Economic Update

Published 22 Jul 2010

With a constant rise in global demand for natural gas projected to continue unabated well into the future, the industry remains significant to the economy of Qatar. With an estimated 900trn cubic feet of natural gas reserves – more than 5% of the world’s total and the third largest deposit in the world – liquefied natural gas (LNG) and its production has helped enable Qatar to rise in regional and global importance.

Because of this, any causes for concern in areas that affect LNG production or potential problems related to this sector are important and are closely followed.

One area of concern is the rising cost of infrastructure. The most important infrastructure needed for LNG production and transportation is a plant with one or more LNG trains that act as independent gas liquefaction units. Also needed are terminals for loading the LNG onto specialised vessels for transportation and for receiving it at the other end for discharge and re-gasification. According to data compiled by an industry publication, the construction of an LNG plant costs, on average, $1bn to $3bn, with receiving terminals costing $500m to $1bn and LNG vessels are around $200m to $300m.

However, these prices alone are not so important to many investors due to the nature of how deals are secured in the industry. The sector uses a value-chain system, which means that suppliers first confirm their buyers and a project will move forward only if it is deemed economically viable.

It is therefore necessary to take a closer look at other contributing factors.

The ease in transporting LNG has contributed to the overall rise in global demand. According to data published by an industry journal, demand surpassed overall trade for the first time in 2005. Because of this Qatar can now export LNG to areas that were not previously economically feasible. This has helped make it possible for Japan and South Korea to become two of the world’s top three importers of LNG.

However, trade is continuing to increase, with growth at more than 6% in 2006; raising the total amount of trade to 189bn cu metres, up from 101bn cu metres a decade ago.

Another area of costs to consider is project contractors. As the number of LNG infrastructure-related projects increases, with many projects expected to come on line between 2012 and 2015, the demand for contractors has outstripped their supply. This has led to an increase in contractor pricing.

Other factors, such as sharp rises in materials and labour costs, have added to the cost of infrastructure projects. As investors usually have already allocated buyers and signed agreements, there is no room for extended talks and with so many projects on the horizon, contractors can afford to be choosy and demand higher prices. According to data compiled by Contax Group, a management consultancy on Middle Eastern energy, the project activity market is expected to swell to $450bn this year. With energy related projects expected to see continued growth, there is no sign the current lack of contractors or the high prices will change any time soon.

Over the past few decades, the general cost of production has fallen and new technology has made it possible for more players to become involved in the industry. However, the high cost of construction, continued higher prices of oil, and an anticipated global shortage of LNG by 2012, noted by the US Energy Information Administration, have led Qatar, which is now the world’s largest exporter of LNG, along with other significant exporters like Indonesia, to demand considerably higher long-term prices from consumers.

The BP Statistical Review of World Energy puts the 2006 rate of natural gas consumption at around 2500 metric tonnes oil equivalent. While this is a large number, it represents only 24% of current world consumption of all energy types, including oil, natural gas and coal, and it is third behind oil and coal. This shows there is significant room for growth in the natural gas and related LNG sector.

However, while the outlook for future demand is high, sector insiders have said there is still cause for concern. Many industry analysts said they believe consumers will be unwilling to pay significantly higher prices for LNG. The result of over-inflated prices could lead to a global slowdown in demand as large-scale buyers choose alternative fuel sources. If this happens, the industry could face a possible price collapse. Qatar will need to remain proactive in the industry to retain its place in the market and ensure its economic future.