Crossing the Rubicon: Qatar’s Journey to Natural Gas Dominance

Qatar has been a world leader in exporting liquefied natural gas production (LNG) for over a decade and has adroitly positioned itself to take advantage of the relentless increase in global LNG demand. Qatar’s rise to prominence is due in no small part to its political enabling factors, namely that it is governed by a well-educated, ambitious and tolerant elite promoting a robust pro-market philosophy.

Natural gas is Qatar’s principal export to the global energy sector, with its proven natural gas reserves equal to approximately 12 % of total world reserves. (1) Its 24.7 trillion cubic metres (TCM) of gas, plus 22.3 billion barrels (2020) of associated condensates, are the third largest in the world, placing it behind Russia (37.4 TCM) and Iran (32.1 TCM). Qatar’s reserves-to-production ratio is tentatively estimated at approximately 100-130 years at current output rates, meaning that Qatar can expect to remain one of the world’s natural gas leaders over the next century. Most of the country’s gas is located in the massive offshore North Field (See Figure 1.1 below), the world’s largest non-associated natural gas field.

But when Qatar became the world’s largest exporter of LNG in 2006 (overtaking Malaysia), it truly strode onto the world stage. Qatari policymakers, though, have recognised that they cannot be complacent and depend on a mono-export economy for long-term sustainable development. To shift gears, they are currently diversifying the Qatari economy and enhancing its natural gas posture by expanding the downstream natural gas industries, investing in shale gas production sites and LNG plants in North America and worldwide, while also taking a leading role in global decarbonisation efforts. Because of its economic strategy based on diversification in the natural gas value chain, Qatar is now strongly represented in nearly every sector of the natural gas trade: LNG, Gas-to-Liquids (GTL), pipeline gas and Natural Gas Liquids (NGL).

The centrepiece of Qatar’s dominance in the LNG market is the North Field. (See Figure 1.1.) This massive gas field allowed Qatar to become a significant regional gas exporter through the Dolphin pipeline – the first and only transnational Gulf pipeline – and a major international gas supplier through LNG exports. It also represents the cornerstone of Qatar’s quest to establish an independent foreign policy based on its own strategic interests and maintain a delicate regional balance of power.

This article will discuss Qatar’s rise to dominance in the global LNG market and several challenges it could face, and provide an in-depth analysis of Qatar’s strategy for global market growth and domestic economic diversification by examining the various political and structural dynamics animating its energy policy.

The Master Key: North Field Development and the Birth of the Qatari Gas Industry

The North-West Dome Reservoir (known as the North Field in Qatar and South Pars for the Iranian extension) is a combined gas condensate field located in the Arabian Gulf, spanning the Iranian and Qatari maritime border. Known as the “Qatar Arch,” the geological structure is a Permian Khuff stratum that lies approximately 3050 metres beneath the surface and runs north-south through the entire peninsula. Near Qatar’s tip, the sub-stratum veers off into a northeasterly direction. (See Figure 1.2). There are various estimates as to how much recoverable gas reserves the field holds, but some of the more credible ones maintain that the total amount of gas in the field (in both the Iranian and Qatari zones) is nearly 50.1 TCM, with Qatar’s technically recoverable reserves standing at approximately 24 TCM and Iran’s at 14 TCM. (2) However, it is essential to mention that many of the available reports conflict regarding the amount of gas the combined North Field/South Pars holds, so the remaining 12.9 TCM may merely be unlikely to be successfully recovered at current levels of extraction technology. (3)

The North Field covers an area equivalent to nearly half the surface area of Qatar. (See Figure 1.2.) It is a carbonate reservoir with an approximate thickness of 457 metres, variable throughout the reservoir. When discovered, Qatar initially viewed the North Field as a “disappointment” because of the lack of adequate natural gas infrastructure and difficulties finding export markets for resources designated as “stranded’ assets.” (4)

Because the Qatar General Petroleum Company (QP) did not perceive its future potential, it earmarked the gas exclusively for local consumption. As an additional barrier, Qatar had not pursued a proactive gas production policy because of the necessity of modernising its administrative structures. Reminiscing about those days, former energy minister, Abdullah bin Hamad al-Attiyah, said, “I remember all the people who advised me and my country not to go into the LNG business.” (5)

Because Qatar viewed gas so unfavourably in the early 1970s, it flared approximately 80% of the 6.13 billion cubic metres of associated natural gas produced per year (16.8 million cubic meters per day), which essentially wasted what later became its main foreign revenue generator. (6) But, as it became more mindful of its gas wealth, it steadfastly reduced the onshore gas flared to 66% by 1974, and to less than 5% by 1979.

Even though Qatar nationalised the North Field in the late 1970s, the handover was amicable. Unlike the somewhat aggressive nationalisation programs in Latin America and other Middle Eastern countries, Shell remained a contractor to provide technical and support expertise. The fact that Qatar remained on cooperative terms with the international oil companies (IOCs) during the tumultuous 1960s and 1970s was the primary impetus for its current reputation of being a bastion of market stability in a sometimes-fractious region. The forward-looking Qatari leadership clearly recognised that there was no strategic benefit to being confrontational with the IOCs and the governments of their headquartered countries.

As with most Gulf nations at that time, Qatar viewed itself through the narrow prism of an “oil producer” and did not readily discern the profitability of natural gas reserves. However, a seminal report commissioned by Qatari officials in 1962 to examine the administrative effectiveness of governmental ministries, known as the Arthur D. Little (ADL) study, sounded an early warning for Qatar to diversify from oil into other economic sectors. (7)

The ADL study expressed concern over Qatar’s overwhelming economic and financial dependence on the oil sector, which it projected would be exhausted by 1982. The report, therefore, cautioned Qatar to develop other non-oil sectors, especially its natural gas wealth. The Qatari government took these recommendations seriously, and in 1964, took the initial steps to initiate a broad-based implementation.

However, the geopolitical turmoil associated with the 1973 Organization of Arab Exporting States (OAPEC) oil embargo and the 1979 Islamic Revolution in Iran significantly increased global oil prices and channelled enormous revenue inflows to Qatar. Consequently, this massive revenue growth mitigated most of the negative economic impacts they would have otherwise experienced from declining production rates due to oil field maturity. Accordingly, the influx of additional revenue lessened the sense of urgency to diversify economically.

For example, from 1973-1974, oil prices rose nearly 300%, from approximately $3 per barrel to almost $12 per barrel. This monumental foreign revenue inflow allowed the government to funnel the increased oil revenue into massive social and infrastructural investments, thereby creating the edifice of the modern national social contract seen today. As with most other oil-producing countries experiencing such windfall profits, the hard decisions accompanying economic diversification fell by the wayside. Despite the ADL’s policy suggestions, natural gas receded into the background, and only dimly glimmered on the policymaking radar.

However, several factors arose that precipitated oil’s decline in importance for Qatar. After Qatar’s oil production began declining in the 1970s, IOCs became convinced that its mature oil fields were not worth further investment. Furthermore, the IOCs perceived Qatar’s service contracts as not being financially viable for them, which made the prospect of additional large-scale upstream investment less appealing. Then, by the mid-1980s, while the economy was still heavily reliant on the oil sector, falling oil prices due to the massive Saudi oil production expansion meant that between 1979 and 1983, the percentage of government revenues derived from petroleum fell from 93% to 80%. (8) In tandem with the stark decline in oil prices, Qatari oil production continued to plummet until about 1987, producing a meagre amount of around 300,000 barrels per day.

The final coup de grâce to oil’s formally vaunted position in Qatar’s macroeconomy occurred when Qatar officially departed from OPEC in 2019, stating that it sought to focus on its domestic gas sector. This was an undeniable blow to OPEC, as it often prided itself for being an organisation that spoke for the region’s interests in the global oil sector since its establishment in 1960. Structurally, however, Qatar’s exit did not disrupt the organisation’s operations; and as mentioned above, Qatar’s declining oil production did not impact OPEC significantly in any way.

But for Qatar, this volte-face realignment of its foreign policy was seen as an entirely justifiable and prudent strategic response to the nearly three-year blockade (imposed by Saudi Arabia, Egypt, Bahrain and the United Arab Emirates) that emphasised its sovereignty.

When viewed geostrategically, the decision to withdraw from OPEC reinforced Qatar’s autonomy and lessened Saudi political influence. What is notable is that despite a not insignificant animosity between Qatar and the countries that imposed blockade, the embargo did not disrupt energy trade amongst them. For instance, Qatar did not halt gas exports through the Dolphin natural gas pipeline during the bloackade, and was still able to export its LNG globally without interference. Moreover, as an example of continuing energy collaboration, Qatar and the UAE renewed a concession agreement to develop and operate the joint Al-Bunduq offshore oilfield, even at the peak of the diplomatic crisis. There were no pronouncements that future disruptions on electricity swapping through the Gulf Cooperation Council Interconnection Project would be forthcoming either. The principal disruption to Qatar was that its airline, Qatar Airways, could not avail itself of the jurisdictions of the blockade countries for its flights.

To a certain extent, the lack of disruption in the regional energy sector illustrated that the regional energy sector could potentially be the glue of stability for future cooperative ventures in the region. But even though energy trade continued, unabated, unforeseen and lasting repercussions for further Gulf partnership could emerge at any time.

Nonetheless, since its transition to natural gas production, Qatar ceased its dependence on oil production for its foreign revenue generation. Therefore, its departure from OPEC merely confirmed an existing reality. Also, Qatar’s oil fields continued to mature and had been in steady decline since 2013, from 1.9 million barrels per day to nearly 1.8 million barrels per day by 2020. (9) All of this signified that oil would be of minuscule importance to Qatar’s economic growth strategy moving forward. Qatar’s future was planted firmly in the natural gas sector.

For Qatari policymakers, LNG was the future and would be fuelling the economic growth boom of the Asia-Pacific region, become the bridge fuel in the drive for global decarbonization, and power its foreign policy aspirations.

Seizing the Crown: The LNG Pivot

All was not smooth on Qatar’s LNG production journey. Several challenges arose in Qatar’s transition to becoming a natural gas-based economy. Phase One of North Field development was interrupted several times before its planned start-up date in 1990.  (10) In addition to the Iraqi invasion of Kuwait upsetting most major regional development projects and causing most Gulf governments to be externally focused, Qatar faced numerous obstacles as well. The evacuation of skilled personnel during Operations Desert Shield and Desert Storm measurably delayed North Field progress. Further exacerbating these issues, progress was delayed due to several infrastructural problems. For example, 14 of the 16 production wells in Phase One suffered from cement casing leaks during this period. (11)

A week before the revised start-up date of 3 August 1990, engineers discovered a chemical leak in an onshore pipe and the North Field, thereby shutting it down. (12) But by 3 September 1991, the 20th anniversary of Qatari’s independence and the date of the North Field’s discovery, production officially commenced. Up to this time, most of Qatar’s natural gas came from a couple of onshore and offshore oilfields, from which the associated gas was processed at the Umm Said complex.

After the North Field came online, Qatar took advantage of the confluence of two events that significantly increased natural gas demand in the international and regional markets: first, the widespread use of combined cycle gas turbines in the 1990s in power generation; and second, cost reductions throughout the LNG production chain. These developments allowed Qatar to reconfigure its previous strategy and reorient its gas resources primarily from domestic power generation to the global export market.

However, Qatar is now attempting to regain its leadership position in global LNG export that it had relinquished in 2018 to Australia. Beset by a worldwide LNG glut, tepid international demand, rising LNG competitors, the North Field moratorium, the slump in global oil prices from 2014-2017, the push of Qatar’s LNG importers to renegotiate contracts, and the pressure on the dominant long-term contractual model, Qatar’s leading position became tenuous. But, as it will be mentioned below, when Qatar’s new trains come online, it is expected to regain the top position. By the end of the 2020s, global LNG rivalry will likely be between the United States and Qatar, with Australia trailing in third place.

The North Field gas exploration and production moratorium (2005-2017) was a significant factor in Australia's ability to overtake Qatar in LNG production. The moratorium was repeatedly extended yearly to moderate North Field gas production to maintain future export potential. The overriding concern was that the rapid development of the North Field could lead to its overexploitation, with attendant gas depletion and perhaps even structural reservoir damage.

But, Qatar recognised that as long as the moratorium was in place, it would continue to lose market share to other LNG producers. Therefore, two years after the moratorium was lifted, in 2019, Qatar announced that it would expand its LNG production from 77 to 126 million tons per annum (MTPA) by 2027. QP is planning to increase its LNG production to around 110 MTPA by 2024 and construct four new LNG trains to manage the proposed increase. (13) The planned output increase is due to drilling and appraisal work in the North Field that determined that its gas reserves now exceeded 50 TCM. (14) The announcement came as Qatar was locked in fierce competition with Russia, the United States and Australia for global LNG dominance as Qatar’s rivals had significantly increased their LNG production, sending prices to multi-year lows. (15)

Yet, despite the untamed market-share rivalry, Qatar still has several comparative advantages that elude other LNG exporters. It has some of the lowest-cost gas production in the world because of the revenues from the natural gas liquids, butane and propane. Therefore, it has tremendous economies of scale because the North Field is nearly homogeneous, making extraction less capital intensive. Other producers find it challenging to rival those enabling factors. When considering whether in the future other jurisdictions would be able to acquire market share from Qatar, their typically higher break-even prices must be considered. Moreover, even though new LNG production zones are being constructed globally, no other country can match Qatar’s ability to renegotiate legacy contracts and create mutually advantageous agreements by undercutting its peers. And, lastly, in its favour, Qatari gas production is unitised, in that there are just a few gas fields allied with a much more streamlined decision-making process, in contrast to the diverse gas producers operating in other producing countries.

Still, Qatar is currently experiencing a conflict of vision with some of its foreign operators as the government seeks to produce its natural gas reserves over the most prolonged period possible to avoid rapid field depletion. This view contrasts with the perceived strategy of its foreign partners, who, as a rule, seek rapid profit maximisation from producing as quickly as possible to recoup exploration costs. Because of this fundamental difference in views, additional field development in Qatar may face difficulties until a viable consensus can be found.

Because most of Qatar’s natural gas was previously associated with oil, periods of weak oil demand and stringent OPEC quotas obstructed many gas-reliant industries from reaching maximum efficiency. But, even now, due to its significant gas-derived wealth, Qatar faces unique obstacles that other developing countries do not have. While it does not impede capital-intensive investment in the energy sector, its small economy, with consequent limited absorptive capacity and a small demographic base, is potentially economically disruptive, making it vulnerable to the Dutch Disease. Since it cannot depend on domestic demand for the economic growth it desires, Qatar will be externally oriented for a long time, and it must successfully navigate the ebbs and flows of the global economy.

Qatari leadership considers economic diversification key to overall economic sustainability and has invested billions of dollars across various economic sectors. (16) Even with these enormous strides and the overcoming of reliance on the oil sector, the Qatari economy is still overly dependent on gas (upstream and downstream) and the hydrocarbon sector in general. Qatar’s much-vaunted diversification efforts may not represent a substantive transition away from hydrocarbon dependence because most of its economic diversification is concentrated in the chain of downstream value-added industries, such as the petrochemical sector. Although the prices of petrochemicals and other value-added products are much more stable and fluctuate less often (and drastically) than that of crude oil and unprocessed gas, these products are still inextricably embedded in the hydrocarbon sector and may not represent “true” economic diversification focused on the creation of a multifaceted macroeconomy with interlocked sectoral growth engines.

Qatar has also taken an early leadership role in international climate issues with the hosting of COP 18 in 2012 and has established a broad suite of policies intended to reduce its greenhouse gas (GHG) emissions. Qatar plans to reduce its carbon footprint with the LNG train expansion by installing carbon capture and storage (CCS) infrastructure to reduce carbon emissions from its gas liquefaction and storage by nearly 25% below comparable operations in other jurisdictions. (17) Qatar is implementing its carbon and methane reduction plans primarily due to its Paris Agreement climate pledges in 2015 and to adhere to the EU’s recently implemented policies, such as its Methane Strategy announced in October 2020. (18) The European Commission’s Methane Strategy requires emissions reporting for exporters to the EU member countries. It posits the default values for methane emissions if the exporters do not meet the reporting standards. This undoubtedly placed external pressure on Qatar to reduce the GHG emissions from its LNG production lifecycle.

Following the promulgation of the EU Methane Strategy, QP signed an LNG supply contract in December 2020 with the Singapore-based Pavilion Energy Trading and Supply Pte Ltd. to export 1.8 MTPA for a decade from 2023. These LNG cargoes will identify and list the emission levels attached to each cargo. While this agreement does not obligate QP to a specified level of emissions, the Qatari energy minister, Saad al-Kaabi, announced that it represents, “[O]ur first long-term LNG arrangement containing specific environmental criteria and requirements designed to reduce the carbon footprint of the LNG supplies ultimately.” (19) Overall, QP indicated that its carbon reduction plans, a portion of its overall sustainability strategy, would act “as a clear direction towards reducing the emissions intensity of Qatar's LNG facilities by 25% and its upstream facilities by at least 15%, while also reducing flare intensity across upstream facilities by more than 75%.” (20)

QP’s sustainability strategy also set a target to eliminate flaring by 2030 and reduce methane emissions by implementing a methane intensity target of 2% to apply to all facilities by 2025. The strategy also obligates QP to expand its power capacity by more than 4 gigawatts (GW) from renewable energy, which would remove more than five million tons per year of carbon emissions while also planning to remove seven million tons of carbon per year by 2030 by CCS. By taking a leading role in reducing the carbon intensity across the natural gas value chain, Qatar has positioned itself ahead of its peers as a green and responsible energy giant ready for the “post-carbon world.”

The Transformative Gambit: Challenges and Opportunities  

Qatar’s former Emir, Hamad bin Khalifa Al-Thani was the visionary who foresaw Qatar’s vast natural gas resources as central to its security and economic development. His father, Khalifa bin Hamad Al-Thani, was far less driven in promoting the country’s resource development. Not only did the development of its natural gas sector help Qatar avoid the impending collapse of oil production and the resultant foreign policy concerns, but this resource also enhanced Qatar’s global importance considerably. As the far-sighted emir understood, Qatar’s wealth was also its vulnerability, a fact that required reliance on the international community, particularly on the United States, for security needs. Qatar has made much progress in hoisting itself from an undeveloped emirate to becoming one of the most progressive and advanced Gulf states. Its progress has proven itself to be integral to the region's peace and stability and the future security of the global natural gas supply.

Qatar succeeded in its breakneck journey as the world's largest LNG producer in the late 2000s and early 2010s due to the prodigious reserves in the North Field and coordinating production with various IOCs in the RasGas and Qatargas joint ventures. Even though it experienced a significant drop in LNG demand due to the global financial crisis of 2007-2008, Qatar transformed the crisis into an opportunity and successfully managed its market position to create a portfolio of over 25 importing countries to diversify its customer base. As a result, it emerged relatively unscathed from the global economic turmoil during that period, which ultimately allowed it to continue to expand its LNG profile.

Qatar has also proved itself to be quite flexible in adapting itself to the worldwide LNG market by incorporating different contractual models, such as long-, medium- and short-term contracts, oil and hub indexation pricing, and as spot sales. It seems Qatar was able to manage its gas demand increases, as in 2012, demand for Qatari gas started to plateau and appears unlikely to continue its rapid historical growth rates. But even though there will still be significant investments coming online in the downstream industries, aggregate natural gas demand may continue to increase from the mid-2020s; nevertheless, in 2034, domestic gas demand is predicted to decline when energy efficiency policies, gas or power pricing configuration and national decarbonisation plans begin to take hold.

Overall, Qatar's cost of production in the natural gas sector has allowed it to remain ahead of its competitors, principally because of the prodigious location of the North Field and the large amounts of LPG, condensate and ethane the field delivers. Also, as another tool in its arsenal, Qatar is poised to increase its investments significantly in overseas energy assets in North America, Asia, Africa, and perhaps other jurisdictions, to leverage its dominance over its rising competitors. Qatar's investment of billions of dollars in its LNG production and global LNG transport fleet expansion will allow it to leapfrog ahead of the competition in the coming years.

Qatar’s leadership has also determined that it should initiate more of a “green” focus for its gas operations, and we can expect to witness more carbon reduction policies to be implemented that can drive efficiency gains throughout the gas and industrial sectors. Reducing the carbon intensity of its energy sector operations is becoming paramount in Qatar policymaking as the government has recognised numerous benefits it may reap from implementing decarbonisation policies. While the Gulf countries, and most of the Global South, fiercely contested the early global climate negotiations, they have subsequently become much more proactive in these conferences and even led the charge with multibillion-dollar renewable energy investments and decarbonisation initiatives.

Typically, there is a symbiotic relationship between carbon intensity and energy intensity; when one is reduced, the other declines as well. Therefore, with the implementation of robust decarbonisation strategies, Qatar would be able to reduce the opportunity cost of domestic natural gas consumption to reserve more gas earmarked for export to the lucrative international market for foreign revenue generation.

Additionally, installing more energy-efficient equipment improves a facility's operational efficiency, which places it as a significant competitive advantage in the global economy. As part of its foreign policy, the Qatari government seeks to develop an outsized role in climate negotiations, which it feels would benefit the country as it aims to promote natural gas as a global bridge fuel (replacing coal and oil) as the world transitions to renewable energy sources such as solar, wind, biomass and other clean energy sources. An added benefit of this role is that Qatar would also position itself as a global steward of the environment. Lastly, implementing carbon reduction policies allows Qatar to create alternative revenue streams with the potential sale of carbon credits.

Yet, Qatar will have to deal with some challenging obstacles in the short- to mid-term. The Covid-19 pandemic has decimated the global economy; and while global hydrocarbon prices have begun to rise, a significant amount of volatility remains in global energy markets. As a result, this will prompt Qatar to increase its dependence on the resurgence of Asian LNG demand. It will also need to implement a more multifaceted economic diversification that builds robust forward and backward linkages throughout various sectors, such as finance, downstream commodities, logistics, and even tourism. The interlocking of diverse economic sectors allows a mutually reinforcing growth dynamic that transcends being a mono-exporter. Still, Qatar is undeniably in a favourable position despite these issues compared to Australia, the United States and Russia, all of whom are still suffering to a significant degree from the effects of economic shutdowns and unable to avail themselves of the streamlined decision-making process that Qatar enjoys.