Feature: Qatar’s lucrative hydrocarbon game

Qatar’s exposure to global oil and gas prices is immense, with volatile international events able to influence Doha’s spending power. So how is the market bearing up in light of the peninsula’s huge budgetary needs? Edward Jameson reports.

The world of oil and gas trade is a volatile, unpredictable and potentially lucrative one, in which both necessity and speculation combine to buffer energy prices and ultimately contribute to the shaping of national and regional economies.

And perhaps nowhere is this more in evidence than the Middle East and especially, Qatar which, has built its world number one gross domestic product (GDP) on a foundation of oil and gas exports.

And among the top ten World Bank ranked GDP per capita nations, Norway and the Netherlands have also gathered fortunes from natural gas export income, while the United Arab Emirates (UAE) and Kuwait have each built cities in the sands as a direct result of oil exports.

On the demand side, the impact of hydrocarbons on national economies is equally pronounced. The world’s fastest growing international markets – China, Turkey, India and Brazil – have in recent years found their growth restricted not by financial crises, but by cost-effective access to the same hydrocarbon resources.


In Doha, the significance of global oil and gas prices on the national economy cannot be overstated. At the time of writing, Qatar was close to unveiling its 2012/13 budget and, according to reports, finance minister Yousef Hussain Kamal, is preparing a “much bigger” budget than was the case the previous year.

The driving force behind this increase in spending, Kamal says, is that for the first time in three years, Doha is planning to increase its oil-price assumption from US$55 (QR200) per barrel (/bl) to US$65bl (QR236).

Last year, the Qatari economy grew by a huge 14 percent, with year on year growth in the fourth quarter alone coming in at 14.7 percent, according to the Qatar Statistics Authority. The increase in national wealth was attributed to an increase in oil prices, and a consequent rise in natural gas values, which coincided with an increase in gas production on the peninsula.

The link between oil and gas prices is not a fundamental one – it is more the result of financial structures. Across the globe, many natural gas supply contracts are index linked to oil prices. That is, if the average price of a basket of crude oil products increases, so the price that a customer may pay to receive a particular volume of natural gas also increases – the gas price directly tracks the oil price. As a result, the movements of the two hydrocarbon markets are very closely linked.


In mid-May, the price of Brent crude, which is used to price approximately two thirds of the world’s internationally traded crude oil, stood at US$113/bl (QR411), its lowest since early February. Between these dates, the price rose to more than US$125/bl (QR364), where it remained for a sustained six-week period, before falling back.

But the Brent crude oil price has not fallen below US$100/bl (QR364) since early October 2011, which shines a light on the deliberately conservative nature of the Doha oil-based budget, and the likelihood of Qatar winding up with a substantial surplus.

An oil price in excess of US$100/bl (QR364) is considered high by historical standards. Prices approached US$150/bl (QR546) in the days leading up to the dawn of the financial crisis in July 2008, before retreating.

But in February 2011, two events: the Japanese earthquake and the emergence of civil war in Libya, again pushed crude prices into three figure territory. And since this date 15 months ago, prices have only once dipped below the three figure floor and only then for a single day, thus marking the longest spell of a three-figure oil price in the history of global trade.


The vagaries of predicting global oil prices are many, varied and complicated. Oil price movements – and by extension Doha’s long-term income – can be influenced by political instability, poor economic data, an explosion on a pipeline or a threat against the leader of a hydrocarbon-exporting nation.

According to the Organisation of Petroleum Exporting Countries’ (OPEC’s) latest forecast, global oil demand to 2015 will increase by 5.3 percent to reach 93 million barrels a day (mb/d) after a swifter-than-expected global economic rebound led by emerging Asian economies. But despite this, Europe’s debt crisis and slowing United States (US) growth pose risks, the group says. “It is assumed that prices stay in the range of US$85–95/bl (QR309–345) for this decade,” OPEC concluded.

A second international organisation, the US-based Energy Information Administration, broadly agrees with OPEC. The group’s most recent estimate put world crude prices at US$95/bl (QR345) in 2015, rising to US$108 (QR393) in 2020.

LNG Today

Qatar, positioned as it is geographically, exports the vast majority of its liquefied natural gas (LNG) via tanker ship. The global market for LNG to be delivered over the short-term, known as spot cargoes, is commonly priced in FOB (freight on board) US dollars per million metric British thermal units (MMBtu).

In the Middle East, prices have traced a sustained increase since 2010, supported by a long list of geopolitical drivers and global events. The peak in LNG prices was seen late in 2011, prior to the northern hemisphere’s mild winter as nations stocked up to cover against the possibility of cold weather-triggered high demand, when a FOB cargo in the Middle East was valued at US$16.2 (QR59)/MMBtu. Following this, prices retreated to US$12.9 (QR47)/MMBtu, before gradually tracking higher again. At the time of writing, spot LNG prices were back in line with their long-term peak.

As one would expect, LNG prices elsewhere around the world are very closely interlinked because of the global nature of the market. When demand is high during the northern hemisphere winter, the opposite is true in the southern hemisphere. But when the northern hemisphere enters its summer, demand is supported by the southern hemisphere winter – meaning Qatar is able to sell its most valuable export into a year-round market.

As a result, prices in Qatar’s two dominant markets for LNG exports, northwest Europe and the Far East, have traced a very similar path to that set in the Middle East, with spot values in May of this year broadly in line with historical peaks.


It is difficult to distinguish future gas prices from those of oil because of the intrinsic financial link between the two commodities. But one primary driver of the LNG spot gas market that exerts a more pronounced influence on gas prices than on the crude market is Japan’s ongoing energy gap.

Since the Far East nation switched off its huge 50-strong nuclear reactor fleet for safety checks, the nation has been heavily reliant on expensive imports of predominantly crude oil and LNG, in order to fuel its rebuilding efforts.

“Japan’s trade with Qatar, its third largest trading partner among the Gulf Cooperation Council (GCC) countries, increased by 36 percent to US$31.2 billion (QR113 billion) in 2011,” the Japan External Trade Organization (JETRO) confirmed in a statement in May. “Qatar was the world’s largest supplier of gaseous hydrocarbons to Japan,” it said. “The value of Japan’s import of petroleum gasses from Qatar, which has also pledged to supply additional quantities of LNG jumped to US$13.2 billion (QR48 billion) in 2011, compared to US$7.4 billion (QR26.9 billion) in 2010.”

Much may now depend on the degree of public opposition that exists when the Japanese government inevitably moves to ease its heavy burden of import costs by reactivating its nuclear power plants.

Should the government be forced to back down from the idea of reactivation, as some analysts fear it will, there will be no medium-term alternative other than to continue to import fossil-fuels – which will support demand and possibly keep global prices near the current historical peak.


Should support for demand remain in place, Doha will find the means to fund expansionist budgets similar to the one it is preparing to unveil. And with the small matter of the 2022 World Cup construction programme to bankroll over the next decade, expansionist budgets are required. And even looking beyond the 2022 World Cup, the hugely expensive process of economic diversification must continue to progress with the same impressive momentum that has characterised it over the past decade.

This article first appeared in TheEDGE 4.6, June 2012.


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