Energy & Mining

Securing Market Domination

Major oil and gas producers are scrambling for better deals, cost optimization, and market share consolidation. In the face of rising competition in its main turf, Qatar has decided to move on the development of its massive North Field after a 12-year hiatus.

2017 was witness to a major announcement in Qatar’s natural gas industry. After 12 years of sitting on the development of the biggest natural gas field on the planet, Qatar announced in April that it is moving forward with new developments on its North Field. While the area is already responsible for most of Qatar’s natural gas output, Qatari leaders leveraged a moratorium on further field development in 2005, citing the need to evaluate the effects of rapid field development on reservoir structure and reserve depletion. According to national oil and gas company Qatar Petroleum (QP), the moment has come to lift the ban on further development and push forward with production.

New output should come online within five to seven years and will add up to 2 billion cubic feet per day of natural gas to the field’s current production, or a 10% increase in output.

The development will be facilitated by existing infrastructure, with considerable available processing capacity for liquefied natural gas (LNG) exports already in place. Regardless, QP is evaluating capacity expansion at its existing LNG plants and signed an agreement with Japan’s Chiyoda Corporation to undertake an evaluation of its current infrastructure and propose solutions for existing bottlenecks. The study should be completed by the end of 2017, allowing QP to make a decision on how to proceed by early 2018, according to Reuters.
The North Field is in fact shared with Iran, where it is known as the South Pars field. For years, South Pars remained underdeveloped due to international economic sanctions on Iran, but with the nuclear agreement reached between Iran and the UN in May 2015 and the consequent lifting of sanctions, Iran is fighting for its position in the oil and gas market once again. In late 2016, Iran signed an agreement with French Major Total to develop the South Pars II project. According to Iranian authorities, the new development will add 5.3 billion cubic feet per day to current production volumes. Qatari leaders have stated, however, that the decision to move forward with the North Field development is not related to Iran’s move.

Rubbing Shoulders

2017 has not brought a resolution to the crisis affecting the price of crude oil or the continued depressed prices of natural gas, which has considerably affected Qatar’s economy. In November 2016, Qatar agreed with its OPEC allies on cutting 1.8 million barrels of oil production for six months, across the member states, to push prices of crude oil up. The effects on pricing were limited. After a short rally in December, oil prices have remained around the USD50 per barrel mark, as global stocks remain at historic highs, far above the 2.7 billion barrels of oil five-year average goal OPEC defined as a benchmark for a balanced market. In May 2017, at the end of the agreed period, again OPEC and allied non-member countries, including Russia, met to discuss production output and agreed on the extension of the existing cuts by another nine months. The markets have so far shown little reaction.

As one of OPEC’s smaller oil producers (at an output of around 1.5 million barrels of oil per day), however, Qatar has not been as affected by the oil price collapse as other members.

Qatari leaders have focused their attention on the LNG market, which saw a few major developments over the last year. For the first time in years, 2016 saw the Middle East lose the lead on LNG exports to the Asia Pacific region, as Australia kick-started a number of LNG-producing plants. Qatar remains, by far, the biggest LNG exporter in the world, controlling 30% of the market with export volumes of 77.2MT per year. However, Australia, the world’s second-biggest exporter, accounted for 17.2% of the market in 2016, in contrast to 12% in 2015, leaving third runner Malaysia far behind, at around 10%.

It was mostly due to Qatar’s production expansion between 2010 and 2015 that the Middle East had become the main powerhouse for LNG production in the world. Australia’s production expansion and Yemen’s production cuts due to political instability have now tipped the balance in a different direction. The impact of this shift for Qatar is relevant in as much as that the rise of other major producers aiming to supply some of its clients, like Japan, the world’s biggest LNG importer, reduces its capacity to negotiate both prices and long-term agreements. Qatar’s production boost works as a deterrent against potential future investments in other regions as well as a defence of its market share.

The Qatari ability to influence commodity prices has in fact been very much at the center of the industry’s main developments this year. The US started to export LNG from its shale gas fields at growing levels and threatens to flood the market. An agreement between the US Commerce Department and Chinese officials was announced in May 2017 as giving the go-ahead for Chinese companies to start importing LNG from the US, a historic development.

The North American press lauded the agreement as a potential counterweight to Qatar’s dominance in the market; however, the agreement was announced almost simultaneously with the arrival of Qatar’s first export of LNG to China.

The US is approaching non-free trade agreement nations, particularly in Asia, to sell what is now its excess production of natural gas. This will naturally include countries that are Qatar’s traditional import partners. The North American expansion into Asian markets, where Qatari LNG has reigned supreme over the last decade, could see a price war, as shale gas can have lower production costs than the conventional gas produced in the Gulf.

Along with Australia, Iran, and the US, Qatar’s production expansion could see the price of LNG dilute. The potential competition coming from Mozambique and Tanzania’s major natural gas reserves, an area commonly referred to as the “Qatar of Africa,” could also come to impact the market in years to come.

The market is expected to be oversupplied until 2020, with Australian and American LNG increasing global production by 10% over this period and outdoing predicted consumption growth. However, it is estimated that after 2020 the global market will once again become undersupplied, as few new natural gas projects have seen the go-ahead since the oil price collapse in 2014 and taking into account the usual period of five to seven years for an LNG project to start operating.

While Qatar is at no risk of losing its leadership as the world’s biggest LNG exporter in the next few years, the market will be more competitive in the decades to come than it has been since the 1990s, when Qatar first started its LNG production.

It took less than a decade for the Gulf nation to lead the globe in the LNG sector, but now its leaders are also looking at diversifying its economy. As Hassan Al-Emadi, General Manager at Dolphin Energy Qatar, told TBY, “economic diversification and the expansion of non-oil and gas sectors is the right solution for sustained economic growth and development. Qatar was one of the first GCC countries to call for such strategic plans due to the finite nature of oil and gas.” However, he adds, as demand for natural gas continues to grow, “even while countries across the region are diversifying their energy mix, natural gas will remain the most important energy source.”

Changing paradigms

On the other end of the spectrum, Qatar has been working on guaranteeing a reliable supply of power to its industries and people. Over the last decade, due to considerable economic growth, the country’s population has expanded greatly, and with it the need for power generation. It is estimated demand has grown around 10% per year over the last five years. With the FIFA World Cup coming to the country in 2022, it is expected that demand will further soar.
In response to consumption growth, the Qatar Electricity and Water Company (QEWC) commissioned in May 2017 the biggest power generation plant in the country yet. The Ras Qartas Energy Plant, located at the Ras Laffan Industrial City, has a production capacity of 2,730MW and doubles as a water desalination plant with a 63 million gallons processing capacity. The ownership of the USD4 billion gas-fired power plant is split between Qatar, through the QEWC and QP, which together own 60% of the asset, and private partners.
Ras Qartas directly contributes to the 50% hike in power generation expected over the next two years in Qatar. This plant alone expands the country’s previous production capacity of 8.8GW by more than 30%. With the conclusion of another gas-fired plant in Umm Al Houl and further small projects, Qatar will boost power generation capacity of over 13GW by the end of 2018, much above current internal demand of 8.2GW, consequently boosting its export capacity to its neighbors in the GCC area.

While natural gas will continue to dominate Qatar’s economy and its power sector for years to come, the country is looking to reduce the relevance of the commodity in its power generation sector. The government has set a 2% target of contribution from renewable energy sources for its power generation mix by 2022, ahead of the World Cup, with plans for solar power parks already on the table and wind power farms under study. In the longer term, the government’s plans for renewable energy are more ambitious, intending to produce 20% of the country’s energy from solar power from 2030 onward. The government expects that investments in the power and water infrastructure will add up to USD22 billion in the period up to 2020. The first step toward reaching these targets is materializing in another joint venture between QEWC and QP for the construction of a USD500 million, 200MW solar power project. The consortium, named Siraj Power, announced that construction should kick off in June 2017 and is expected to start contributing to the national grid by 2020, with potential for later production capacity expansion to 500MW.

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