Qatar: Supplying gas to the world

10 April 2009

The inauguration of the Qatargas II liquefied natural gas project is a major milestone not just for Doha but for the industry as a whole.

The arrival of supertanker Tembek at Milford Haven’s South Hook terminal in southwest Wales on 20 March was an historic moment for the UK, and for the Gulf state of Qatar. Within weeks, the tanker’s cargo of 216,000 cubic metres of liquefied natural gas (LNG) from Qatar will be offloaded and transformed into natural gas to be pumped into homes across the UK.

The cargo is the first of about 50 shipments that will be delivered to the UK every year from Qatargas II, the world’s first fully integrated LNG supply project.

While the project is undoubtedly important for energy-hungry consumers across the UK, it is also a major milestone for Qatar, and for the wider global industry.

The Qatargas II scheme has revolutionised the way LNG is produced and delivered, creating a new blueprint not only for Qatar but for the industry as a whole.

For Doha, the real achievement is that it has been able to own and control the entire project. When the Qatargas initiative was launched in 1997, Qatar’s Minister of Energy & Industry Abdullah bin Hamad al-Attiyah faced an uphill struggle to convince sceptics of Qatar’s ability to become a major LNG exporter.

Despite being a significant producer of oil and a prominent member of Opec, Qatar had no experience in the gas industry and was in an unfavourable geographical location to supply the biggest markets. The economics of launching such a big project were also challenging. In 1997, the price of a barrel of crude oil was just $10 and experts in the gas industry were divided about the prices needed to justify long-term gas investment.

A decade on and Qatar Petroleum (QP) has become known the world over as a reliable supplier of LNG. Doha has become the world’s largest LNG producer and remains on target to roughly double current production to 77 million tonnes a year (t/y) by 2011.

Energy analysts estimate that of the total additional LNG production capacity of 95.3 million t/y that is set to come on stream globally by 2012, almost half, about 46.8 million t/y, will be sourced from Qatar’s fields.

Innovative thinking

QP has reinvented the way producers and consumers think about the gas industry. The LNG business, which relies on long-term contracts with offtakers, is slow-moving. Trains can take years to reach full capacity, while the raw gas that is turned into LNG must be available in sufficient quantities to ensure long-term supplies.

Qatar’s considerable advantage over rival producers is the offshore North field. With an estimated 900 trillion cubic feet of gas reserves, the field is the world’s biggest non-associated gas reservoir, and the bedrock on which Qatar’s LNG projects have been built.

The two operating companies that hold the key to exploiting LNG from North field supplies are Qatar Liquefied Gas Company (Qatargas) and Ras Laffan Liquefied Natural Gas Company (RasGas). Together, they will increase global LNG supply by 25 per cent in just two years. Both are majority controlled by QP but also use the expertise of some of the world’s leading oil majors (see table).

RasGas has been the more active of the two ventures, launching its first two LNG trains in 1999 with a combined total capacity of 6.6 million t/y, and three trains each with capacity of 4.7 million t/y in 2005, 2006 and 2007.

Qatargas shipped its first LNG cargo in 1997 as part of a majority owned joint venture with oil majors including the US’ ExxonMobil Corporation, France’s Total and two Japanese firms, Mitsui and Marubeni Corporation.

The firm boosted supplies for its first venture through a debottlenecking exercise to hit output of about 10 million t/y split between three separate trains. Now, after a 10-year pause in bringing on new capacity, decades of heavy investment in Qatar’s gas sector will come to fruition in the next two years.

Qatargas is set to more than triple its own production by 2011 through additional ventures with Exxon and Total as part of the Qatargas II venture, along with further supplies as part of Qatargas 3 and 4 with US partner Conoco-Phillips and the UK/Dutch Shell Group respectively. It was gas from its fourth, 7.8 million-t/y train, part of Qatargas II, that reached the UK on 20 March. Train 5 supplies are due to come on line by the end of 2009.

RasGas, which is partly owned by ExxonMobil, is also involved in a massive ramp-up of supply, with its overall LNG capacity set to double by 2010. The firm is on track to start producing LNG from its 7.8 million-t/y sixth train in the second quarter of 2009, while its seventh train, with the same capacity, will be on line by the end of the year.

Alex Dodds, ExxonMobil’s general manager for Qatar, says the next phase that is coming on stream is critical for the overall development of Qatari gas resources. “It is the next phase in the development of the Qatar LNG story,” says Dodds. “We were part of the initial development of Qatargas I, and now Qatargas is at the point of bringing on a mega venture [Qatargas II] for the first time in 10 years. It is a big moment.”

Untapped reserves

Dodds says that creating an LNG business virtually from scratch was not easy. In the 1990s, Qatar was not widely known in energy circles. While its products were theoretically in demand, its reserves were untapped and Doha had yet to establish itself as a transport hub.

Dodds says the strength of its partnership with both Qatargas and RasGas came from a strong emphasis on technology development for onshore and offshore gas production, and the creation of synergies and economies of scale through joint facilities at Ras Laffan.

“We have been able to leverage lessons learned from our experience of being involved in RasGas,” says Dodds. “Over the past three years, we have started up the 4.7 million-t/y [RasGas] trains and there has been good co-operation between the ventures and all the shareholders to make sure we are learning from our collective experiences.”

One of the great advantages of Qatar’s LNG projects is the different ventures’ ability to take advantage of economies of scale at Ras Laffan Industrial City while implementing techno-logical advances learned during the construction of each train.

Although the various Qatargas projects will triple production capacity to an estimated 30 million t/y, the size of the company’s workforce remains largely unchanged, with staff seamlessly moving between production and operation of the facilities.

Ching Thye Khoo, chief operating officer for the Qatargas II venture, was head of research at RasGas when the two companies were looking ahead to the next stage of development for the country’s gas industry.

“From a technology standpoint, we were thinking what else do you do beyond a train of 4.7 million t/y,” Khoo tells MEED. “Out of that came the idea of building 7.8 million-t/y trains. We started with Qatargas II with two trains and then quickly went into two more trains with RasGas, and then eventually two more trains split between Qatargas 3 and Qatargas 4.”

Khoo attributes the rapid development of Qatar’s LNG industry to lessons learned from the first Qatargas operation, in the late 1990s.

“From an operations and design standpoint, when you go down to the basic specifications, we had discussions with Qatargas I to make sure that knowledge was passed down to the other ventures,” says Khoo.

ExxonMobil’s Dodds says the implementation and start-up of so many large LNG trains in quick succession, a concept he calls ‘design one, build many’, has been integral to the success of the ventures.

“What we saw with the design one, build many concept for the RasGas 4.7 million-t/y trains was very successful,” he says. “It is too early to say if we have the right initiative with the 7.8 million-t/y trains because we have not had any experience with them yet. But it has certainly worked well in other areas, and our expectation is that it will deliver benefit to these megaprojects.”

The speed with which Qatargas and RasGas are managing to hike LNG exports has, however, left Qatar exposed to the volatile contracting market. A huge ramp-up in engineering and construction costs over the past two years has also led to questions being raised about the feasibility of several of its LNG megaprojects.

Two of the state’s most well-known contracting partners, Paris-based Technip and Japan’s Chiyoda Corporation, admitted last year to losing hundreds of millions of dollars on executing projects. Technip flagged up its project execution difficulties to the stock market in January 2008, saying it would incur fourth-quarter charges of nearly $300m because of delays on its four key LNG projects in Qatar, including Qatargas II. Chiyoda, which has a 60 per cent stake in the joint venture with Technip, has yet to put a cost estimate on its exposure to the project delays.

Khoo says recent changes in the contracting environment have been tough to manage for Qatar’s LNG industry. “The incredible run-up in prices and the cost of everything over the past several years has been a challenge,” he says.

Rising costs

However, he says Qatargas II missed some of the worst effects of the contracting boom. “We contracted during a timeframe just before the big run-up so we have been affected by prices [on Qatargas II] but not affected wholesale,” says Khoo.

Rising costs put a big strain on Qatargas’s relations with EPC contractors. “It is very easy for a client to say ‘a contract is a contract’,” says Khoo. “You need to make a judgment against what the contractor ought to have assumed as risk and try to find areas of common ground. We try to find the right balance, but we have had a tremendous amount of dialogue with contractors over the past two or three years.”

Total, which holds an 18.3 per cent stake in train 5 of the Qatargas II venture, says part of the problem was the expectation that new technologies would be easily built into each new train. “These were brand new trains that had never been done before and there were a lot of new things to be integrated for the contractor,” says Philippe Guys, managing director for Total in Qatar.

“To integrate, and for the contractor to adapt themselves for the size of the new train, was not necessarily easy to do. But all of these problems were tackled one by one and I think now we have the result, even if there has been a bit of a delay to get there.”

Guys says everyone involved in the process has learned a “huge amount” over the past few years. “Building a train of 7.8 million t/y is not like building twice a train of 3.6 million t/y because there is much more to integrate,” he says. “Somehow, contractors underestimated how many people were needed, but I think everything has settled down now. We consider this project [Qatargas II] to be on budget.”

Market uncertainty

The long-term demand and pricing for LNG also presents potential problems, with uncertainty creeping into the US and European markets that Qatargas is supplying.

One LNG analyst says there is likely to be significant pressure on LNG prices for at least the next two to three years, given the dramatic drop in both oil and gas prices over the past nine months. “With such a strong underlying position, Qatar is likely to ride this out, but it could not have picked a more difficult time to launch so many projects onto the global LNG market,” he says.

Ahmed al-Khulaifi, chief operating officer for commercial and shipping at Qatargas, says the projects will flourish regardless of short-term fluctuations in price and demand.

“We have proven technology, reliability and a focus on the market’s needs, and these guidelines are important across all of our ventures,” says Al-Khulaifi.

The important thing is to be able to adapt to changes in the industry. “LNG is a long-term business,” says Al-Khulaifi. “We could not launch the agreement without being sure there is a financial study that covers the economics of a project over a 25-year period.”

Al-Khulaifi says the real risk for the RasGas and Qatargas ventures was the decision to embark on them in the first place.

“It was a bold step given that QP did not have experience abroad [when the original agreements were signed],” he says. “There were worries but we said ‘don’t worry’, and I think looking back we were courageous to go beyond what we were used to.

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