There is no denying that the Qatargas-II project is ground-breaking. Estimated to cost up to $12,000 million, the massive integrated scheme looks set to revolutionise the way LNG is produced and delivered. The impact on Qatar Liquefied Gas Company (Qatargas) will be no less dramatic, catapulting the pioneer of Qatar LNG into the major league of gas producers, carving out a new market in the UK and substantially reducing its unit costs.
Driving down unit costs has been a priority for Qatargas since it entered production with the first of three trains in late 1996. ‘Our objective has been to cut our cost structure year-on-year: today we are spending less money than we did in 1999,’ says vice-chairman and managing director Faisal al-Suwaidi. Four years of high oil – and by extension, gas – prices have not undermined the company’s resolve either. Says Al-Suwaidi: ‘The price of oil is up now, but it could quite easily fall. Everyone remembers early 1998 [when oil prices fell to below $10 a barrel].’
Building up capacity is at the heart of Qatargas’ drive to cut unit costs. Through a series of debottleneckings, production capacity at its three-train Ras Laffan plant now stands at 8.5 million t/y, well above nameplate of 6 million t/y. By 2005, the figure will have risen to about 9.5 million t/y with the completion of the final element in the company’s $100 million debottlenecking programme.
But the real unit cost benefits will come from the Qatargas-II project. ‘Qatargas I will benefit from a unit cost reduction; Qatargas II will make a lot of savings through the synergies with the existing plant and the upscaling in technology,’ says Al-Suwaidi. ‘The whole idea is to achieve the lowest production costs anywhere, so that we can compete even in a liquid market like the UK. When we had 2 million-t/y trains, we never thought of the UK. But with 7.5 million-t/y trains and vessels of 200,000 cubic metres, it is feasible.’
Qatargas II is not only looking to take advantage of economies of scale. The cost of developing LNG projects has tumbled by as much as 50 per cent over the past decade, as competition among contractors and shipbuilders has intensified and technological advances have improved efficiency. ‘This business is getting cheaper by the day,’ says Al-Suwaidi. At the same time, Doha has consistently demonstrated that it is willing to back projects that take technology to its limit. The first trains on both Qatargas and Ras Laffan Liquefied Natural Gas Company (RasGas) were in their day the largest ever built. It will be the same story with Qatargas II.
‘What distinguishes Qatar is that we have greater tolerance for risk,’ says Al-Suwaidi. ‘We shoot for the maximum capacity.’
But what really enables Qatargas II to consider such an ambitious scheme lies in the North field. With gas reserves of 900 trillion cubic feet (tcf) and rising, the world’s largest non-associated gas reservoir is the bedrock on which the project is being built. ‘There are very few places in the world that have the reserves to support such a project,’ says Al-Suwaidi. ‘One train of 7.5 million t/y requires 7 tcf of reserves over a 20-year period. That is a lot of gas.’
Since a heads of agreement (HoA) was signed in mid-2002 between Qatar Petroleum (QP) and ExxonMobil, the pieces have gradually been falling into place on the Qatargas-II project. Al-Suwaidi says the two prospective shareholders have reached agreement on all the major issues. ‘Now it is a matter of drafting 80 to 90 different agreements, of which the joint venture agreement and two or three other accords will be the cornerstones,’ he says. The front-end engineering and design (FEED) packages are under way for the new LNG trains at Ras Laffan and the planned receiving terminal in Wales. The upstream FEED contract covering infrastructure in two new blocks in the North field is close to being awarded. Preparations for the financing package are advancing too, as are discussions with the regulatory authorities in the UK.
‘The positive response we have received from the UK is more than we expected. We have had meetings with the regulators and they were very encouraging,’ says Al-Suwaidi.
Discussions have also taken place with France’s Total about joining the Qatargas II project. Total first announced its desire to be involved in a new Qatar LNG project last October, when it proposed to Qatargas the construction of a 5 million-t/y train. The thinking now is to integrate the French oil giant into Qatargas as a shareholder. If Total comes on board, the Qatargas-II scheme will probably be expanded to a three-train operation, with the third train being completed once the first two are up and running.
As with ExxonMobil and the first two trains, Total would lift the output from the third train on a take-or-pay basis. Initially, it may also take some product from the first two. ‘We don’t want to bring 15 million t/y into the UK from day one, as it could flood the market. The volumes will be phased, which Total could assist with,’ says Al-Suwaidi.
It is a measure of Qatar’s LNG ambitions that yet another ground-breaking project is taking shape at Qatargas. On 12 July, an HoA was signed between QP and the US’ ConocoPhillips for Qatargas III, a development that calls for 7.5 million t/y of product to be delivered into the US.
The $5,000 million scheme is the first involving East of Suez product being targeted exclusively at North America. It involves a new train and terminal being built at Ras Laffan and the acquisition of a fleet of 12 LNG carriers, each with capacity of 200,000-plus cubic metres. Under the plan, ConocoPhillips will purchase the entire output and be responsible for marketing and regasification of the LNG in the US.
Scheduling two such massive projects will be critical to their success. At present, the first train on Qatargas II is due for completion in early 2008, to be followed about a year later by the second train. As for Qatargas III, start-up is now planned in 2009/10.
‘We do have a team looking at the scheduling issue. There is a limit in capacity in the construction, shipping and finance communities and we want to make sure that this will not harm either project,’ says Al-Suwaidi. ‘Contractors must also understand that these projects are targeting northern Europe and the US: there are plenty of other producers closer to these regions. So if they want to see projects of this size again, they will have to bid competitively.’ The first opportunity to demonstrate their competitiveness is likely to come in early 2004, when the engineering, procurement and construction (EPC) package for the Qatargas II trains goes for bid.
The push to break into the deregulated gas markets of the UK and US reflects not only Qatar’s ambitions but also the changing world of LNG. Demand in the traditional markets of Japan and South Korea is simply insufficient to underpin the next stage in the state’s LNG development.
‘If we want to grow, we have no choice but to go to the liquid markets of Europe and the US. That does not mean that you go and jump in. We have done a lot of studies on the US and we are doing some more to get a better understanding of the market,’ Al-Suwaidi says.
Market diversification will also increase flexibility at Qatargas. During the summer, the crisis in Japan’s nuclear industry meant Tokyo asked its existing gas suppliers, including Qatargas, if they had additional cargoes available. Qatargas’ response was to contact its medium-term offtakers in Europe to see if they had any gas surplus. Some had, which meant Qatargas could divert additional cargoes to Japan. As Qatargas grows and enters the liquid market, its ability to divert product will increase significantly.
Qatargas’ near neighbour is also preparing to break new ground. Over the coming 18 months, RasGas II will begin long-term sales into India and Italy from its third and fourth trains. That is likely to be followed by a push into North America: an HoA was signed on 16 October between QP and ExxonMobil to build a further two trains, each of 7.8 million t/y, to service the US market.
The fact that ExxonMobil could have new capacity at both Qatargas and RasGas not only underlines the US major’s elevated position in the local gas sector. It also highlights QP’s development strategy. ‘It doesn’t really matter whether ExxonMobil puts its investment into Qatargas or RasGas. Obviously, from QP’s perspective, it does not want to overload one company. But at the same time, we are looking to market ourselves as Qatar LNG,’ says Al-Suwaidi.
Qatar LNG today has installed production capacity of 14 million t/y, a figure that will jump to 25 million t/y in 2005. How high it will go after that is a matter of some conjecture. With the latest round of investment plans progressing, the target of 45 million t/y by 2010 now looks extremely achievable. After that, it is anyone’s guess. But with effectively no limits on either market demand or gas reserves, Ras Laffan could quite conceivably be home to 75 million-80 million t/y of capacity by 2015 and supplying North field gas to households as far apart as New York and Mumbai.