar's exports. For example, when the US became oversupplied with LNG owing to an increase in supply of shale gas, Qatar was able to divert exports to a number of countries including Japan and China. Demand from these countries has been robust owing to rapid economic growth in China and the devastating tsunami in Japan which led to the country cutting back on its nuclear power production. Qatar announced in April 2011 that it would sell an additional 4 million tons of LNG to Japan over the next twelve months. Qatar remains one of Japan's major LNG suppliers, having shipped 7.63 million tons out of a total of 70 million tons imported by Japan in 2010, as per the Economist Intelligence Unit (EIU). Qatar has also entered new markets, signing a long-term agreement with Argentina and sending LNG cargoes to Brazil. Qatar is looking at other potential export markets in South America and the Caribbean. The top four LNG destinations in 2010 were:

  • UK (10.2 million tons)
  • India (7.7 million tons)
  • South Korea (7.5 million tons)
  • Japan (7.63 million tons)

Qatar also exports the equivalent of 15 million t/y of natural gas through the Dolphin project pipeline to the UAE. QNB Capital estimates that a further 24% of raw natural gas production will go towards other uses, including:

  • Power generation
  • Feedstock for petrochemical and fertilizer plants
  • GTL projects, which chemically convert natural gas into fuel that is liquid at normal temperatures
  • Household cooking gas

According to a Bank Audi report, State-owned energy company Qatar Petroleum (QP) announced in April 2011 plans to raise $5 billion to part finance the Barzan Gas project, which aims at producing 1.4 billion cubic feet per day of gas. Envisioned in 2005 and 93% owned by QP and 7% by ExxonMobil of the US, Barzan Gas is one of six projects that had been put on hold during the 2008-09 global economic recession. Most of the gas would be supplied to power stations, while the petrochemicals and other by-products would both be sold locally and exported. The resumption of the project is due to the rapidly rising demand for gas by domestic industries.

Investing in gas-to-liquids (GTL) technology

On the other hand, as Bank Audi's report also mentions, in order to diversify the energy sector, the government is investing in gas-to-liquids (GTL) technology, which turns gas into high value clean liquid fuels for export. A major project in that field is the Pearl GTL developed by Qatar Petroleum and Shell at a cost of around $18 billion. At full capacity, Pearl is expected to produce 1.6 billion cubic feet of gas per day from Qatar's North Field, which would be processed to deliver 120,000 barrels per day of condensate, liquefied petroleum gas and ethane, and 140,000 barrels per day of high quality gas-to-liquids fuels and lubricants. Shell has recently shipped the first cargo of gasoil manufactured from natural gas at Pearl GTL as production from the first unit has started. The plant would reach full production capacity by the middle of 2012.

Oil production to rise to meet domestic and international demand

Qatar's proven oil and condensates reserves were estimated at 26 billion barrels at the end of 2010, according to BP. This is 1.9% of proven world oil reserves and ranks Qatar 13th globally. Total crude oil, condensates and NGL production in 2010 were around 1.6 million b/d, of which 800,000 b/d was crude oil and the remainder condensates and NGL. This equates to 1.7% of world oil production in 2010, according to BP. At this level of production, Qatar's total proven reserves of crude oil and condensates are expected to last for around 45 years.

According to the EIU (Economist Intelligence Unit), oil production was projected to reach 823 thousand barrels per day (b/d) in 2011 compared to 805 thousand b/d in 2010. Oil exports account for about 90% of oil production, as consumption of oil in Qatar remains limited compared to gas, standing at a little more than 100 thousand barrels per day. The expansion at the Al Shaheen oilfield is set to contribute to increase crude production capacity in the medium term, though production would remain constrained by OPEC quotas.

Qatar has one onshore field at Dukhan, which currently produces around 250,000 b/d of crude oil. The remainder of crude oil production is from offshore fields. Owing to OPEC's crude oil production targets (condensates are not subject to the targets), Qatar is currently producing well below its potential capacity of just over 1million b/d of crude oil. In its 2010-14 development plan, QP budgeted $6.6 billion for investment in crude oil projects. This investment has and will continue to boost production at some fields, such as Al Shaheen, offsetting declining production at some of the older fields, such as Dukhan.

Around 150,000 b/d of total crude oil production is used domestically and the remainder is exported, mainly to East Asia. In the first half of 2011, production has averaged 809,000 b/d, 1% higher than during 2010. Production in most OPEC member countries has been rising slowly and is slightly above OPEC output targets. This has occurred as world demand for oil has risen and prices have been at higher levels, encouraging producers to increase output levels. It is expected that oil prices will remain high and world oil demand will continue expanding slowly, and so crude oil production will rise from an average of 809,000 b/d in 2011 to 820,000 b/d in 2012.

International affiliations

According to QNB, Qatar is also expanding its involvement in the international oil and gas sector. Qatar Petroleum International (QPI) has been established to make strategic investments across the energy value chain around the globe. It is a subsidiary of QP and manages a multi-billion dollar international portfolio of upstream and downstream investments. Various Memoranda of Understanding (MoU) have been signed by QPI around the world with national and international oil companies and governments to explore potential energy investment opportunities. Its current holdings and activities include:

  • A joint-venture LNG project in the Yamal Peninsula, eastern Russia, together with Novatek and Gazprom
  • Stakes in LNG regasification terminals, such as South Hook in the UK, Adriatic in Italy, and Golden Pass in the US
  • Petrochemical joint-ventures, including one with Shell in Singapore, the Long Son project in Vietnam and a planned complex in China
  • A stake in oil exploration in Mauritania, together with Total
  • Bids along with Japanese partners for two independent power projects (IPPs) in Oman
  • Qatar has proven reserves and proven its success thanks not only to these natural resources but also to the country's human resources and strong leadership to back it up. This super train is running full steam ahead.
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