Qatar better off than its GCC peers

The country's dependence and focus on gas production, steady economic growth, quest for new export markets and a planned strategy of economic diversification places it a notch above its GCC

Qatar’s domestic gas consumption grew by 80% in the last five years.
Qatar’s domestic gas consumption grew by 80% in the last five years.

With proven gas reserves of over 25tn cubic metres (tcm), Qatar – the world’s largest LNG exporter – has arguably been better insulated from the economic shocks that its GCC peers have been reeling from due to the low crude oil prices.

In spite of the slow growth and sluggish outlook for the global economy, the energy sector-powered Qatari economy has performed reasonably well. The country’s real GDP grew by 4.7% year-on-year in Q2 2015, according to the latest data released by the Ministry of Development Planning and Statistics, compared with 4% in 2014, and is expected to further accelerate to 6.4% in the 2016-17 fiscal year.

However, despite the steady economic outlook, the hydrocarbon sector’s contribution to the GDP growth in Q2 was nominal, with its own GDP growing by just 0.9% year-on-year, as production “remained stable”. In a bid to increase its global LNG market share, as well as to cater to the rising domestic demand for gas, Qatar is seeking to ramp up production.

Gas production and exports

According to the ministry’s data, Qatar’s domestic gas consumption grew by 80% in the last five years, from 24.9bn cubic metres (bcm) in 2009 to 44.8bcm in 2014.

“The rise is driven by increasing demand for electricity and water, as electricity and water desalinisation sectors account for most of the natural gas consumption in Qatar,” the Qatar National Bank’s (QNB) ‘economic commentary’ observes.

Qatar is heavily reliant on its ambitious Barzan gas project to boost production, which is slated to start operations ‘later this year’, according to RasGas, the owner and operator of the project.

The drilling platform to supply the Barzan Gas plant will be located 80km north-east of the Ras Laffan Industrial City.
RasGas says the project will be developed in two phases: Train 1, which came on stream in 2014, and Train 2. Together, the project is expected to supply around 57mn cubic metres (mcm) of gas per day.

“Much of this production will be directed to the power and water sector,” RasGas said in a recent statement.

When the Barzan gas project becomes fully operational, the total offshore production from all RasGas-operated facilities will reach around 311.48mcm per day (or 2 million barrels of oil), making the company the largest gas producer in Qatar.

“The Barzan project will meet Qatar’s growing domestic gas demand,” QNB estimates.
However, it is the North Field – the world’s largest natural gas reserve – that Qatar shares with Iran, which is crucial to the country’s goal of increasing gas production.

Qatar, which started gas production from the North Field in 1989, had also invited foreign players – the likes of Royal Dutch Shell, Total and Exxon Mobil – to invest in exploration and production from the zone that holds an estimated 37tn cubic metres of gas. However, ever since authorities placed a moratorium in 2005, fearing that the North Field’s reserves were being developed too quickly, production has fallen significantly.

Iran has, in the meantime, being boosting gas production from the South Pars (its side of the shared gas field), and experts suggest the Islamic Republic may have been producing more gas than Qatar, despite owning a much smaller portion of the gas bed. Iran, which has been systematically developing the South Pars in 24 phases, has only recently made public that it plans to hike daily output to 100mcm.

Iran’s Oil Minister Bijan Zangeneh has vowed to increase the country's natural gas production capacity to 1bcm per day “in four years' time”, a move that experts feel will considerably improve Iran’s fuel export capabilities and widen its market share.

“The lifting of sanctions on Iran will only accelerate the oversupply in the market, as Qatar races to maximise their advantage in the North Dome field. International oil companies will be very wary of engaging in Iran, but the mere threat of Iran accessing the technology to export LNG is likely to spur Qatar to exploit the field as quickly as possible,” Harry Miskin, an associate partner at Bell Pottinger Middle East, says.

Indeed, Qatar has slowly begun giving the green light to gas production projects in the North Field. The UAE-based Dolphin Energy, which had earlier said it is working on a project in Qatar’s North Field, has recently awarded an 18-year service and maintenance contract to Siemens.

With plans to start operations from the Barzan and the North Field projects, Qatar seems determined to boost its energy exports to customers, despite gas prices tumbling presently due to an “oversupply situation”.

“The key priority for Qatar – and the natural gas industry more broadly – should be encouraging demand diversification. Due to US shale and Australian LNG proximity to Asian markets, spot prices have already fallen drastically and research from Citi has estimated that, by 2018, the global market for LNG could be oversupplied by up to 28mn tonnes annually,” Miskin told Oil & Gas Middle East.

“Attempts to restrict competition and maintain market share look like they have failed. US shale producers are more resilient at current prices than many analysts predicted a year ago, and President Obama sees bringing Iran back into the international community as a cornerstone of his legacy. The only alternative is to start investing in creating additional demand for natural gas. In effect, producers need to start thinking about owning a smaller piece of a bigger pie,” he adds.

Qatar, which relies heavily on energy exports for its economy, has traditionally focussed on key Asian markets. Some estimates say that Asia accounts for about 70% of the country’s total fuel exports. The nation already is a major gas exporter to Japan and currently, in a major move, has tapped into energy-hungry Pakistan for supplying LNG.

Although reports say that no formal government-to-government deal has yet been inked, Pakistan is finalising steps to sign an official agreement with Qatar to import 600mcm per day, raising the initially planned import figure of 400mcm daily. Pakistan’s Petroleum Ministry officials have also said that since March this year two ships on a monthly basis, carrying about 85mcm per day volume of LNG, have been “offloading” in the South Asian country.

The export deal with Pakistan puts Qatar in a more comfortable position than its oil exports-reliant GCC peers, which are presently troubled by the low oil prices and locked in fierce competition with global rivals for markets. Industry players also believe that, unlike oil, the global demand for natural gas is already growing at 5% per annum, and has the potential of being significantly higher, as gas has emerged as a popular transport fuel in both developed and emerging economies.

Miskin offers his take: “Low prices will naturally spur R&D in the use of natural gas as a transport fuel, but there are areas where producers can be more proactive.”

“One idea that is interesting to consider is whether Qatar will use its holdings in Volkswagen to pressure the automotive maker into looking more seriously at natural gas-powered cars. For Volkswagen, currently in the midst of an emissions scandal, being at the forefront of a rollout of cleaner technology is one potential way to repair its damaged reputation. In Qatar, they have an obvious partner to make that happen.”

Economic diversification and the way forward

Despite its uncertain strategy regarding production from the North Field, where many believe Iran is maintaining a lead presently, Qatar still has significant sway over the global oil and gas industry.

As a reflection of Qatar’s growing global economic influence and diplomatic clout, the country’s former Minister of Energy and Deputy Prime Minister Abdullah Bin Hamad Al Attiyah has endeavoured to launch a think tank on energy in capital Doha in November. The think tank - tipped as the Middle East’s first - is ‘committed to the creation of knowledge and solutions critical to the future of the regional and international energy system’, a statement said.

Also, recently Qatar’s Energy Minister Mohammed bin Saleh Al Sada (who is also the alternate president of the OPEC Conference) made a conscious effort to pacify the fuel-producing nations, particularly the GCC neighbours, and restore the world’s confidence in their economies.

Al Sada said he believes that oil prices have “bottomed out” and that, come 2016, the only way it can go is up. He also noted that oil supply from non-OPEC members has been on the decline, a trend that he expects will continue in 2016. On the other hand, he said he expects demand for oil from OPEC countries will increase to 29.3-30.5mn barrels next year.

With economic growth, the Qatari economy, like all the other GCC economies such as Saudi Arabia, the UAE and Oman, speedily continues to diversify. The share of the non-hydrocarbon sector in Qatar’s GDP pie rose to 61.7% in Q2 2015 from 59.8% in the previous quarter, and is expected to grow further in Q3, Qatar’s Ministry of Development Planning and Statistics says in its report.

The non-hydrocarbon sector expanded by 9.1% year-on-year in Q2 2015, the report found, with financial services, construction and trade, hotels and restaurants, being the biggest contributors to the sector’s growth. Construction activity grew by 19.7% year-on-year on the back of ongoing infrastructure projects in the country.

“This suggests that Qatar is capable of weathering lower oil prices thanks to a favourable macroeconomic environment characterised by low inflation, large external surpluses and healthy fiscal balances,” the ministry statement read.

“Diversification has been high on the agenda for the Qatari government and really picked up pace in 2007-08. The country's sovereign wealth fund has a number of real estate and retail sector investments globally (e.g. a stake in Sainsbury's and ownership of Harrods),” Gaurav Sharma, a London-based financial writer and an independent oil markets analyst, told Oil & Gas Middle East.

“However, diversification also has a flipside with their stakes in commodities and mining firms set to book paper losses that could be as high as $10bn depending on where the share prices of Glencore, Agricultural Bank of China and Royal Dutch Shell end the financial year. Furthermore, the Qatar Investment Authority also has investments in beleaguered automaker Volkswagen,” he warned.

Although, economic diversification is a highly debated subject in the region, with some critics saying that it is the GCC governments’ eventual resort rather than a strategic decision, it is amply clear that the bloc will press ahead with it.

Qatar, in particular, will try to strike a fine balance between its hydrocarbon and non-hydrocarbon sectors. While on one hand, it is expected to increase its oil and gas production to earn steady revenues and maintain its status as the top LNG exporter in the world, it will simultaneously strengthen sectors such as services, real estate and construction, hospitality and tourism, on the other.

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