The following article on the Qatari LNG market is taken from the Oxford Business Group's latest publication, Emerging Qatar 2004. For more information on how to order a copy of the most comprehensive review of the Qatari economy to date, please write to us at email@example.com
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Many energy analysts see the surge in the liquefied natural gas (LNG) industry in recent years as the beginning of a boom akin to that of the oil industry in the 1960s and 1970s. The result will be the emergence of a truly global market for natural gas, brought about primarily through the liquefaction of gas to allow it to be transported internationally.
The growing importance of natural gas reflects the rising use of gas-fired electric power plants to meet the world's growing demand for electricity. Stronger environmental standards in high-energy-consumption countries have also been key, as natural gas is the cleanest of the fossil fuels. By the same token, vehicular air pollution has led to a greater emphasis on automobiles powered by natural gas.
Asia led the way in the development of the gas industry, with Japan emerging as the world's largest importer of LNG. By and large, however, the gas industry was regionalised, based on shipment by pipeline from source to market, particularly in Europe and the US. Until recently, the costs and the technology involved in the LNG process were prohibitive in commercial terms. While LNG projects are still expensive, technological improvements have made the costs much more manageable.
Asia will remain crucial to the LNG market, particularly with the rising energy needs of rapidly developing countries like China and India. However, the US is seen as the real driving force behind the recent blooming of the LNG industry. The growing gas needs of the American market have put the industry practically on an emergency footing, with US policymakers realising that domestic supplies, and even those of Canada - the largest source of gas for the US - will not meet future demand. American energy companies have therefore embarked on a quest to locate and develop overseas supplies of natural gas.
Qatar has benefited tremendously from this, with multi-billion dollar gas deals coming closely linked to the US firms' LNG plans. Moreover, the enthusiasm of US energy companies for gas ventures in Qatar has been helped by the stepped-up US military presence in Qatar since early 2003. Perceptions of stability and security have been important for both the US corporations and the Qatari government in taking the plunge into large-scale LNG production.
LNG production plants normally take several years to finance and built, which does little to ease the short-term rise in US demand. LNG shipments are also limited at present because the US currently has only four receiving terminals; while more are being built, they will not be ready until the latter part of the decade.
PRODUCER COMPETITION: While such immediate obstacles are a cause for concern, the global gas market will continue to expand. The more problematic issues will likely be at the supply end, with competition among gas suppliers intensifying as more projects come online, thereby exerting a downward pressure on gas prices.
While Qatar's North Field holdings represent the largest single gas reserve in the world, the country falls behind Iran and Russia in overall terms. Analysts describe Russia, rather than any Middle Eastern state, as "the Saudi Arabia of natural gas".
Moreover, countries with smaller reserves, such as Malaysia and Indonesia, are already among the largest LNG exporters in the world. Indeed, Indonesia, Malaysia and Australia offer Qatar stiff competition in the Asian market. Russia is a key player in the Asian and European markets, while Canada and Trinidad and Tobago are big in the US market. Nigeria and Angola may also become major forces in the gas trade.
GLOBAL GAS PRICING?: Unlike oil, which trades as a commodity in international markets, gas is shipped mostly according to schedules and prices fixed by long-term contracts between energy companies and their supplier countries. LNG could change the dynamics of gas pricing considerably, as small amounts of gas can be shipped as needed to meet short-term demand.
Yet the internationalisation of the gas market might still not create a standard, global price for the commodity, as is seen with oil. Analysts argue that the price of gas will still be dictated by local dynamics, as energy companies will continue to look for stable arrangements with key suppliers in order to justify the cost of LNG investments.
This could play in Qatar's favour, as the ease of access to the country's North Field well sites results in low production costs for LNG. Officials for RasGas, a joint venture between Qatar Petroleum and ExxonMobil, note that the company also has one of the lowest liquefaction costs in the world, as recent technological and engineering advances have boosted efficiency, lowering costs by some 20%.
In the oil sector, such geographic factors have been mitigated by policies of the Organisation of Petroleum Exporting Countries (OPEC), sometimes termed the "oil cartel", though a few major oil producers - notably Russia - prefer to stay outside it. The issue of pricing has led to speculation that gas-producing countries might attempt to form a gas version of OPEC.
Indeed, some level of co-ordination is likely to emerge among gas producers, if only to increase the exchange of information and technical co-operation. Yet the diverse nature of gas-producing countries, and the associated divergences in their interests, would probably prevent any formal entity from controlling production and pricing.
THE PROCESS: Producing LNG is a technologically complex, capital-intensive process with four basic stages: extraction, liquefaction, shipping and revapourisation.
In Qatar's case, gas and condensate are extracted from offshore wells, with initial processing being done on-site. The resulting condensate is then moved ashore via underwater pipelines. It is then stabilised and treated to remove impurities, an important step in order to comply with increasingly tight environmental regulations.
During the cooling cycle, which defines the LNG process, the gas is liquefied in a specially constructed "cryogenic heat exchanger", where a refrigerant is used to cool the gas to -160 C.
This cooling process is the key to making the transport of commercially viable amounts of gas possible, as gas in its liquefied state has 1/600th of the volume of its gaseous form. Because of the cold temperatures involved, the liquefied gas must be stored in large, specially insulated tanks to prevent the inflow of heat, and thus avoid the problem of evaporation.
LNG must then be carried in purpose-built LNG tankers. The original ships built in the 1960s and early 1970s carried anywhere from 25,500 cu metres to 87,600 cu metres. By the late 1970s, ships were being constructed with a capacity of 125,000 cu metres, only slightly less than the ships in Qatar's LNG fleet today.
In the transport process, some LNG evaporates, but this "boil-off vapour" can be used as fuel for the carrier vessel. A small portion is also retained at the receiving terminal in order to keep the tanks at the necessary temperature for the next cargo.
LNG receiving terminals normally include facilities for revapourisation, which essentially turns LNG back into regular natural gas before it is delivered to users.
OVERSEAS INVESTMENT: Given the complexity of the LNG process, there is a desire among producers to shift the costs of shipping and regasification to purchasers.
This has not always worked. Qatar's LNG fleet was built specifically because of a sales purchasing agreement (SPA) with Chubu Electric, in which Qatargas is obliged to take care of shipping.
High costs also created pressures to fit the largest amount of LNG possible in each vessel. While new LNG ships were clearly needed, the limitations of receiving terminals led to a 135,000 cu metre maximum capacity for each ship. Qatar opted to time-charter the new ships in order to streamline costs and avoid the diversion of attention and resources necessary to fully manage a new fleet of gas tankers.
Additional LNG projects have seen Qatar's producer companies take on a growing role in the shipping and regasification process. For example, QP and ExxonMobil stepped in to acquire a 90% stake in Edison's offshore receiving terminal. Under the original SPA, Edison was to have full responsibility for this project; however, RasGas officials noted that the deal fell apart after a number of questions were raised about the logistics and safety of the nominated receiving terminal.
A Qatari shipping venture acquired a 15% stake in two LNG shipping companies set up to supply LNG to the Dahej terminal in India as part of the SPA between India's Petronet and RasGas. India's shipping industry has faced declining profits and limited expansion in recent years.
The trend of shifting the responsibility for shipping to producers is likely to continue as the expected increase in the international supply of LNG gives purchasers more bargaining power over the finer details in future contracts with producers.