Qatar remains a leading player in oil and gas

The year 2015 was a challenging one for Qatar’s oil and gas industry. The state saw its hydrocarbons revenue, which accounts for a significant portion of its income, significantly impacted as an ongoing global oil price plummet accelerated, with crude oil losing over two-thirds of its value between June 2014 and January 2016. Redundancies, private sector exits and the cancellation of a multi-billion-dollar petrochemicals complex, the second such project to be cancelled in less than six months, also had an effect.

The price slump is expected to extend through 2016, driven by soaring global reserves and rising output from the US and Iran. Despite these challenges, Qatar is better positioned than many. The world’s fourth-largest producer of dry natural gas and largest producer of liquefied natural gas (LNG), it has benefitted from over a decade of targeted investments that have allowed expansion into value-added gas-to-liquids (GTL) and condensate production, with a planned new helium project indicating long-term confidence in GTLs.

Although state-owned Qatar Petroleum (QP) underwent major restructuring during the first half of 2015, it is slated for medium-term growth after launching a new strategy targeting investment in foreign production projects. While low oil and gas prices, declining crude output and a moratorium on new gas production at the offshore North Field will keep exploration and production activities muted in 2016, recovery prospects are promising and should see the sector regain its footing in the coming years.

State Giant

Qatar’s energy sector is vast, complex and well developed, encompassing a diverse array of state-owned energy companies, along with strong private sector participation in nearly all major energy projects. The state’s dominant energy company, QP, controls all aspects of the upstream and downstream oil and natural gas sectors, from exploration and production to transportation, storage, marketing and sales. Established in 1974, the company works with a host of international oil companies (IOCs) under exploration and production-sharing agreements (EPSAs), as well as development production-sharing agreements to produce oil and gas for exports. QP and its subsidiaries operate at onshore locations including Doha, Dukhan, and the Mesaieed and Ras Laffan industrial cities; offshore activities on Halul Island, North Field; and other offshore production stations and drilling platforms.

The US Energy Information Administration (EIA) reported in October 2015 that QP has offered more favourable terms for EPSAs in recent years in order to increase production and reserves, and to mitigate natural gas-related capital expenditures.

Overhaul

In September 2014 QP welcomed a new managing director, Saad Sherida Al Kaabi, marking the start of a new strategy for the company and unofficially splitting the Ministry of Energy and Industry (MEI) from QP, which had operated largely as a single entity prior to the announcement. Shortly after Al Kaabi’s appointment, the company began a restructuring programme involving an operational overhaul, staff redundancies, the absorption of subsidiary Qatar Petroleum International and a new strategy focused on international investment in new production (see analysis).

From Boost To Bust

QP’s restructuring came in the wake of an extremely challenging period for the global energy market, which has seen oil prices fall by over 70% since mid-2014. Global energy markets took a hit in 2015, with average oil prices continuing a decline that began in June 2014, when Brent crude traded for roughly $115 per barrel. The declines accelerated throughout the year, falling to $28 per barrel by early 2016. It has since gained some ground, standing at $49-50 per barrel as of mid-2016.

LNG prices, which are often indexed to oil prices, have also tumbled since 2014. The International Gas Union (IGU) stated in its 2015 report that global LNG trade reached 241.1m tonnes in 2014, an increase of 4.3m tonnes over 2013 and the second-highest year for LNG trade on record. Prices also remained strong, with North-east Asian spot and Japanese import prices both averaging more than $15 per million British thermal units (Btu) in 2014; however, these prices did come under pressure in 2014, leading to a levelling of both European and North-east Asian spot LNG prices. According to figures from the IGU, gas from the Louisiana-based Henry Hub distribution complex traded at a discount to European and Pacific basin markets to finish the year at $3.40 per million Btu, while gas prices in the UK and Germany fell from $10 per million Btu in early 2014 to around $8 per million Btu at the end of 2015.

Government Revenues

Qatar, like many of its GCC neighbours, relies on hydrocarbons export revenue to support its economy, and the state felt the pains of significantly lower prices in 2015. The hydrocarbons sector’s contribution to government coffers had already started to decline in recent years, decreasing from 58.1% of nominal GDP in 2011 to 57% and 54.8% in 2012 and 2013, respectively, according to Qatar National Bank (QNB) data.

Falling prices saw the state’s foreign merchandise trade surplus fall from $6.5bn in November 2014 to $3.4bn in October 2015 and $3bn in November 2015. QNB attributed this to a 36.7% year-on-year decline in export revenues, caused by low oil and gas prices. The Ministry of Development Planning and Statistics also reported that oil and gas revenues made up 51.1% of nominal GDP in 2014 at QR390.7bn ($107.2bn) in revenues, down from QR402.8bn ($110.5bn) in 2013. By the end of 2015 oil and gas revenues accounted for 36.3% of nominal GDP, with QR219.9bn ($60.3bn) in revenues against a total of QR606.1bn ($166.3bn), according to provisional data from QNB.

Cloudy Forecast

Falling energy revenues are expected to continue into 2016 as worldwide reserves swell on the back of new production in North America, Iran and Australia, forcing governments across the GCC to revise spending and budget estimates, and negatively impacting growth. Qatar will record its first budget deficit in 15 years in 2016, with expenditure of QR202.5bn ($55.6bn) and a projected QR156bn ($42.8bn) in revenue, down from QR226bn ($62bn) in 2015. These projections assume average oil prices of $48 per barrel, compared to previous budget estimates of $65 per barrel.

Upstream Gas

Despite these near-term woes, Qatar remains well positioned to maintain its spot as the leading global LNG producer and exporter. Natural gas production and export is the backbone of Qatar’s energy economy. The EIA reports that Qatar is the world’s fourth-largest dry natural gas producer after the US, Russia and Iran, and holds the world’s third-largest proven reserves of gas at 872trn standard cu feet (scf) as of January 2015, which have provided it with the feedstock needed to fuel expansion within its petrochemicals industry. The government has allotted 16% of annual gas production to domestic petrochemicals production, as well as power generation and industrial use.

Qatar exported nearly 4.3trn scf of natural gas in 2014, accounting for 32% of global exports and keeping it in the leading global position it has maintained since 2006. The majority of production is shipped to Asia as LNG, and smaller amounts to the UAE and Oman via the subsea Dolphin pipeline.

Historically, the majority of Qatar’s LNG exports have been made under long-term oil-indexed contracts, although recent years have seen the state shift to short-term contracts and spot market sales, with these comprising about one-quarter of LNG exports in 2012, according to data from the EIA, which reported that more than 90% of Qatari LNG production is committed as part of supply purchase arrangements running to 2021. This structure provides the state with considerable insulation against an influx of new LNG projects coming on-line in the next several years in Australia and North America.

Major LNG Players

Qatar has often emphasised development of integrated, large-scale projects linked to LNG exports and downstream industries requiring natural gas feedstock, a strategy that has led to tremendous growth and success over the past 15 years. It has also drawn a number of major IOCs into the Qatari market, bringing valuable investment and expertise, most notably Shell, ExxonMobil and Total. Both of the state’s two main LNG ventures have an individual ownership structure, with QP holding at least a 65% stake in each. Qatargas Operating Company (Qatargas) is the largest LNG producer in the state, and, with production capacity of 42m tonnes per annum (tpa), the largest LNG-producing company in the world, operating four major LNG ventures known as Qatargas 1, 2, 3 and 4. Established in 1984, the company consortium includes QP, Total, ExxonMobil, Mitsui, Marubeni, ConocoPhillips and Shell.

Qatar’s second-largest LNG company is RasGas Company (RasGas), which operates three major LNG ventures, known as RasGas Laffan I-III. QP holds a 70% stake in the firm and ExxonMobil holds 30%. The two companies offer a combined capacity of 77m tpa and handle their own upstream, downstream and transport operations, although both charter LNG vessels from Qatar Gas Transport Company (Nakilat) for export shipments. Qatargas’ chartered fleet includes 43 purpose-built vessels, comprising 13 Q-Max, 19 Q-Flex and 11 conventional LNG vessels, while RasGas owns a charter fleet of 27 ships, including 12 large Q-Flex vessels. Ships are also chartered from Nakilat, a joint-stock company that is 50% owned by private shareholders and 50% listed, whose LNG fleet is the world’s largest at 67 ships.

North Field

Nearly the entirety of Qatar’s gas reserves is concentrated in the North Field, which together with Iran’s South Pars field forms the world’s largest natural gas deposit. According to QP, the field holds more than 900trn scf of recoverable gas and spans an area of 6000 sq km, with commercial exploration commencing in 1991, 20 years after it was first discovered. The North Field comprises four separate reservoir layers that narrow towards Qatar, making the field shallower than South Pars and presenting challenges to producers.

Moratorium

Although stakeholders hope to improve the situation in the North Field through horizontal drilling, which has already paid dividends for companies such as Occidental and Maersk, the risk remains that too much production over too short a time span could lead to loss of overall pressure in the field. With this in mind, Qatar announced a moratorium on new production in the North Field in 2005, and although the ban was initially expected to be lifted in 2008, it remained in place as of mid-2016.

Khuff Field

The industry was heartened by the 2013 discovery of up to 2.5trn scf of natural gas in Block 4 of the Khuff formation, just outside the North Field. The find marked Qatar’s first new discovery of gas in 42 years, under an EPSA between QP and IOCs including Germany’s Wintershall, which signed an EPSA for Block 4 development in 2008, and Mitsui Gas Development Qatar, which joined in 2010 by acquiring 20% of Wintershall’s interest in the project.

The Khuff project has not yet been successful, and in July 2014 Shell ended its investment in the so-called pre-Khuff formation after signing an agreement with QP and PetroChina for a 75% share in a joint venture to develop the field’s Block D in 2010. Although the company was meant to drill two wells over a five-year period ending in May 2015, its first well drilled in Block D, which had been touted as the area’s most promising exploration block, came up dry. In May 2015 Wintershall also announced that it planned to leave Qatar and the Khuff project, citing lack of access to local infrastructure as the primary reason behind its decision.

Barzan

The state’s sole prospect for a near-term production increase now lies in the 1.4bn-scf-perday (scfd) Barzan project, the final project to be approved before the North Field moratorium was instituted. The $10.4bn project, which reached financial close in 2011, consists of both onshore and offshore developments, including offshore platforms, pipelines and a natural gas processing unit. QP holds a 93% stake in the project, while ExxonMobil owns the remaining 7%, with operations expected to commence in 2016 and reach maximum production capacity in 2017. Although officials estimate the project will see an additional 1.4bn scfd of gas added to the Qatari market, the EIA reports that Barzan is only expected to offset some of the anticipated production decline in the North Field.

With oil and gas production expected to, at best, remain steady over the medium term, Qatar is increasingly turning towards value-added GTLs to bolster its hydrocarbons revenue, following the cancellation of two high-profile planned petrochemicals projects in 2014 and 2015. The GTL segment thus remains primed for steady future expansion, as witnessed by a contract awarded in 2015 for a Qatar III helium plant (Helium 3).

GTL 

One of Qatar’s major competitive advantages lies in its GTL production, which processes natural gases into heavier hydrocarbons. The state is a leading global GTL producer through two operational facilities, Oryx and Pearl GTL, which use a refining process to produce fuels including low-sulphur diesel and naphtha. Qatar is one of just three countries, including South Africa and Malaysia, to hold operational GTL facilities, with Pearl GTL standing as the largest GTL plant in the world.

Pearl GTL

Under a development and production-sharing agreement, QP and Shell jointly developed the Pearl GTL project. The plant uses 1.6bn scfd of natural gas feedstock to produce 140,000 barrels per day (bpd) of GTL products, in addition to 120,000 bpd of natural gas liquids and liquefied petroleum gases (LPG). After launching in 2006, the project’s initial phase began operations in early 2011, with the first shipments sent out in June of that year. The second phase of Pearl GTL’s development commenced in October 2012, bringing it to full and present capacity. The $19bn project is expected to deliver 3bn barrels of oil equivalent over its lifetime and stands as the first integrated GTL operation globally, meaning it offers upstream natural gas production integrated with an onshore conversion plant.

Oryx

The Oryx GTL plant, meanwhile, is a 51:49 joint venture between QP and Sasol. The project first began operations in 2007, ramping up to full capacity in early 2009. It uses roughly 330m scfd of natural gas feedstock from the Al Khalij field to produce 30,000 bpd of GTL products.

Although the EIA reports that officials have discussed expanding the Oryx facilities, this is unlikely to occur until after the government decides to lift the North Field moratorium.

Helium

Outside of these two GTL facilities, downstream expansion is ongoing. One of the only new hydrocarbons-related projects to move forward in 2015, RasGas’s upcoming Helium 3 plant will bolster value-added GTL production in the state, with the new plant joining the Helium 1 and 2 plants, both located in Ras Laffan Industrial City, and adding 400m scf of liquid helium annually to the company’s supply. When construction on Helium 2 finished, Qatar became the world’s second-largest producer of helium gas, which is currently in short supply globally, painting a bright forecast for expansion of helium production within the state.

In October 2015 RasGas announced it had awarded two major contracts linking to the plant. US firm Air Products was awarded the sales and purchase contract for long-term helium supply and a technology licence to supply helium licensor packaging equipment for the new plant. The project’s engineering, procurement and construction agreement was awarded to Chiyoda Al Mana.

Oil

Although Qatar has been a member of OPEC since 1961, it is also the organisation’s second-smallest member with proven crude reserves of 25.7bn barrels, according to the 2015 “BP Statistical Review of World Energy”. Oil production in Qatar has been declining in recent years, with non-crude liquids production surpassing crude oil production for the first time in history in 2012 as a result of growth in output of natural gas condensates, which produce heavier hydrocarbons in addition to natural gas.

At the same time, declining production at Qatar’s mature oilfields has further diminished oil’s share of the energy mix. Crude oil made up 35% of petroleum and liquid production in 2014, compared to 44% in 2010. According to the EIA, Qatar produced 2.1m bpd of petroleum and other liquids in 2014, of which 1.5m was crude and the remainder non-crude liquids. This represents a 64% increase since 2005.

Oilfields

Three main fields make up the majority of oil production in Qatar: Dukhan, which is operated by QP; Al Shaheen, currently operated by Maersk; and Idd Al Sharqi, which is operated by Occidental. Together they are responsible for approximately 85% of the state’s total output. Additional oil reserves are located at the offshore Bul Hanine and Maydan Mahzam fields, as well as the onshore Al Khalij, Al Karkara and Al Rayyan fields, the latter of which became Qatar’s most recent discovery after commercially viable deposits were found in 1994.

QP operates both the Bul Hanine and Maydan Mahzam fields, Al Khalij is operated by Total and Occidental operates Al Rayyan. Japan’s Qatar Petroleum Development Company operates Al Karkara. Qatar produces three main crude oil streams: the heavier crude Al Shaheen and the lighter Qatar Land and Qatar Marine blends.

In late June 2016 QP announced that development and operation of Al Shaheen, located some 80 km north of Ras Laffan, will be taken over by a 70:30 joint venture between QP and Total after Maersk’s 25-year production-sharing agreement expires in July 2017. Maersk has announced plans to cease operations in Qatar thereafter.

Exploration

Although oil exploration in the state is ongoing, it has been over 20 years since the last significant find, and stakeholders are now moving to improve efficiency and productivity at existing fields in a bid to prolong their lifespan, largely through the use of enhanced oil recovery (EOR) techniques such as water flooding and horizontal drilling.

The EIA has reported that fields including Al Shaheen, Dukhan, Bul Hanine and Maydan Mahzam have already benefitted from the introduction of EOR practises, although it notes that the government’s previous crude oil production capacity target of 1.2m bpd is not feasible. Indeed, QNB reported in January 2016 that in 2015 crude oil output fell from 663,000 bpd in September to just 639,000 bpd in October. This could change over the longer term, however, if an ongoing project at the Bul Hanine offshore field proves successful.

Bul Hanine

In May 2014 QP announced plans to invest more than QR40bn ($11bn) in the redevelopment of Bul Hanine, which is located roughly 120 km off the east coast of Qatar. One of the largest such developments ever to be managed and executed by QP, the project is expected to prolong the field’s lifespan while simultaneously doubling its oil production rate through the introduction of advanced EOR techniques. The ambitious project envisions a major new drilling campaign involving 150 new wells being sunk between 2014 and 2028.

Wellhead steam fluids will be processed in a new offshore central complex, and oil produced at Bul Hanine will then be sent to Halul Island for export, in addition to an estimated 900m scfd of sour rich gas produced from the new wells, which will be delivered to a new gas treatment facility in Mesaieed via a new 150-km subsea pipeline.

The lean sweet gas will then be sent back, via an additional new subsea pipeline, to planned new offshore facilities for compression and injection. In December 2015 Air Energi secured a contract to supply personnel for the project for five years.

Oil & Condensate Refining

Qatar is home to two oil refineries with total combined crude oil refining capacity of 338,700 bpd. According to QP’s 2014 annual report, total exports of refined products stood at 1.21m tonnes, against planned volumes of 1.08 tonnes. The oldest of these, the 100% QP-owned Qatar Petroleum Refinery, was established in 1958 and today has a capacity of 137,000 barrels per stream day (bpsd), as well as 57,000 bpsd of condensate refining capacity to process feedstock into value-added products.

Decades of rising natural gas production have boosted Qatar’s production of condensates and natural gas plant liquids to 700,000 bpd in 2015, with exports of 500,000 bpd, according to the EIA. These value-added products offer considerable economic benefits to the state, helping to offset near-term oil and gas export losses. Condensate production is becoming a major driver of energy sector growth since the Laffan Refinery, Qatar’s first condensate refinery and one of the world’s largest, started production in September 2009.

Using gas from Qatargas and RasGas facilities, the Laffan Refinery is owned by QP (51%), ExxonMobil (10%), Total (10%), Idemitsu (10%), Cosmo (10%), Mitsui (4.5%) and Marubeni (4.5%). The refinery has a processing capacity of 146,000 bpsd, transforming field condensate from LNG production into high-value fuels. Production capacity for naphtha, for example, stands at 61,000 bpsd, while production of kerojet, gasoil and LPG is 52,000 bpsd, 24,000 bpsd and 9000 bpsd, respectively, according to Qatargas.

Since 2014 the majority of the gasoil produced at Laffan has been converted into diesel. Its operations will double with the opening of Laffan Refinery 2, a new facility with capacity of 146,000 bpsd. In November 2015 QP announced the new refinery is set to open in the third quarter of 2016.

Value-Added Expansion

Although the government is also moving to expand production within the petrochemicals segment – in 2012 the MEI took a decision to pursue an ambitious strategy aimed at boosting petrochemicals production from approximately 9m tpa to 23m tpa by 2020 – plans have taken a hit in recent years.

In September 2014 Qatar’s state-owned petrochemicals and steel producer, Industries Qatar, announced that it was shelving plans to build a $6bn petrochemicals project known as Al Sejeel, which would have been carried out as a joint venture between Industries Qatar and QP.

Al Karaana  

More bad news came in January 2015, when an 80:20 joint venture between QP and Shell announced it had cancelled the planned $6.4bn Al Karaana petrochemicals project, which had been expected to include a mixed-feed steam cracker producing 1.1m tpa of ethylene and 170,000 tpa of propylene. According to both companies, the project was not financially feasible, although state-owned petrochemical players, including the Qatar Petrochemical Company, Qatar Chemical Company, Qatar Vinyl Company and Ras Laffan Olefins Company, are now able to expand their operations using the feedstock that had been reserved for the project.

Outlook

While a near-term oil price rebound is not anticipated, rising global demand, particularly for LNG will ensure positive long-term growth. The state’s energy market remains a major strength, with strategic foreign investment, optimisation and restructuring expected to help Qatar weather the worst of international energy market volatility. Investments in new GTL projects also indicate a promising future for value-added production, and although production and revenues are struggling at present, ambitious plans to expand the use of EOR, the potential for new gas discoveries outside of the North Field and rising condensate production will keep Qatar at the forefront of both the GCC and international market as it moves into 2017.

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The Report: Qatar 2016

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