In the wake of the Dubai debt crisis, attention has shifted back to Qatar, writes Nicholas Noe.
There is renewed interest among bankers and investors in LNG-rich Qatar, particularly as the country’s government pledges to back some key infrastructure projects.
“Despite the regional issues – the Dubai World issue, etc – one trend has been apparent from the outset: Qatar has always been viewed as a strong market, and that has just been proved again during the last period,” explains Umer Sultan, executive director, loan syndications Emea, at WestLB.
Sultan adds: “Once the deal volume shrank in Dubai, the emphasis shifted to Qatar, and for the right reasons.”
Reasons include the 23% real GDP growth for 2010 as forecasted by the Economist Intelligence Unit. Qatar also managed to rack up a ”fast-paced” expansion last year, according to the International Bank of Qatar, with real economic growth pegged at 9.8%.
Not unexpectedly, that growth was led by the hydrocarbons sector, which expanded an estimated 11% in 2009, propelled by rising gas production.
The hydrocarbons industry is set to grow 15% per year over the coming two years as Qatar finally reaches its stated goal of producing 77 million tonnes per year (tpy) of LNG by the end of 2010, although it has already achieved the accolade as the world’s leader in LNG.
The surprise then, for most analysts, was that the non-hydrocarbons sectors also grew an impressive 9% in real terms through 2009 and are now expected to expand 15% in 2010, driven by the financial and real estate sectors which contribute the largest share of the more than 35% of GDP not related to hydrocarbons.
Against this backdrop, the Qatari government has made it increasingly clear that it is willing to strongly back and inject a large amount of cash into projects being carried out by its subsidiaries or partners.
“We are seeing a huge jump in infrastructure projects in particular, because of the large budget increase,” explains one senior manager of trade transactions at a leading Qatari commercial bank.
Furthermore, local banks are now getting more involved across the board as the financing constraints are beginning to lessen.
“There is a gradual change at the local level, certainly. With all of these new projects – the roads, bridges, railways, etc. A large number of companies are coming from the outside but the guarantees are starting to be issued by our banks licensed here in Qatar,” comments the Qatari banker.
“The majority of project deals are actually coming on stream right now – they are getting completed – so there is certainly going to be a cash windfall for the state of Qatar,” agrees WestLB’s Sultan.
His comments refer in part to the two LNG “super-trains” (each with a capacity of 7.8 million tpy) that are expected to come on stream in 2010, the expansion at the Al-Shaheen oilfield and the expected commissioning of the first 70,000-barrels per day train in the Pearl gas-to-liquids (GTL) project, operated by Royal Dutch Shell, in the next year.
“That is one important trend,” he remarks.
Perhaps more important, however, are the other trends: government-backing and direct financial support for key projects. This is particularly important given that ratings agency Moody’s recently put three Qatari LNG firms and a gas transport company on review for “possible downgrade”, saying that they lacked “explicit formal support” from the Qatari government.
Shortly after this, Qatar’s Aviation Lease Company raised US$650mn (there were over US$2bn in commitments) in a three-year loan syndication via Deutsche Bank and Standard Chartered Bank. This deal had full sovereign backing from the ministry of finance, sending out clear signals to the market that the government would explicitly support key sectors.
Sultan explains: “This alleviates any doubts at all [on this deal] since it is directly coming from the ministry itself… We can debate whether it was overpriced but coming just after Dubai World the result was pretty impressive.”
Furthermore, in late March, the government-owned Qatar Telecommunications Co (Qtel), which itself had come in for a possible downgrade the month before over the performance of its Indonesian unit, successfully syndicated a US$2bn loan – without explicit guarantees from the finance ministry – that it will use to refinance a forward start loan agreed to last until September.
In doing so, it gained the distinction of becoming the first Gulf borrower to secure a five-year maturity since the global financial crisis began.
“Everyone, when times were good, overleveraged themselves,” notes Société Générale’s CIB director, energy project finance, Katan Hirachand. “Many banks got in on the act.
“Now, with these possible downgrades, a number of companies are going to have to raise fresh equity to restore their balance sheets. Hopefully all will be more cautious going forward.”
From the perspective of the banking sector, the Qatari government has also been relatively supportive.
At the very onset of the financial crisis, Qatar’s government took decisive steps to prop up the country’s financial sector, announcing clearly it would buy 10-20% of listed banks’ capital.
Accordingly, in late December of last year, the Qatar Investment Authority (QIA) took a second 5% stake, buying up a further US$900mn of bank portfolios, on top of the US$1.78bn it had already spent.
“The subscription process came in line with the government decision taken in October under the terms of which QIA would be providing additional capital of up to 20% for all Qatari banks listed on the Doha Securities Market,” a statement from the Qatar News Agency said at the time.
Partially as a result, in a mid-February report this year, Bank of America Merrill Lynch predicted that Qatari banks will see further credit recovery with lending accelerating to 17-19% this year.
Still, it is the hydrocarbons sector, as well as the growing downstream projects, that are the main drivers of confidence and growth in Qatar.
Even though the government is sticking to its moratorium on new gas export projects until 2013, it has bucked calls from other major gas producing countries like Russia and Algeria to scale back its LNG production. This is entirely unsurprising, given that gas prices dropped significantly in 2009, punching an estimated 25% hole in LNG revenue in 2009 for the state.
Indeed, the new volumes coming online this year and into the next are expected to contribute heavily to the increased revenue predictions that the state wants (and needs) to anchor its diversification and overseas investment efforts.
The moratorium has, however, cut into some related projects, including GTL efforts like Exxon Mobil’s massive US$18bn Palm GTL project, cancelled in 2007, as well as proposed export pipelines to Bahrain and Kuwait.
The seminal Dolphin Pipeline project (led by Abu Dhabi’s Mubadala, Total and Occidental Petroleum) has notably avoided problems though. Producing 2 billion cubic feet of natural gas per day from Qatar’s North Field and delivered through a 364-km sub-sea gas line to the UAE and Oman, it had been the subject of some media speculation over the past year as to possible extension delays.
But as one senior company representative tells GTR: “There was a short delay (eight weeks in total) in the completion of a second milestone [of the Taweelah-Fujairah extension] – this was because of delays in getting approvals for building the pipeline across highways and close to existing utilities plants. The completion of the project is expected to be in Q3, 2010.”
Having effortlessly tapped capital markets in September 2009 (to the tune of US$4.1bn) to refinance and expand the network, the market, for once, seems mostly unconcerned with any speculation about delays. It is also welcoming the proliferating downstream projects that Qatar hopes will eventually encourage greater diversification in its economy.
Among these efforts are:
• The Ras Laffan refinery which, according to a recent announcement by the government, will expand over the next year and a half to handle 146,000 barrels of oil per day.
• The production of the first metal from Qatalum’s US$5.7bn aluminium smelter in December 2009 – a project which brings together Qatar Petroleum (QP) with Norway’s Hydro, the world’s third largest integrated aluminium producer. The smelter has a capacity of 585,000 tonnes per year of aluminium and is scheduled to reach full production of 340,000 tonnes in late 2010.
• The Ras Laffan Industrial City (RLC) situated along the northeast coast of Qatar and the primary residence of the country’s giant LNG trains. It has been one of the fastest growing industrial sites in the world.
Qatari investment is also finding a home beyond its borders.
There are a number of examples, including a US$1bn deal to invest in France’s heavily-indebted CMA CGM, the world’s third-largest shipping group; a (US$874mn) stake in French utility giant Veolia in a partnership to develop joint projects in the Middle East and North Africa; a new US$1bn fund in Indonesia to invest in infrastructure, energy and mining; a 10% stake in India’s Hinduja Power; and a partnership pact between Total and Qatar Petroleum International to invest together in oil production in West Africa.
China, too, was the object of focus for Qatari officials – though not through the sovereign wealth fund’s various entities.
“China will soon become the largest LNG market in the world,” Fu Cheng Yu, chairman of the board of directors of China National Offshore Oil Company, told reporters late last year.
“That is why as the world’s largest LNG supplier, Qatar should have its market share in China matching its supply capacity. Together with Qatar Petroleum and Qatargas, if we both work together properly, I have full confidence that for the next five to 10 years you will see that Qatar’s largest LNG market will be China.”
As if to underscore the point, one of the largest Chinese banks – ICBC – promptly opened an office in the capital, Doha.
“They also opened an office in Dubai,” adds Sultan. “But they wanted to have an office in Doha. This shows how comfortable the Asian banks are in Qatar – and, in my experience, they really do their due diligence.”
Qatar is also looking at other potential LNG partners. In late March, Qatar announced that it had inked a deal with Russia to pursue joint gas investments on Russia’s Arctic Yamal peninsula. Russian gas giant Gazprom added that Qatar had proposed cooperation in its massive North Field once the moratorium on new projects is lifted.
Almost simultaneously, reports surfaced that Iran and Qatar had also expanded their economic ties and cooperation, with Qatar National Bank planning to invest US$520mn in Iran’s Esfandiar oilfield in the Persian Gulf. Most importantly, the two countries also said that they had committed to sign a maritime boundary agreement in the coming months to clarify the demarcation of the North Field/South Pars, which they share.