Qatar finds itself in a stronger position than most as the world economy pitches into another year of uncertainty, write Nicholas Noe and Lucy Fielder.

The Gulf’s fastest growing economy has steadily consolidated its gas infrastructure over the years, ensuring a steady high income for the coming decades from long-term gas-supply contracts. After years of careful management of its formidable financial resources, Qatar looks prepared to dig deep to finance infrastructure expansion over the next couple of years, aiming to boost carbon-related manufacturing and tourism as well as the crucial natural gas sector. As global demand for natural gas grows apace, this tiny peninsular state is well-placed to benefit from a stable source of income, compared to its more oil-dependent neighbours.

That’s one reason why in February, Egypt-based investment bank EFG Hermes forecast that Qatar’s economy would be one of the world’s strongest performers in 2009. “It is important to note that Qatar will have the strongest economic figures in the region and one of the strongest globally as a result of a substantial jump in gas production,” the investment bank said in a report.

Qatar has earmarked US$150bn for investments that are expected to be completed by 2012, of which US$100bn is for hydrocarbons and related manufacturing. A December Reuters poll put Qatari growth at 9.5% this year, more than any other regional power. Abdullah bin Hamad al-Attiyah, the Gulf state’s energy and industry minister, told a local Qatari paper in January that Qatar did not expect to post a budget deficit this year, though its budget would be “the largest in the history of Qatar”.

Ras Laffan developments
Naturally, it is gas that dominates the outlook for Qatar’s development. In the second half of 2008, gas revenues for the first time overtook oil revenues to become the largest GDP contributor for the Gulf state, which holds a third of the world’s natural gas reserves and is the world’s primary LNG exporter.

A headlining act in Qatar’s gas sector performance is Royal Dutch Shell’s ambitious Pearl gas-to-liquids (GTL) project at Ras Laffan, 80km north of Doha.

However the Pearl project, undertaken in partnership with state-run Qatar Petroleum, looked more viable when oil prices were high, since the cost of producing crude through GTL technology is US$40-90. The plant is projected to produce 140,000 barrels a day of the synthetic diesel fuel by 2012.

International bankers say the current status of that deal is unclear, since it has not gone to the financial markets and is being financed by Shell. But it will be one to watch in the coming year or two.

Another key event for Qatar last year was the opening of the 360km Dolphin pipeline to transport gas from the country’s vast North Field to the United Arab Emirates (UAE). Financial advisers Royal Bank of Scotland (RBS) launched the project’s debt into the bank market in February, with responses expected by the end of March.

As one project finance chief in the Middle East put it to GTR, the deal was among the largest around and will provide evidence of how the market will react to such projects generally.

ECA opportunities
GTR’s source says that despite some recent reports that project finance in Qatar started drying up in 2008, there were a number of major deals to look out for over 2009, with export credit agency (ECA)-supported finance seen as the clear way forward.
They include the Qatar-Bahrain causeway, which could be between US$3-5bn depending on its exact specifications.

Qatar Petroleum is likely to bring another tranche of LNG-related chain project financing to the market for Qatar Gas Transport Company (Nakilat), with an Islamic tranche possible in that deal.

Nakilat is a Qatari-listed shipping company established by the state of Qatar to own, operate and manage LNG vessels and provide shipping services to a range of participants in the Qatari hydrocarbon sector. The company has been an instrumental component in the supply chain of various energy projects including those undertaken by Qatar Petroleum.

According to bankers, Qatar Petroleum is reviewing several projects at the moment, but has not announced additional plans apart from Nakilat.

BNP Paribas, a leading player in Qatar, arranged US$1.3bn of financing on the Nakilat LNG tanker deal in July 2008 with Qatar Petroleum.

Another major deal of 2008 was the US$3.25bn limited recourse financing for the Ras Laffan C power and water desalination project.

Yusuf Ali Khan, Citi’s London-based vice-president and team leader for the Middle East and North Africa, says Qatar is a traditional ECA market, with large companies, like Qatar Petroleum, having considerable experience in such borrowing. “Some of the other smaller private-sector corporations do not have that kind of experience and they are the names we’re now seeing come to the ECA market,” he says.

Crucially, a major expansion of Qatar’s LNG status is planned for the coming few years, with six new liquefaction trains set to come on line between 2009 and 2010, boosting annual LNG output by 46.8 million tonnes to more than 77 million per year. Combined with Qatar’s current eight LNG trains, this should boost the country’s share of the LNG market to 29% by 2012.

One international banker commented that it was “more or less on track”.

“But obviously Qatar has not just to look at the capacity of the market to absorb financing, but it also has to look at the consumer market itself. China, Japan, the US, Europe are going through a significant slowdown, so their consumption of gas has to be reviewed.” Also, although gas prices are generally more stable, in some Asian markets they are tied to the price of oil, making them more vulnerable to fluctuation.

The dogged focus on gas nonetheless augurs well for the long-term financial stability for Qatar, economists say.

Doha reaped a staggering US$24.2bn in revenue from its gas sector in 2008.

Crucially, gas purchase contracts are typically for around 25 years. That makes them a steady source of income and also renders the fuel far less subject to dramatic fluctuations of the type that provided a wake-up call to oil producers as the economy spiralled into crisis in 2008. Over the past few years demand has grown rapidly for gas, considered a ‘greener’ fuel than oil.

Trends in trade
Trade in general may be starting to shrink.

“Indirect evidence suggests maybe the start of a small decline in (Qatari) imports and exports,” a senior banker in the country reports, adding that it was “nothing to worry about” so far. But project finance is a different story, with infrastructure development continuing apace, he reassured.

Qatari policy-makers have regularly announced that ambitious plans to expand airports, seaports, roads, power generation and telecoms, are of national interest and will push ahead, as will the crucial LNG tanker and plant projects.

The government is aiming for the new international airport to be able to handle 12.5 million passengers by 2009, and 50 million by 2015.

“Some projects may be delayed slightly or scaled back slightly, but the major projects, those that are of national interest, especially in the energy sector and major development projects will go ahead,” the Qatari banker remarks.

A senior trade finance specialist at another Qatari bank agrees. “There’s a slight delay in completion, I think due to supply delays, but it’s all on track and going ahead.” Such projects may start to benefit from cheaper raw materials and construction costs, he said, but he had seen no re-pricing of deals yet.

Qatari national banks, still liquid compared to institutions elsewhere, are being approached more and more to step in to support large projects, as some international institutions have to scale back their foreign operations.

Qatari banks are also benefiting from the large-scale public spending, which the state is channelling through the national financial system, and are understandably eyeing the upcoming budget to see whether Al-Attiyah’s promise of high spending is made good.

Several bankers expressed their view that cuts in the range of 20-25% were likely, though that would still leave spending levels high.

Indeed, most bankers, economists and forecasters have been near-unanimous in their cautious optimism concerning the Qatari economy looking forward. Some point to inflation, which was at 15% in 2008, but which is now expected to come down as global prices drop.

On the project financing side, one senior international banker stressed that secondary refinancing and bond markets need to re-open for business in order for financiers to breathe easy. “The basis of doing project finance in the region for regional banks and those abroad, to be able to extend for 10, 15 years and sometimes longer, is the capacity to absorb a refinancing after year five or six or so,” he said. “That market is not yet there and that creates uncertainty that could put a lot of pressure on projects.” But, he said, the market was likely to stabilise in four to five years at the most.

The slowdown could in fact benefit Qatar. As seen in the UAE already, it could give state-run companies like Qatar Petroleum opportunities to acquire distressed assets. A correction in the market could also temper rising costs for equipment, raw materials and services, which might have hampered development and investment in the country. In the real estate boom, the Qatari government had to cap steel prices.
Qatar now has time to pause for thought and plan its next phase of economic development.