Qatar's LNG Party Clouds Wider Gas Market Issues

DOHA (Zawya Dow Jones)

Qatar, the tiny Arab Gulf state, cemented its status as the undisputed exporting giant of liquefied natural gas, or LNG, Monday when it celebrated reaching its long-awaited 77 million tons annual production capacity of the super-cooled fuel -- at a time when the market is facing a supply glut.

The country's Emir, Sheik Hamad Bin Khalifa Al Thani and its energy minister, Abdullah Bin Hamad Al Attiyah, were among those attending a lavish day of celebrations where dancers and musicians performed in front of hundreds of industry experts and government officials at a specially erected site in the northern industrial city of Ras Laffan on Monday.

"It's a huge achievement," said Kamel Al Harami, an independent energy analyst based in Kuwait. "Especially bearing in mind Qatar only sits on the third largest reserves of gas after Russian and Iran."

Natural gas is the lifeblood of Qatar's economy, spurring double digit growth of 16% this year and an expected 21% next. Nearly 15 years after the first cargo of LNG left its shores gas has made Qatar one of the world's richest nations. Its LNG expansion program has centered around the construction of 14 so-called 'supertrains,' or liquefaction facilities, operated by state-run firms RasGas and Qatargas. Qatargas' train 7 is the last remaining facility and is expected to come on stream early next year.

LNG is gas cooled down so it becomes liquid and can be transported in special vessels over long distances. Qatar ships its LNG on specially designed tankers to 23 markets across the word including Asia, Europe and the U.S.

While it has been the largest global producer of LNG for some time, a yearly export quota of 77 million tons, or 105.1 billion cubic meters, is the equivalent to 21% of Asia-Pacific's entire annual gas consumption, based on 2009 consumption data. Qatar's output of 77 million tons is also enough to supply the whole of the U.S. for 59 days, according to official government data.

But the Arab Gulf state reaches this milestone amid less promising signs in the international gas markets that have dramatically changed from pre-crisis times when the Persian Gulf state made the bulk of its big investment decisions.


A massive supply glut that is unlikely to disappear in the next 10 years, according to a report from the Paris-based International Energy Agency last month, casts an unwelcome shadow over the international market. Gas prices are around a quarter of what they were in early 2008 with benchmark U.S. Henry Hub gas on the New York Mercantile Exchange hovering at around $4 a million British Thermal Units, or BTU, compared to around $20 a million BTU in early 2008.

Discovery of shale gas in the U.S., a type of natural gas that is extracted from shale rock, has exacerbated the glut and altered the global supply picture of the fuel. After years of wanting to tap the lucrative U.S. market, Qatar and other big gas producers are now concerned that the world's largest economy is a fast shrinking LNG customer.

"The shale gale in the U.S. has clearly upset Qatar's initial strategic calculations, forcing it to enter into tougher competition about market shares in Europe and Asia," said Samuel Ciszuk, a London-based senior analyst at IHS Energy.

Instead, Qatar will increasingly look to booming emerging economies like India and China that are set to top demand for LNG in Asia over the coming years.

"Initially, Qatar was hoping to balance its output between the Atlantic and Asian basins, but this is a strategy which they have had to abandon, since Europe will never be on par with Asia as an LNG market and the U.S. is disappearing as an import market," Ciszuk added.

Qatar, though, is better placed than most to cope with low prices amid the shift in supply fundamentals. Gas from its giant North Field it shares with Iran is very high in condensate, which can be used to make lucrative products like kerosene that is the preferred fuel in the aviation industry.

"Qatar can afford to sell gas for zero dollars and still make money from condensate [production]," said Qatar Petroleum LNG analyst Jabor Al Mosallam. "Condensate products are very much in demand."

Copyright (c) 2010 Dow Jones & Co.