LNG: The Gulf gas club expands membership

17 January 1997

The emergence of the Gulf region as a major gas exporter became a reality in the last days of December when a huge tanker drew anchor in Ras Laffan and set sail for Japan. The Al-Zubarah is carrying Qatar's first export cargo of liquefied natural gas (LNG) and will deliver 60,000 tonnes when it arrives in Nagoya after a 19-day journey from the Gulf. By the turn of the century, Qatari gas will be finding its way to Japan, Korea, India, China, Turkey, Thailand and Taiwan according to current plans.

At the same time, Oman will be shipping its first LNG cargo to Korea and should be supplying other Asian customers as well. For both Oman and Qatar, the start of the gas export trade will be a valuable addition to their long-term earnings from hydrocarbons. It also establishes firm connections with some of the fastest growing economies of the Far East.

It has taken a long time to get this far. In the case of Qatar, 15 years of planning and investment of almost $4,000 million has gone into getting the first 60,000 tonnes of LNG out of the new Ras Laffan industrial port. The Japanese customer - Chubu Electric - will be taking 4 million tonnes a year (t/y) of LNG over the next 25 years which is the entire output of the first two trains built by Qatargas. Production from the trains will rise gradually over the next six months to their full design capacity of 2 million t/y each.

Work is now starting on a third train, due to be completed in 1998, which will push Qatargas' capacity to 6 million t/y. The extra 2 million t/y will be supplied to seven Japanese utilities. There are plans for further development of the Qatargas plant with additional trains which would lift its ultimate capacity to 10 million t/y. Customers will have to be found and signed up for a long-term sales and purchase agreement (SPA) before any more trains can be built.

Local rivals

Some of the competition for Qatargas is very close to home. The Ras Laffan LNG Company (Rasgas) project shares the same site and uses the same export terminal as Qatargas. It has equally big ambitions and wants to rival Qatargas one day by developing a capacity of 10 million t/y. Unusually in an industry that has huge capital costs and needs to exploit economies of scale to the full, Rasgas has gone ahead with only a single customer and a single train. Nevertheless, company officials say that the one-train facility is commercially viable.

Construction has now started on the first 2.5 million-t/y train. Being built by a joint venture of JGC Corporation and MW Kellogg, its entire output is earmarked for Korea Gas Corporation. The first LNG cargoes are due for delivery in mid-1999, although Rasgas has said it aims to bring the date forward. In its bid to tie up more customers and validate additional trains, Rasgas has over the past two years signed memorandums of understanding or letters of intent with power generators in India, Turkey, Thailand, China and Taiwan. In early December, it brought in two Japanese trading houses - Nissho Iwai and Itochu - as shareholders, which should help in the search for long-term customers in the Far East. It has also announced an innovative bond issue which will raise $1,200 million towards the estimated $2,400 million project (MEED 3:1:97, Finance).

Yet another LNG project is planned in Qatar, although its progress has been fitful at best. The project developer is the international arm of the US' Enron Corporation which is working on a joint venture agreement with Qatar General Petroleum Corporation (QGPC) to develop a 5 million- t/y integrated gas scheme (MEED 25:10:96).

The weakness of the Enron proposal is the choice of customers and the formidable political and financial obstacles that need to be surmounted if it is to succeed. One aspect of the project has been overshadowed by the slowdown in the Middle East peace process: 2 million t/y of the LNG had been earmarked for delivery to Israel.

In the current climate, such a link would be politically unpalatable and Enron is instead focusing on India as the customer for the entire output of 5 million t/y. Half of this would go to the Dahbol power station scheme, in which Enron is a core investor and developer. Even if SPAs are reached with customers in India, Enron and its Indian clients will enter uncharted territory when they try to raise finance for a deal of such magnitude.

Oman races in

While Qatar gets to grips with its second and third LNG plants, Oman is racing to get its first up and running. Qatar has the largest non-associated gas field in the world to develop, and proven reserves of 7.1 trillion cubic metres (tcm) which are the largest in the Middle East after Iran's. Oman is a much smaller operator and will remain so - its gas reserves are still being assessed, but were put at 0.7 tcm at the end of 1995, which is not even 10 per cent of Qatar's endowment.

This has proved no barrier to development and Oman LNG has put a project together in barely three years. The key development came last October when an SPA was signed with Korea Gas Corporation (KGC) for 4.1 million t/y for 25 years. Deliveries are to be fob and will start in 2000. The next step is to sign a deal with Petroleum Authority of Thailand (PTT) which is due to take 2.2 million t/y from 2003. 'We are nearing the end of negotiations [with PTT],' says Ian Coult, Oman LNG's marketing manager. The final SPA is expected to follow soon.

The two agreements account for the bulk of Oman's proposed LNG output, although there is some capacity, available from 2000-2003, which is left to market.

'We have several interested potential customers and we will continue discussions [with them] over the next few months,' says Coult. 'Korea is already a customer and will have the demand for more gas in 2000.' Other targets for Oman LNG's marketing activities include Japan, Turkey and Spain.

A third train, which would raise capacity above 6.3 million t/y, is definitely a possibility. The two-train plant being built by Chiyoda-Foster Wheeler & Company has been designed to permit the easy integration of a third train and Coult believes that Oman LNG could certainly sell additional gas.

'In terms of the market for LNG and the market's perception of this particular project, the prospects of a third train are very high,' he says. 'The market is ready for a third train, there are plenty of potential buyers.'

The prospects for a third train depend on how much gas is ultimately found in Oman and whether the government will be in a position to allocate more of it to Oman LNG, given the demands that are being made on it by other projects. Proven reserves of 16 trillion cubic feet (tcf) are all accounted for.

The authorities have committed 8.5 tcf to the LNG project, and smaller amounts to projects for aluminium, fertilisers and petrochemicals. The volume that has been allocated for domestic customers only covers half of the expected requirement from this sector.

'The remaining domestic requirement will come from newly proven reserves,' says Khalifa Al-Hinai, director general of Gas & Petroleum Industries at the Petroleum & Minerals Ministry. If so, then any future discoveries may also be spoken for, reducing the chances that Oman LNG will get enough gas to justify further expansion.

Nevertheless, the government is confident that more gas will be found and developed. Expectation reserves are now put at 27 tcf and may increase to as much as 40 tcf by 2000. A third LNG train would require just

4 tcf in order to be viable.

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