Qatar streamlines the LNG sector

With global oil and gas prices remaining depressed in mid-2016, impacting government revenues and production, state-owned Qatar Petroleum (QP) is now rolling out an ambitious restructuring programme that aims to reduce its domestic workforce and expand into international energy markets, with a focus on production. Restructuring and diversification are expected to improve efficiency, further mature QP’s existing asset portfolio and help to retain domestic oil and gas resources. This will in turn ensure smoother and more sustainable longterm growth within the company and the wider Qatari economy, in addition to presenting numerous opportunities to invest in international markets at their low points, a move which has proved highly profitable for the state in the past.

Falling Revenues

Despite being one of the smallest contributing members of the Organisation of Petroleum Exporting Countries – with crude production falling from 830,000 barrels per day (bpd) in October 2010 to an estimated 650,000 bpd in May 2015 – Qatar still plays a critical role in international energy markets. The country is the largest supplier of liquefied natural gas (LNG) in the world, with QP ranking as the largest LNG producer globally, and its international energy portfolio has increased significantly over the past decade.

In recent years, however, energy revenues have declined as oil prices fell from a high of close to $115 per barrel in June 2014 to a low of around $28 in early 2016. Qatar’s budget surplus is projected to drop from 10.8% of GDP in 2014 to 1.6% in 2015 and 2.2% in 2016 as a result, while hydrocarbons revenues were estimated to have fallen by 33% in 2015, according to local daily The Peninsula.

The impact of lower oil and gas prices on the state’s annual budget was also significant. Upon unveiling its 2016 budget in late December 2015, the state forecast a QR46.5bn ($12.8bn) deficit, its first deficit in 15 years. According to the Ministry of Finance, total government revenues, of which oil and gas revenues comprise roughly half, are expected to reach QR156bn ($42.8bn) in 2016, against QR202.5bn ($55.6bn) in expenditure, based on a projected oil price of $48 per barrel.

Restructuring

Although QP does not release financial statements, the company’s restructuring process, launched in early 2015, demonstrates the extent to which it has been hurt by falling oil and gas prices. Aimed at improving efficiency, reducing overheads and diversifying its markets and assets, the restructuring saw QP roll out sweeping layoffs, divest non-core businesses and re-tailor its focus to new international assets and markets.

Competition among international and national oil companies is heating up, meaning the state may need to expand its international reach in order to capitalise on new opportunities.

At the same time, ongoing energy market turmoil has created an extremely favourable situation for companies with the liquidity to invest in distressed assets, as was the case in 2008 and 2009 when the state’s sovereign wealth fund, Qatar Investment Authority, was able to snap up high-end real estate and stakes in blue-chip European companies at low prices (see Trade & Investment chapter).

The restructuring process first entailed QP taking over operations at Qatar Petroleum International (QPI), which was formed in 2007 to act as the government’s international oil investment arm. In recent years QPI has launched more than 10 separate joint ventures in the US, the UK, Italy, Singapore and Egypt, among other countries, although the size of its international assets has not been publicly disclosed. QPI had been actively expanding its portfolio in recent years, and in January 2014 the company purchased a 23% stake in Parque das Conchas, off the coast of Brazil, from Shell for an estimated $1bn. The oilfield is one of the largest in Brazil, consisting of five connected fields. Under the terms of the deal, Shell will continue to operate the project, which produces 50,000 bpd.

In May 2014 QP moved to acquire new assets in Canada, when CQ Energy Canada Partnership (CQE), a joint venture between Canadian firm Centrica and QPI, signed a $38.3m deal to acquire a package of natural gas assets in the Foothills region of Alberta from Shell Canada Energy. Under the contract, Shell will receive CQE’s interest in Alberta’s Burnt Timber gas processing plant and its interest in the Waterton undeveloped lands in South-west Alberta. According to CQE estimates, the Foothills assets contain 90bn standard cu feet (scf) of natural gas and will increase the partnership’s regional production by approximately 24m scf per day.

In late June 2016 QP announced plans to takeover Qatar International Petroleum Marketing Company (Tasweeq) by the end of 2016. Tasweeq currently operates as an independent government firm engaged in market research and marketing.

Layoffs

On announcing the integration of QPI into QP in January 2015, QPI officials issued a statement saying the company’s management and employees would continue to run day-to-day operations; however, media soon reported that QP was planning to cut its 14,000-strong workforce in the coming months by as much as 30% in some areas, in addition to restructuring a number of departments. In June 2015 local press – including The Peninsula and Doha News – widely reported mass layoffs across the company, although details as to the total number of redundancies and the departments affected were not made public. Additionally, the company exited all of its non-core businesses, including insurance, catering and service companies. Following these moves, QP made an announcement in late June 2015 that it had completed its restructuring process.

US Market

Although QP officials have yet to announce which markets they intend to focus on, the company is in the midst of expanding its investments in the high-potential US market, which has been hit hard by falling global oil prices and could offer attractive returns on investment.

The country is also home to sizeable natural gas reserves, with demand for its LNG slated to rise significantly in the coming years, according to a June 2015 report from the International Energy Agency. Global LNG exports are forecast to rise by 40% by 2020, of which 90% will be supplied by the US and Australia. European imports, meanwhile, are expected to double over the same period, with the EU seeking new suppliers.

QP is well aware of the opportunity this presents and has already begun investing in the US market. In July 2014 a joint venture between ExxonMobil and QP announced plans to construct a new liquefaction plant in Texas which, following regulatory approval of its export licence, could begin construction as early as 2016. QP holds a 70% stake in the project, which is known as Golden Pass.

Asian Potential

QP is not the only company to adopt this strategy. In recent years, Saudi Aramco has also focused on international expansion in a bid to maximise domestic resources while expanding its international asset base. For example, it is currently helping to build a 260,000-bpd processing plant in China, as well as a second plant in China’s Fujian province. In May 2015 Saudi Aramco also announced plans to invest up to $80bn on international energy acquisitions over the next five years, with the majority concentrated in China and South Korea.

Asia presents a major opportunity for international expansion, despite QP’s October 2015 decision to withdraw from the $3.77bn Long Son petrochemicals project in Vietnam. Qatar’s LNG market share in Asia rose to around 80% by September 2015, according to the Asia and the Pacific Policy Society, as a result of rising production in the US and an increased preference for LNG power plants rather than nuclear energy.

LNG demand in Asia is expected to rise from 237m tonnes in 2013 to over 450m tonnes by 2025. Growing demand requires rising production, but at current market prices Qatar is better placed to invest in LNG operations abroad, rather than increased local production. If Qatar wishes to remain the world’s largest LNG exporter, it will require new supplies from outside its own borders, with Nasser Khalil Al Jaidah, QPI’s former CEO, telling LNG World News in December 2014 that international expansion is the only possible future for Qatar’s oil and gas sector.

Promisingly, negotiations with potential partners appears to be going well, and in December 2015 Deddy Saiful Hadi, Indonesia’s ambassador to Qatar, told local daily Gulf Times that Indonesia is interested in exploring the potential for oilfield development in partnership with QP and RasGas, potentially under some kind of production-sharing scheme.