Qatar aims to achieve huge economies of scale

A small emirate with global ambitions, Qatar aims to achieve huge economies of scale that will give it a decisive lead in the world market for LNG and enable it to ride out price fluctuations and compete for supply contracts in Asia, Europe and the USA with equal facility, for decades ahead.
With their limited national reserves of crude oil running out fast, Doha’s economic strategists concluded some time ago that they had no choice but to pursue an unrelenting expansion of gas output -- especially given the cost and time required for new projects, and the fierce competition for supply contracts. Indeed, the argument over the dash for gas and the huge investments involved has been given as one reason why Emir Sheikh Hamad Bin Khalifa Al-Thani overthrew his father in 1995.

Qatar is benefiting from a dramatic surge in US and European demand for imported gas, triggered partly by the exhaustion of many North Sea deposits. This has created an unprecedented opportunity for new producers to secure a long-term market position, which Qatar’s leadership has well understood. Over the next six years, the annual gas import requirement of Europe is projected to rise by 50 mm tons, with American needs climbing by almost as much; a further 50 mm tpy will be needed by 2020.
Holding one of the world’s gas largest reserves, the North Field, and located mid-way between the Atlantic and Pacific, Qatar sees itself as uniquely positioned to meet this need.

Having initially developed an LNG industry on the back of Japanese and South Korean demand, the Gulf state is now trying to establish itself as one of the key suppliers to the USA and western Europe, particularly the UK, although substantial quantities will also go to Italy, Spain, France and neighbouring countries. Qatar’s need to develop an alternative source of revenue to replace oil, and its practical capacity to expand gas output, neatly coincide.
"We are eager to monetise the field as soon as possible," vice-chairman and managing director of Qatar Liquefied Gas Company (QatarGas) Faisal Suwaidi told.

By 2010 global demand for LNG is expected to roughly double, to some 250 mm tpy. Over this same six-year period Doha planners expect their own country’s output to grow even faster. At the end of the decade, Qatar Petroleum (QP)’s two LNG offshoots, QatarGas and Ras Laffan LNG Company (RasGas), will be producing a combined 60 mm tpy, catering for almost one-quarter of all world demand.
These production ambitions are underpinned by commercial reality. The past two years have seen QatarGas and RasGas sign deals for extra deliveries of almost 35 mm tpy. of LNG. QatarGas initially started production in 1996 on the back of a contract to supply Chubu Electric Power in Japan. RasGas started out on the basis of a deal to supply South Korea. But the companies’ more recent transactions have spread their future market base well beyond the Far East.

QatarGas signed up Spain’s Gas Natural as another customer for its first three production trains (QatarGas I) under a 1.5 mm tpy supply contract running through to 2012. Subsequently, it agreed a further 1.5 mm tpy contract with the Spanish group, running through to 2025. Suwaidi told it now hopes to extend the first contract over this period as well.
Then in June 2002 QatarGas reached agreement with ExxonMobil for the development of two further gas trains, each with a world record capacity of 7.8 mm tpy, to supply the UK -- which is emerging as a major potential customer as its domestic offshore reserves run down. This $ 11 bn project -- QatarGas II -- also includes the construction of a $ 1 bn terminal in Milford Haven, Wales, and the purchase of 16 large gas tanker ships.
In mid-2003, the company laid the basis for QatarGas III, with a deal to supply the USA market in joint venture with ConocoPhillips. This $ 5 bn development involves a further 7.8 mm tpy train and 11 large ships. GasGas is also pressing ahead. On 23 March it inaugurated a third production train, with a capacity of 4.7 mm tpy, to supply India’s Petronet LNG.

Knowing that it has limited oil but enormous gas reserves -- over 20 years the deal with ExxonMobil to supply the UK will only use up 2 %-3 % of the North Field - has persuaded Qatar to take a degree of risk that many competitor LNG producers might not have been able to live with. Yet this was not always the case.
Although the North Field was discovered in 1972, development of the LNG industry was slow. QatarGas only came on stream in 1996, making its first delivery to Japan in January 1997. The delay was partly caused by the difficulty of finding creditworthy foreign buyers who would commit themselves firmly to a project.
However, political factors were also an issue. Many people in Qatar, Suwaidi recalled, were unconvinced of the case for early development of the gas sector. They felt the country could continue to rely on oil and then just move into the gas business when it felt the need to build up an alternative revenue stream. They failed to appreciate the competitive nature of the international gas market.

Change came when Sheikh Hamad ousted his father as Emir in 1995. The new ruler knew that, with a number of rival producers around the world also developing gas reserves, Qatar needed to carve out its market space as soon as possible.
He gambled on committing $ 1 bn to development of an LNG port before any firm customers had been signed up. That gamble nearly failed as debts piled up when oil prices subsequently crashed, but it facilitated the confirmation of the early contracts, setting up the industry now emerging on a global scale.
Suwaidi sees the first QatarGas deal in Japan as crucial: "If we had missed Japan, then Korea would not have happened -- and then Europe would not have come."

Today, with only a tiny domestic market to service, and having already made the initial start-up investments, Qatar is able to add on capacity, in the form of extra gas trains and tanker ships, at much less cost than brand new projects would require.
It thus enjoys acritical lead, in economies of scale. "This will enable us to compete in every market around the globe," Suwaidi argued.
The aim, he explained, was to push forward both technology and the scale of operations, to extract the maximum degree of competitive clout. Not only will the new gas trains be the largest in the world, but the new tankers, at more than 200,000 tons each, are more than 25 % larger than the biggest LNG carriers now in operation.

LNG is of course a standard product. But with the economies that size can bring, Qatar can adjust its commercial offer to the demands of different customers.
"We know that there are different countries around the world. They have different needs and call for different pricing formulae," Suwaidi told. "It’s technology and innovativeness in the marketing front that will differentiate us."
Certainly, the up front costs of getting to this market-leading position will be massive -- Suwaidi said he planned on the basis of $ 5 bn for each new gas train and associated tanker capacity -- while the volatile state of world energy prices poses risks that cannot be exactly forecast. But the international oil companies that are QP’s partners in QatarGas and RasGas are accustomed to living with this. Moreover, Suwaidi pointed out, at least the demand for LNG is nailed down in long-term contracts, and is thus a lot more stable than for oil.

Indeed, QatarGas has been able to develop all its projects on a project financing basis, without the backing of any formal sovereign guarantee. Of course, given the industry’s importance to Qatar and the role of the parastatal QP as majority shareholder, financiers may have concluded that the government would never allow the company or any of its projects to fail. It benefits from Qatar’s good sovereign rating, of A+ with Standard & Poor’s.
But the fact remains: it has proved possible to mobilise hefty lumps of development capital on a commercial basis.

Meanwhile, on a wider canvas Qatar is seeking to diversify its investment in gas -- for example, through direct involvement in the Milford Haven terminal. But it is selective in the USA, where it will leave ConocoPhillips to take responsibility for import facilities.
The Dolphin project, to pipe gas to the UAE, is already well advanced. Italy’s Saipem has been chosen as the main engineering contractor. Planning is also under way for the Al-Khaleej project, to pipe gas to Kuwait.
Gas-to-liquids (GTL) technology is another means of spreading the market net (see box). One project, with Sasol Chevron, is already under construction. In March, the first well was drilled on a second project, with Shell.