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Gamble on gigantic LNG project is set to come good

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By James Drummond

Published: December 9 2008 02:00 | Last updated: December 9 2008 02:00

In the late 1990s, the newly-installed emir of Qatar took a risk. Despite being a big oil producer and member of the Organisation of the Petroleum Exporting Countries, the emirate was broke.

But rather than hide its head in the sand, Qatar solicited ratings from international agencies – unusual for an Arab country – and issued bonds to finance big schemes to extract gas from the North Field, the world’s largest reserve of non-associated gas, that is gas which is not part of an oil-bearing field.

Western bankers were not deterred by Qatar’s reserves being inside the Straits of Hormuz and shared with Iran, which calls the field South Pars.

A decade on, and Qatar has commissioned the largest liquefied natural gas (LNG) production system in the world – first cargoes from the facility are due to be despatched imminently – and is about to commission the biggest gas-to-liquids plant.

The expense has been sizeable. Gas-to-liquids technology produces cleaner burning fuel and is, therefore, a popular choice in more environmentally conscious times, but it is complex and expensive.

Royal Dutch Shell is building the 140,000b/d Pearl GTL complex at a cost of more than $18bn.

The fact that the gas is non-associated means transport infrastructure had to be installed from scratch at even greater cost. LNG has to be cooled into liquid form in so-called trains before it can be shipped.

Qatar has split its LNG industry into two operating companies – Qatargas and Rasgas. The latter is a series of joint ventures in which ExxonMobil holds 25-30 per cent and state-owned Qatar Petroleum has 65-70 per cent along with mainly Asian investors. The company is on schedule to complete its sixth train early next year, with a seventh coming on line at the end of 2009.

Qatargas is a series of joint ventures between Qatar Petroleum and big oil companies, including Shell, ConocoPhillips, Total and ExxonMobil. Qatargas’s fourth LNG train started in July, delayed from the scheduled start the previous winter. Qatargas is developing four so-called mega-trains, each of which can produce more than 7m tonnes a year. The target for Qatar as a whole is 77m tonnes, up from about 31m tonnes at present.

Industry observers are focused on a reservoir evaluation study of the North Field where the authorities have declared a moratorium on further development. The government has previously said it wants to develop the reserves in such a way that they last 100 years.

Youssef Kamal, the finance minister, says visitors to Doha frequently ask if the moratorium is likely to be broken. “We have committed ourselves to 77m tonnes. We are not committing ourselves to any extra while there is a lot of demand,” Mr Kamal says.

Andrew Pearson of Wood Mackenzie, the Edinburgh-based consultants, says that current LNG projects may be the last. Most estimates put the North Field reserves at 900,000bn cu ft of gas – although higher figures are proffered. Mr Pearson says if all the projects under the moratorium are completed, then Qatar will be producing about 23bn cu ft daily.

“If you do the maths on that production for a 100-year period, that gets you close to your 900 trillion cubic feet,” he says. “Our view is that it is unlikely there will be further large-scale LNG developments from Qatar.”

Wood Mackenzie sees the only room for further large-scale expansion coming from gas that was allocated to a gas-to-liquids project cancelled last year as costs spiralled. That project was sanctioned before the moratorium.

As attention has focused on the enormous gas reserves, oil production has been ticking along nicely. Despite recent sharp falls in prices as demand has plummeted amid the gloomy economic outlook, economists say prices for Qatari oil are likely to average $100 a barrel over the year.

The credit crunch may even yield benefits to the emirate. Qatar, and other hydrocarbon-rich states, have suffered a dearth of skilled engineers who have been able to name their price as oil has soared and previously uneconomic projects became feasible.

Mr Kamal says oil production this year is approaching 900,000b/d and is a bigger earner than gas. That situation is likely to change in two years’ time, he says. Next year, production should exceed 1m b/d.

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