Bring it on home: The long-term focus is switching to maintaining a steady supply of gas for domestic use

Signs of a shift in Qatar’s energy policy have been evident over the past two years. As the moratorium on the North Field continues, the government is turning its attention to domestic requirements, eager to avoid the fate of other regional liquefied natural gas (LNG) producers that have had to begin importing gas. The $10.3bn Barzan gas project, owned by Qatar Petroleum (93%) and ExxonMobil (7%) and operated by RasGas, is a clear signal that Doha is looking to focus on domestic demand over the coming years.

LONG-TERM NEEDS: Since Qatar reached its target of producing 77m tonnes of LNG at the end of 2010, the government has begun to turn its attention away from the monetisation of reserves through LNG exports towards meeting long-term domestic gas needs. In early 2010, for example, the then-minister of energy, Abdullah Al Attiyah, told the LNG Review, “We need the gas. We have to give domestic supply priority.”

The first steps in this direction were taken with the Al Khaleej project, a joint venture between Qatar Petroleum and ExxonMobil, the second phase of which came on-stream in May 2010. The project has the capacity to deliver 2bn cu feet of sales gas per day, with customers including the Ras Laffan Power Company, Qatar Power Company, Oryx GTL and Ras Laffan Olefins Company, as well as customers in Mesaieed Industrial City.

However, with the government intent on meeting the targets of Qatar National Vision 2030, and the requirements for hosting the 2022 FIFA World Cup, there is a realisation that more gas will be required to power this expansion. As such, the government has committed to the Barzan project, first discussed in 2007 and subsequently delayed to take advantage of advantageous construction costs. The project, which will be completed in two phases, trains 1 and 2, should be able to deliver a total of 1.4bn cu feet of sales gas per day by 2015, after Qatar Petroleum and ExxonMobil signed agreements confirming the project in January 2011. “Demand for energy in Qatar will continue to grow over the next decade as a new airport and seaport are built, as major initiatives are completed in the transport, health and education sectors, and new facilities are built in preparation for the World Cup,” Hamad Rashid Al Mohannadi, the managing director of RasGas, told OBG. “The Barzan gas project will be supplying natural gas to the expanding power generation infrastructure.”

PROJECT FINANCE: Barzan is dominating talk in the sector as the only ongoing development and the last sanctioned pre-moratorium project. It will be several years before its impact on the North Field becomes clear, suggesting that further allocations of gas for development are unlikely in the medium term.

Nonetheless, Barzan is already making waves, becoming the largest project finance deal in the world in 2011.

With strong government support in the form of a 93% stake held by Qatar Petroleum, investor confidence in the project seems strong and the offer was heavily oversubscribed when it closed, despite the current global economic climate. The project will be financed by up to 70% debt through a combination of commercial and Islamic bank facilities and export credit agencies. Some $3.3bn of the financing will come from an uncovered commercial bank facility, the largest uncovered tranche in Qatar’s project financing history.

However, it is not only the financing of the deal that is likely to prove complex. The project involves drilling 30 offshore wells and constructing two pipelines to transport the gas to facilities onshore at Ras Laffan Industrial City. The project will process gas into ethane, naphtha, methane and liquefied petroleum gas (LPG).

Qatar Petroleum is not only a majority stakeholder, but will also buy gas from the project under long-term sale and purchase agreements at a fixed price that will provide protection against price volatility in the market.

RAPID GROWTH: RasGas, the operator, and other officials have highlighted the supply of Barzan gas for electricity generation. Natural gas is already important for the utilities sector. According to a 2011 report by the Gulf Times, Qatar’s energy consumption grew by 61% between 2000 and 2009, at an annual rate of 5.5%, with power plants accounting for 52% of the domestic natural gas consumption and 9.8% of total production.

PLANNING AHEAD: With the economy growing by 19% in 2011 and plans in place for significant development and diversification, these trends are unlikely to change soon. While there is a surplus of 2500 MW in generation capacity, the government is still eager to cater for anticipated rapid growth in the next 10 years.

According to a report released by Beltone Financial in 2012, Qatar is likely to spend $20bn on power generation and water desalination over the next 20 years to meet the needs of its economic expansion. Commercial Bank Capital, the advisory, research and asset management arm of Qatar’s Commercial Bank, estimates that the country already has $16.8bn worth of power and water projects planned, $9bn of which will be in the power sector. This is likely to significantly increase Qatar’s natural gas consumption.

Nonetheless, Qatar is currently comfortable in power supply. As Jamal Al Khalaf, the executive managing director of Qatar Power Company, told OBG, “Currently Qatar produces an excess of 30% electricity and 9% water. This is good news for investors, who will be confident with the amount of power available.” As such, Barzan is also likely to provide feedstock to develop Qatar’s downstream industries, monetising the North Field’s reserves in a more indirect, but perhaps more sustainable manner. Indeed, with the global natural gas landscape changing dramatically in the past three years, the government has an increasing number of reasons to look inwards for the future use of its reserves.

As Wael Sawan, the executive vice-president and chairman of Qatar Shell, told OBG, “Three years ago you would have said the pressure on Qatar to produce gas was enormous. Developments in the natural gas industry have altered that equation.” Indeed, with the US shale gas development likely to position the country as a leading gas exporter, a rapid turnaround given that it was considered a key target for Qatari LNG exports a few years ago, the global LNG market is looking less conducive for further Qatari export production.

“The emergence of gas in other parts of the world is changing the global dynamics and landscape of the industry. The US, for instance, has plans to stop importing LNG and become an exporter,” Marjo Louw, the country president of Sasol Qatar, told OBG. This will be compounded by likely Australian capacity increases over the coming decade. As such, Doha’s ability to get the maximum value for its reserves in the international LNG market may be jeopardised over the coming years.

PETROCHEMICALS: Therefore, beyond the immediate concern of energy independence and the needs of power generation, the government is looking at how reserves from the North Field can be used to stimulate growth locally and bolster industrialisation. The main vehicle for this appears to be petrochemicals. The Platts’ composite petrochemicals price index narrowed to $330 above the price of Brent crude in December 2011, against $580 at the start of the year, suggesting the additional value in the industry compared to selling LNG (which is often tied to crude prices) has diminished. Still, the price has picked up in 2012 and the industry is likely to prove less volatile than the LNG market.

As such, Mohammed bin Saleh Al Sada, the minister of energy and industry, announced that the government is looking to more than double the country’s annual petrochemicals production by 2020. Indeed, Qatar aims to spend $25bn by 2020 to increase capacity from 9.2m tonnes to 23m tonnes. A major step was taken in this direction in December 2011 when Qatar Petroleum signed an agreement with Royal Dutch Shell for a $6.4bn petrochemicals plant, which will include the construction of a steam cracker, a 1.5m-tonne mono-ethylene glycol plant and a facility to turn out 300,000 tonnes a year of linear alpha olefins by 2017.

These developments suggest Qatar is currently satisfied with its LNG export production and is now turning its attention to the domestic market. With the Barzan project coming on-stream in 2015, the country will have a steady supply of domestic gas touching 4bn cu feet per day, more than enough to meet its power and industrial requirements over the next decade.