Strong competition for roles to grow North Field output in Qatar

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Qatar’s North Field expansion (NFE) project has continued to grow in scope since it was first mooted in 2017; however, in February 2020 the project was temporarily postponed. This decision comes in the wake of declining gas prices and the increasing supply from the US and other countries. As of March 2020 the delay was expected to push the project back until 2021, and a number of deadlines related to the project have been pushed back accordingly.

Once plans are back under way, the project is set to trigger billions of dollars in investment and a step change in the country’s output of liquefied natural gas (LNG), feeding a growing global demand for cleaner fuels. State-owned Qatar Petroleum (QP) currently produces 77m tonnes per annum (tpa) of LNG. The initial proposal, first put through in 2017, was to boost this number by 30% to 100m tpa, but the target was increased by 43% to 110m tpa in September 2018 following further appraisals of the field’s resources. In November 2019 QP announced that new field reports had enabled it to revise the target up even further, to 126m tpa.

The original goal was to bring this new LNG supply to market by 2027, but that date will likely be revised. Although this may seem to be a dramatic output increase against a tight deadline, the scale of QP’s ambition and the speed of implementation is not without precedent. According to BP’s “Statistical Review of World Energy 2019”, Qatar’s daily production of natural gas increased from 92.4bn cu metres in 2009 to 175.5bn cu metres in 2018 – an output increase of 90% within a decade.

Seizing Opportunities

With each new NFE expansion target announcement, QP provided an upward revision of the number of new 7.8m-tpa LNG mega-trains that will be required to meet its target, joining the 14 LNG trains QP currently operates. As of the most recent announcement in November 2019 the requirement was for six new mega-trains.

At the start of 2020 there were six international oil companies reportedly waiting to see if the tenders they had submitted to QP for a role in the NFE had been successful. QP had warned that it was prepared to do the project alone if the bids were too low, and also hinted that there was room for inclusion for companies from natural gas consumer nations such as Japan. According to international media, a 30% stake in each of the mega-trains is on offer. Working with international oil companies would come with access to their technical expertise and sales forces, which is important in an increasingly dynamic and competitive LNG market.

Early Winners

In 2019 QP began conducting early preparatory work with a number of contract awards. In April 2019 engineering, procurement and construction (EPC) tenders for four LNG gas trains were issued to three EPC joint ventures: Japan’s Chiyoda Corporation and France’s Technip; Japan’s JGC Corporation and South Korea’s Hyundai Engineering and Construction; and Italy’s Saipem, US-based EPC firm McDermott Middle East and Taiwan-headquartered CTCI. The tender called for the EPC of four new LNG mega-trains with gas and liquid-treating facilities, ethane and liquefied petroleum gas production and fractionation, a helium plant, and the utilities and infrastructure that will be required to support the processing units.

The announcement followed the award for the fabrication and installation of eight NFE offshore jackets to McDermott Middle East. In addition, the joint venture formed between construction and engineering firm Consolidated Contractors Company and Teyseer Contracting was given the award for early site works on the project. In May 2019 McDermott was also awarded the front-end engineering and design contract for the associated topsides and pipelines, and in November 2019 the company delivered the first two completed offshore jackets.

Gas

Taking into account the costs of feed gas, liquefaction and shipping to regasification facilities, the International Energy Agency (IEA) projects an average long-term marginal cost for LNG of $7.50 per thousand British thermal units (Btu) over the years leading to 2040. However, the range for Qatar is slightly lower, from roughly $3 per thousand Btu to $5 per thousand Btu – a significantly lower cost than projected for the US, Russia and Canada. The highest potential costs are seen in Mozambique and Australia, with the IEA projecting between $9 and $10 per thousand Btu, respectively.

Saad Sherida Al Kaabi, minister of state for energy affairs, and president and CEO of QP, believes that the increasing focus on natural gas is likely to continue in the years to come. “The current energy transition is mostly driven by the need for cleaner and more economic and sustainable alternatives. Natural gas is key in this transition because of its qualities as the cleanest fossil fuel,” Al Kaabi said in a panel discussion at Doha Forum 2019. “Many countries are moving away from coal and building infrastructure for gas,” he added.

These assertions are backed by forecasts published by a number of energy bodies. According to the IEA, in 2018 there was a 4.6% increase in global natural gas consumption – accounting for around half of the total increase in energy demand – while 2019 was a record year for investment in LNG even as prices in importing regions fell. Furthermore, the International Gas Union (IGU) reported that in 2018 the global LNG trade reached a new annual record of some 316.5m tonnes, an increase of 28m in its fifth consecutive year of growth.

The IEA modelled two scenarios based on how countries respond to global warming threats and adhere to their stated plans for reducing their environmental impact. Natural gas outperforms coal and oil in both the Stated Policies Scenario, which is designed to demonstrate the impact of existing and proposed policy frameworks, and the Sustainable Development Scenario, which outlines major transformations in the global energy system and shows what changes need to be made to meet sustainability goals. The first scenario shows gas demand growing progressively by one-third to 2040, while in the second scenario demand grows to 2030 before falling back current levels by 2040, as accelerated deployment of renewables and increased production of biomethane and hydrogen gradually begins to reduce overall consumption. Even under the latter scenario, natural gas would gain market share at the expense of coil and oil.

In the IEA’s Stated Policies Scenario, by the late 2020s LNG overtakes pipelines as the main way of trading gas between regions. It sees the proportion of LNG in total energy demand in Asia rising from 20% in 2018 to 40% in 2040. However, the IEA does raise questions regarding the longer-term economic sustainability of the LNG model, suggesting that unless LNG prices rise from 2019’s record lows, LNG suppliers may find it difficult to recover their longterm investment costs. Furthermore, governments may have to subsidise the cost of LNG imports. However, it remains possible that this economic projection will play out in Qatar’s favour.

Competitors

The decision to temporarily suspend the NFE came against the backdrop of increased oil market volatility. Qatar, a member of the Organisation of the Petroleum Exporting Countries (OPEC) until December 2018, adhered to crude oil production restrictions agreed to by members and a number of other countries in 2017, in ongoing efforts to restore crude oil prices. Although this reasoning could be applied to the supply and demand of natural gas, Qatar’s competitors outside OPEC in Russia, the US and Australia have been investing in and expanding their LNG industries.

According to the IGU, from January 2018 to February 2019, 36.2m tpa of liquefaction capacity was added globally, including 11m tpa in Russia. In Australia two trains began commercial operations in 2018 with an additional 12.5m tpa due to come on-line in 2019, and the US was expected to bring 29m tpa in liquefaction on-line in the same year. Meanwhile, Russia’s LNG industry is hoping global warming will open Arctic Sea routes to increased shipping. Its Arctic LNG 2 project could commence as early as 2024, with the Northern Sea Route, its busy shipping channel, enabling it to reduce the distance and cost required to reach key Asian markets.

Although the competition is heating up, Qatar’s production costs remain low, and the country has signalled that it will likely need more than 100 new ships built within a decade to carry and store its increasing LNG exports. In the meantime Qatar is still closing a number of long-term international supply agreements. In September 2019 QP booked the full regasification capacity of Belgium’s Zeebrugge terminal in an agreement that will run until 2044.

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The Report: Qatar 2020

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