Qatar Moves Forward with NatGas Pipeline Plans

This tiny U.S. ally is showing few signs of the world economic crisis, even as some of its Persian Gulf neighbors struggle with debt, stalled projects and the collapse in oil prices.

The force driving Qatar: A virtual pipeline to carry vast holdings of Persian Gulf natural gas to energy-hungry consumers in faraway places like Britain and the United States — a project Qatar is determined to pursue despite the global slowdown.

Oil Pump
Oil Pump

Here in Ras Laffan, an hour's drive through bleak desert north of the capital, Doha, sits the country's multibillion-dollar gas bet on its future.

The export route is set to grow much wider, solidifying Qatar's place as the world's biggest liquefied natural gas exporter. This week, Qatar's emir inaugurated the latest in a series of mammoth new production facilities that aim to more than double the country's annual output of LNG to 77 million tons by decade's end.

But from an energy producer's point of view, it is hard to imagine a worse time to come online. The global economic meltdown is killing demand for energy including LNG — a supercooled form of the cooking, heating and power-generation fuel condensed into liquid for easier transport by ship.

"Because you have weakening demand, you're going to have a lot of LNG on the seas trying to find a home," said David Dugdale, an energy analyst at MFC Global Investment Management in London.

Francisco Blanch, a Banc of America Securities-Merrill Lynch commodity strategist, summed up the problem in a report this week: The world, he said, is "swimming in liquid gas."

Blame it on the economic meltdown. Demand for manufactured goods built in factories powered by natural gas-fueled electricity is tumbling. At the same time, penny-pinching consumers are looking to trim their utility bills.

Other countries are racing to profit from LNG. Indonesia, Russia and Yemen each have LNG projects due to start this year, adding to the oversupply.

All that is bad news for Qatar, a nation of 1.4 million — mostly imported foreign laborers — that has parlayed its energy bounty into an outsize role: the tiny country, an OPEC member, hosts the Mideast outpost of the U.S. military's Central Command. It also bankrolls the outspoken satellite channel Al-Jazeera and increasingly acts as a mediator in Mideast conflicts.

But, global recession or not, Qatar is determined to press ahead with its gas plans.

Doing so will ensure additional income to strengthen the Arab state's clout as an alternative to longtime regional powerhouses Saudi Arabia and Egypt. Added capacity will also give Qatar better economies of scale to undercut smaller producers in the U.S.

"I am confident we can manage the glut," Qatar Energy and Industry Minister Abdullah bin Hamad al-Attiyah said earlier this week.

Qatargas 2, the $13.2 billion project inaugurated Monday, is loaded with superlatives.

The production equipment — the world's largest — is more than twice as big as previous models. Purpose-built tanker vessels are so tall and fast the company's head says they should thwart pirates that threaten their route around the Arabian Peninsula. Never before has any company tried to manage so much of the supply chain itself.

Qatargas 2 includes two production lines known as trains. Natural gas sucked from underwater wells is cooled in onshore facilities in Ras Laffan to turn into a liquid for easier transport. It is converted back into gas at destination.

Exxon Mobilowns 30 percent of one train and 18.3 percent of another. French oil producer Total SA has a 16.7 percent stake in one train and state-owned Qatar Petroleum owns the rest.

Natural gas from Qatargas 2 is primarily destined for the United Kingdom, which needs more fuel to make up for declining domestic production.

The project aims to supply some 20 percent of the UK's natural gas needs through a terminal built by Qatargas and partners in Wales. Later projects are targeting the U.S. market.

"It's going to be very, very important to the UK to have a long-term, secure gas supply from a friendly country," the UK's Prince Andrew, who represents British trade and investment, said after the inauguration.

However, it may take years before Britain will need all the 15.6 million tons of LNG the new facility will produce annually.

The remainder — possibly as much as 50 percent — will likely end up in the U.S. and other markets for four or five years, Qatargas CEO Faisal al-Suwaidi said.

"For the shorter term, I don't think the UK will be able to take 16 million tons," al-Suwaidi said. "Anything the UK cannot absorb, we will have to find a market for."