The global market is far more competitive these days, and 2014 saw a dramatic decline in oil prices, which continued into 2015. In March 2015 Brent Crude was retailing at $57 per barrel. Behind this is a global oversupply – Bloomberg reported that the UAE and Qatar estimated this to be in the region of 2m barrels per day (bpd) in mid-January 2015. This is primarily the result of surging US output, which was at a three-decade high. However, this output seems likely to taper off, as falling prices make some of the fracking on which US production is based no longer economically feasible. Furthermore, in 2014 Washington decided to allow exports of condensates for the first time – oil exports having been banned since the 1970s oil crisis. Thus, the global condensates market is also seeing a major supply surge, with press reports suggesting that the US could add up to 1m bpd of these light oils to the export market during the next 10 years. This is particularly relevant to Qatar, as condensates have come to represent a larger proportion of the state’s output than crude.
DEPLETION OF RESERVES: This has been for two main reasons. First, there is the depletion of existing oilfields. Qatar Petroleum’s (QP’s) Dukhan field, the oldest, sent out its first export cargo in 1939, although it remains one of the two largest fields in the country, along with Maersk Oil’s Al Shaheen. Qatar National Bank (QNB) figures show that total output has declined continuously in recent years, from a peak of 845,000 bpd in 2007 to 733,000 bpd in 2010, 724,000 bpd in 2013 and 681,000 bpd in November 2014.
This is despite major investment in enhanced oil recovery (EOR). Some $6.6bn has been invested in crude oil projects under Qatar’s 2010-14 development plan, with much of this going into EOR. At the same time, reports in local media state that Occidental is investing $3bn in water injection to sustain production at the Idd Al Sharqi field, while ExxonMobil has made further investments in Dukhan. Indeed, most of the investments currently ongoing in the oilfields are of this kind, with the aim of maintaining and stabilising production.
“Our overall objective for the field is more to minimise production decline,” Guillaume Chalmin, the managing director and group representative of Total E&P Qatar, told OBG, referring to his group’s Al Khalij field. “This takes priority over increasing production.”
This is not the only strategy that oil companies have been employing, however, as Maersk Oil’s managing director, Lewis Affleck, told OBG. “We have started the FDP2012 programme, which is a $1.5bn project to drill 50 new wells in the field,” said Affleck. “We drilled 22 wells in 2014 and have three drilling rigs dedicated to the project; around half of the wells will be development wells and the others are for appraisal.”
CONDENSATES: The second factor affecting the condensates/crude balance is the huge North Field, and the consequent expansion of natural gas output in the country. This has led to a surge in the production of condensates on the back of new wells and projects aimed at feeding Qatar’s liquefied natural gas and gas-to-liquids sectors. Indeed, if the QNB figure of 724,000 bpd of crude is compared with the BP figure of 1.995m bpd of total oil production – which includes crude oil, light oil (from condensates), oil sands and natural gas liquids – then condensates are likely responsible for over 1m bpd of Qatar’s oil production. QNB figures quoted by Business Quartermagazine in 2013 stated that while crude oil reserves were an estimated 2.3bn barrels in 2011, condensate reserves were an estimated 22.3bn barrels, with condensate production exceeding crude oil production in 2012, when it hit 900,000 bpd.
This was a very welcome boon for the country. Recognising this growing importance of condensates, major investments were made in further boosting Qatar’s condensate refining capacity. Expansion of the Ras Laffan refinery in the shape of Laffan Refinery 2 (LR-2) is set to double its capacity from 146,000 bpd to 292,000 bpd when it comes on-line in 2016. The Barzan Gas Project (BGP) will also generate additional condensate production upon starting operations in 2015, according to Tasweeq, the national petroleum marketing firm.
HIGH-VALUE PRODUCTS: Condensates are hydrocarbons that exist in a gaseous state underground, but which liquefy during the production process. They are thus a low-density mixture of hydrocarbons and come from both oil wells, as associated gas, and from natural gas wells, where they exist alongside raw natural gas and are known as non-associated or wet gas. Condensates can also be produced from dry gas – natural gas that has no associated component – in gas processing plants; this variety is known as plant condensate.
Many of Qatar’s natural gas reservoirs produce wet gas, which can then be separated via compressors and other treatments to produce different products. Condensate-based light oil is one of these, and has often been used in the past to dilute heavy oil, with condensate’s low-density mixture naturally producing low viscosities. Other condensate products include liquefied petroleum gas – a mixture of propane and butane used in cylinders as a fuel for cooking in many emerging and developing countries – and naptha, which is used in a variety of industrial processes and motor gasoline blending. Jet fuel is also produced from field condensate, which has a low sulphur and high paraffin content. Sulphur itself is also a product and has a variety of industrial and chemical uses.
What many of these products have in common is that they are higher value than light oil. With the global glut on oil now in play, this has moved the Qatari authorities to announce a shift in strategy – cutting exports of condensate and instead processing more of it into naptha and these other higher-value products, such as low-sulphur diesel. In November 2014 Tasweeq announced that it was cutting condensate exports by 150,000 bpd associated with the LR-2 project over the following two years – press reports suggested Qatar was exporting around 0.5m bpd of condensates at the time. The state will also raise exports of naptha by 3m tonnes per year once LR-2 becomes operational.
COMPETITION: While naphtha and other products may have commanded high prices compared to the quickly declining barrel of oil, supply may also be rising fast. Iran, for example, is able to export condensates, as it does not fall under international sanctions on Iranian oil exports, and may seek to boost its trade. Other nations in the region, such as Saudi Arabia, are also expanding their condensate production as their own gas sectors expand. This is in addition to US production. The main battleground between these nations in the higher-end condensate market is likely to be Asia, with competition also likely to be fierce there. Another difficulty in the naphtha market is that alternatives are available, such as ethane, with ethane crack capacities also expanding worldwide.
While the strategy may face challenges, Qatar does also possess some major advantages over its competitors. It has good relationships with many Asian markets, and an abundant and reliable supply. Its plants are state-of-the-art and able to switch production from one product to another speedily. It also has one of the most robust financial systems in the region. The years ahead will see Qatar well equipped to go head to head.
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