Qatar: LNG Brings In About 40 Percent of Total Revenue, KFH-Research Says

KFH-Research issued a report regarding the developments of the Qatari economy and its growth indicators, where it expected the total GDP growth to slow down in 2012 compared to the registered rate last year, due to an increase in overseas risks.

Such risks can lead to a drop in oil and gas prices, in addition to maintaining growth levels at 8% on yearly bases, since liquid gas pushes exports into the growth zone.

In addition, the report revealed that the Qatari government plans to spend $130bn on infrastructure projects before hosting World Cup in Doha in 2022. Despite that, many projects assigned to contractors will require additional funding by local banks, according to the terms of the government. This triggered an increase in the financing rate; especially in the real estate sector, which raises concerns. International Monetary Fund called for ensuring quality of credit.

Introduction

Qatar’s real gross domestic product (GDP) moderated to 5.0% y-o-y in 2Q12 from 6.9% y-o-y in 1Q12 as growth in the construction industry eased according to the data released by the Qatar Statistics Authority (QSA). Qatar’s construction industry growth eased to 10.0% y-o-y in 2Q12 from 13.9% y-o-y in 1Q12 merely due to high base effects.

Although the construction industry is showing a moderating trend, the growth rate is still a resilient double digit number. Furthermore, commercial bank’s credit grew by 35.3% y-o-y in the first four months of 2012, according to the General Secretariat for Development Planning, reflecting increased demand for loans by both the public and private sectors.

The government plans to spend $130.0bn to build a rail and metro line (at an estimated cost of $35.0bn), a seaport ($7.0bn), new roads and stadiums and a slew of hotels and housing projects to upgrade the country’s infrastructure ahead of the 2022 football World Cup, which Qatar is hosting. The magnitude of the preparations is already influencing economic developments, alongside additional projects included in the current National Development Strategy. Although the government will be the main source of funding, much of the work, entrusted to contractors, including foreign companies, will require additional financing from domestic banks, as the government has insisted that Qatari firms be involved in all World Cup-related projects.

During the first four months of 2012, loans to the corporate sector were 80.4% higher y-o-y, while personal credit grew comparatively slower, by 14.1%. Lending was particularly strong to the real estate sector.

With loan growth outstripping deposit growth in June, the loan/deposit ratio reached 112.0%. Qatari banks are increasingly turning to funding from international capital markets to support their activities. The International Monetary Fund (IMF) has noted that local banks plan to raise as much as $20.0bn through international bonds and Euro medium-term notes in the near term.

Qatar’s strong credit rating should help banks to access such funding. However, the rapid credit growth and greater reliance on foreign funding comes with potential risks. The IMF has cautioned the Qatar Central Bank to monitor closely the quality of domestic loans, especially in the real estate sector in view of the current excess supply of real estate and the uncertain global economic outlook.

Strong credit growth is in line with our forecast that Qatari banks will continue to expand their loan portfolio to help the implementation of World Cup-related infrastructure projects.

LNG Boost

Meanwhile, growth in the mining and quarrying sector which includes oil and gas industry moderated to 0.8% y-o-y in 2Q12 from 4.6% y-o-y in 1Q12 due to softer global oil prices. Qatar’s liquefied natural gas (LNG) price to Japan fell to $10.8/MMbtu in August 2012 from $18.7/MMbtu in July 2012.

Nonetheless, KFH believes the shortfall in Qatar’s gas price is just momentary and Qatar’s LNG industry will continue to fare well in the coming years underpinned by strong gas production.

Qatar’s LNG exports to Japan increased to 1.4 million tonnes in July 2012 from 1.3 million in June 2012. Qatargas, one of the Qatar’s two flagship LNG projects, has increased short-term LNG supplies to Japan by another 11.0 million tonnes to 20.0 million tonnes.

The increased short-term supply is in addition to long-term deals of 7.0 million tonnes per year that Qatargas has signed with Chubu Electric Power and other Japanese utilities since 1997. Japan has contracted the additional volumes to meet anticipated increased demand during the winter. The Qataris hope that some of the short-term supplies may be converted into medium-to-long-term deals and that further deals may be done with other Japanese firms.

Qatar is the world’s largest LNG producer, with a capacity of around 79.0 million tonnes per year of LNG from its two giant plants, Qatargas (42.0 million tonnes per year) and RasGas (37.0 million tonnes per year) and has intensified its efforts to convert short-term deals, signed in the wake of the March 2011 Fukushima nuclear disaster, into long-term contracts. This sale push comes in anticipation of growing competition from Australian LNG producers, which are set to enter the lucrative Asian markets from 2015 and in the longer term from North American producers.

In addition to Japan, Qatar will focus on entrenching its position in South Korea, India, China and Taiwan. Qatar expects total annual Japanese LNG demand to grow to 97.4 million tonnes by 2020 from 70.0 million tonnes in 2010, and annual Indian demand to double to 20.0 million tonnes by 2015 from 10.0 million tonnes currently. Substantial increases are also expected in South Korea and China. To take advantage of this demand, Qatar will look to leverage its established relationships with these countries.

As of May 2012, Qatari LNG sales to these countries amounted to 31.0 million tonnes per year on long-term sale-and-purchase agreements (SPAs) and 23.0 million tonnes through spot/short-terms deals. Incentives on offer include flexible supply terms, and Qatar is also in a position to offer competitive prices, as its production costs are lower than those of rival producers. Production costs are relatively low because Qatar draws on one giant gasfield, the North Field gas reservoir, which allows for less complicated infrastructure and massive economies of scale.

LNG brings in about 40.0% of total state revenue, but most of it is not included in the budget and is stockpiled for servicing and repayment of external debt. Increased LNG sales to Japan are positive for Qatar’s finances and in line with our forecasts that export receipts will remain buoyant despite a modest fall in LNG prices after 2012 and that the state’s external debt position will remain manageable.

Conclusion

In 2011, real GDP growth expanded by 17.6% y-o-y underpinned by a sizeable increase in liquefied natural gas (LNG) production. However, the GDP growth rate is expected to moderate in 2012 from 2011 due to increased external risks which may lead to lower hydrocarbon prices. Despite the moderation in growth, KFH continues to expect a robust and increasingly broad based growth for Qatar in 2012 (KFH forecast: 8.0% y-o-y), as LNG exports driven growth will remain, while the focus shifts to domestic demand activities.

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LNG World News Staff, October 16, 2012; Image: Qatargas