RUSSIA. This issue is for your personal use only. Published monthly in Russian and in English by Trialogue Company Ltd.

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1 RUSSIA The circulation of this report has been strictly limited to the members of the Trialogue Club International and of the Centre russe d études politiques. This issue is for your personal use only. Published monthly in Russian and in English by Trialogue Company Ltd. Issue 1 (25), vol.3. January December 27, 2012 Eldar Kasayev reports from Moscow: QATAR: RUSSIA S AMBITIOUS COMPETITOR ON THE GAS MARKET ANNOTATION At first glance, Russia and Qatar have very little in common but there are in fact many similarities between the two. Both countries have plans to diversify their economies, but both remain heavily dependent on the production of raw materials, with oil and gas exports generating the bulk of their government's revenues. In this issue of the bulletin the current state of economic relations between Russia and Qatar is assessed, especially in the context of the development of the Gas Exporting Countries Forum. The author concludes that the present state and the outlook for the development of the Qatari gas sector is not only the foundation of that country s financial wellbeing, but also a serious hindrance to Russian interests. In recent years Doha has been working hard to increase its LNG sales to Europe, thereby undermining the competitiveness of Russian gas exports. -1-

2 THE COMPETITION The development of trade and investment ties between Russia and Qatar is currently at a very low level. In Russia invited the Gulf emirate to invest in numerous projects in the oil and gas sector, gold mining, construction, and other industries. Had these projects come to fruition, the Qatari investment into the Russian economy could have reached about 10bn-12bn dollars. But Doha did not accept any of these proposals. By the end of 2010 the size of the Qatari state-run reserve fund had reached about 110bn dollars, enabling the emirate to make serious investments in large foreign projects, including the purchase of stakes in foreign companies. It is therefore clear that Doha's reluctance to invest in Russia cannot be put down to the lack of funds. On the one hand, Qatar is waiting for the consent of the United States and Britain, which essentially steer many of the country s foreign economic activities. On the other hand, Russia itself is not demonstrating genuine interest in effective financial cooperation because it does not want to play by the business rules which the Qataris expect from their partners - and which the Western companies are happy to play along with. It is possible that closer and more effective cooperation between Russia and Qatar can be facilitated by the Gas Exporting Countries Forum (GECF). The forum was set up as an informal club in 2001, and later became an official international organization. The decision to that effect was taken on December 23, 2008 at the 7th ministerial meeting of GECF members in Moscow. In December 2009, during another GECF ministerial meeting, a Russian candidate was unanimously elected as the organization s secretary-general. Some of the GECF members support, to a greater or lesser degree, the idea of turning the forum from a platform for discussion into an effective international organization capable of influencing the price formation mechanism in natural gas exports. In particular, this proposal has the support of Iran, Russia, Algeria and Venezuela. The four countries control more than 50 per cent of the world s natural gas reserves. Unlike oil, gas is not traded on a single global market. Instead, there is a large number of smaller regional markets, which are all different in terms of supply and demand. That is why the suppliers are working hard to diversify the geography of their exports, and fiercely compete with each other in the process. For example, Qatar has plans to increase gas exports to Europe, thereby creating certain difficulties for Gazprom, as well as for Algeria's Sonatrach. Meanwhile, Russia has ambitious plans with regard to the Asian markets - which Qatar views as the main destination for its own gas exports. It is necessary, however, to take into account the different gas policies of the exporting states. Most of them - including Russia - export gas mainly via pipelines under long-term contracts. As a result, they are interested in preserving the stability of annual supplies, for which they charge a fixed price that does not fluctuate depending on the market situation. Meanwhile, Qatar is interested in short-term contracts at spot prices, which depend on the current market situation and are not linked to any long-term arrangements. According to Doha, the best way of achieving stability on the global energy markets is to link the price of natural gas to the oil prices. If the gas exporters can agree on using such a price formation mechanism, the gas markets will become accessible to everyone because that mechanism would obviate the need to choose the export destinations depending on the price offered by the individual importers. -2-

3 Nevertheless, Qatar is opposed to the idea of creating a gas cartel. Exporters and importers alike are actively debating the idea of setting up a proper OPEC-like outfit for natural gas. Countries such as the United States, Canada, Australia and many EU members are vehemently opposed to this. Qatar is forced to take their stance into consideration; it does not want to be accused of entering into a cartel agreement and to see the issue being brought to international arbitration. It would therefore be premature to talk about GECF evolving into an organization that can effectively dictate prices to the consumers by coordinating the positions of the main gas exporters. GECF has not become a cartel; it remains merely a platform for discussion. Even though several initiatives have been proposed to resolve the economic problems faced by the gas industry by achieving a proper balance between the interests of the consumers and the producers, the forum has failed to take any meaningful steps in that direction. The participating countries have not managed to work out a coordinated position regarding the prospects for the development of the gas markets; without such coordination it will be difficult to avoid uncivilized competition. QATAR PURSUING ITS OWN GAME Qatar's proved reserves of natural gas stood as trillion cubic meters (14 per cent of the world total) in By that indicator the country ranks second among the OPEC members, and a global third after Russia and Iran. It is worth noting that exploration of new gas reserves in Qatar was not very energetic until the early 1990s, but the proved reserves figure began to grow rapidly in the middle of that decade. Annual gas production soon started to grow as well (See Fig. 1) Figure 1 [Figure 1: Qatari natural gas production in , billion cu.m. Source: Compiled by the author based on BP Statistical Review of World Energy 2011] In Qatari gas output stood at just below 120bn cubic meters. According to projections by Qatari specialists, the figure was expected to reach 160bn by late early Growing production has enabled the country to increase its exports of Liquefied Natural Gas (LNG). In 2010 there were 18 countries in the world which directly exported LNG; another four were involved in re-exports. Qatar was an undisputed leader -3-

4 among those 22 nations, accounting for 25.6 per cent of the global LNG exports figure. The three runners-up Indonesia, Malaysia and Australia accounted for 29.3 per cent between them (See Fig. 2). Figure 2: Leading LNG exporters in 2010 (million tones and % of world exports) In 2011 Qatar exported 102bn cu. m. of LNG. Most of those exports were destined for Asian and European markets (48.6bn and 43.4bn, respectively). The rest went to North America (6.5bn), Central and South America (1.7bn), and the Middle East (2.4bn). At this time Qatar exports its natural gas to more than 20 countries; that number has been growing steadily over the past decade. The emirate has several longstanding Asian customers which have been steadily increasing their imports year after year. That is entirely understandable from the geographic and strategic point of view, and also taking into consideration that the demand for energy in many Asian countries is very high. But in recent years there has also been a significant increase in Qatari exports to Europe, including Britain (which is the largest importer of LNG from Qatar), Italy, France, Belgium and Spain. In fact, more than a quarter of all LNG consumed by the EU countries originates in Qatar. It is obvious that Qatar s growing LNG exports to Europe will create difficulties for Gazprom because Europe is the main consumer of Russian gas. Although the continent s dependence on gas imports is expected to increase, Europe has a chance to diversify the sources of its gas supplies by increasing imports of Qatari LNG and reducing imports from Russia. Russian industry analysts believe that over the next few years Qatar will supply an additional 50bn cu.m. of gas every year, which constitutes 5 per cent of the EU gas market. The emirate is also working to introduce new gas processing technologies. It was the first country in the Middle East to start making LNG by catalytic conversion (rather than the traditional refrigeration method) at its Oryx GTL plant. The facility's daily output capacity is 34,000 barrels of LNG with extra-low sulfur content. The plant, which is worth an estimated 1bn dollars, is co-owned by Qatar Petroleum (51%) и Sasol (49%). An even larger Qatari project is the Perl GTL plant in the town of Ras Laffan. It is the world's largest facility to use the latest gas-to-liquids technology. -4-

5 Launched in 2011, the plant is owned by Qatar Petroleum (which has a 51-percent stake) and Royal Dutch Shell (49 per cent). It is expected to reach its maximum daily output of 140,000 barrels of natural gas fuel by In addition, the plant will produce 120,000 barrels a day of oil equivalent in natural-gas liquids and ethane. With its constantly growing production capacity, Qatar will not only strengthen its global leadership in LNG exports but also become the region's most powerful player on the market for natural-gas liquids. CONCLUSIONS AND PROJECTIONS The rapid economic growth achieved by Qatar in recent years underpins the country s ambitions of becoming not only the region's leading financial center but also a powerful player on the Middle Eastern and global arena in the broader sense. The country has a unique economic and geopolitical position, lying as it does on the crossroads between Europe, Asia and Africa. Its large reserves of hydrocarbons also put it in a good position to pursue even closer cooperation with Western and Asian countries, which are all betting big on such cooperation. Viewed against that backdrop, Qatar's trade and investment relations with Russia are unimpressive, to say the least. One of the reasons for that is the deteriorating political climate between the two countries following the change of regimes in some Arab states in The strength of future economic contacts will depend, among other things, on Russia s official position on pressing Middle Eastern problems, as well as on Qatar's own political profile. Clearly, Moscow is unlikely to find a common language with the emirate if the Kremlin's statements and Qatar's policies in the region remain at odds. In the short to medium term, Qatar will further increase its investment into the gas sector because gas export revenues are crucial for the continued well-being of that country's economy. According to projections, in the 2030 time frame Asian demand for natural gas will grow at an annualized rate of 4.6 per cent - faster than anywhere else in the world. China will account for 23 per cent of the increase in global demand by The commensurate increase in supply will be generated primarily by the Middle East (26 per cent), especially Qatar. That assumption is based on the projection that LNG production will grow at a faster pace than global gas production or exports via pipelines. The share of LNG in the global increase of supply in will constitute 25 per cent (compared to 19 per cent in ). Considering all of the above, in the longer term we should expect growing exports of Qatari hydrocarbons (mainly LNG, and, to a lesser extent, oil) to Europe, Asia and the United States. An important advantage Qatar has on the LNG market is the latest technologies used by its companies. These technologies reduce costs and provide for greater efficiency during production, transportation and regasification. Speaking about the projected increase in Qatari LNG exports to Europe, we should not forget that Moscow can take some steps to stymie those plans. More specifically, it can slightly reduce the prices it charges European consumers for natural gas delivered via pipelines, while also increasing the volume of its exports. In the longer time frame Qatar is unlikely to shift its economic priorities to Europe. It has always been more interested in partnership with the Asian countries, which have a huge potential for economic growth. That growth will translate into many decades of high demand for energy - including energy supplies from Qatar. It is therefore safe to conclude that at present, effective trade and investment partnership between Russia and Qatar is impossible because of their numerous political and economic differences. At the same time, it cannot be ruled out that at some point in the future the two countries will manage to resolve these differences and achieve a more or less acceptable level of bilateral economic cooperation. -5-

6 This article was written by Eldar Kasayev, an expert on investment into the energy sector of the Middle East and North Africa. Mr. Kasayev served at the Russian Embassy in Qatar in , and was a member of a high-level special group which prepared the First Gas Summit of the Gas Exporting Countries Forum (Doha, 2011). Editor: Aleksandr Kolbin (c) Trialogue Club International: trialogue@pircenter.org; Сentre russe d etudes politiques: crep@pircenter.org Moscow Geneva, December 2012 Extracts from the document Trialogue Club International. Membership terms and conditions. 3. Club members rights 3.1. Individual members of the Club have the right to: Receive one copy of the Russia Confidential exclusive analytics bulletin by , in their preferred language (Russian or English). Under the rules of the Club, the bulletin may not be made available to third parties. [ ] 3.2. Corporate members of the Club have the right to: Receive two copies of the Russia Confidential exclusive analytics bulletin by , in their preferred language (Russian or English) or in both languages, and to make the bulletin available to other representatives of the corporate club member. Under the rules of the Club, the bulletin may not be made available to third persons who are not members of the Club. [ ] 4. Club members responsibilities 4.1. All current members of the Club have the following responsibilities: Not to share materials of the Russia Confidential bulletin they have received, as well passwords to the Club section of the PIR Center website, with individuals and/or entities who are not members of the Club. [ ] 6. Russia Confidential 6.1. The Russia Confidential exclusive analytics bulletin is published by OOO Trialogue at the commission of PIR Center for personal use by Club members only The bulletin contains concise and exclusive analysis of problems pertaining to international security, as well as foreign and domestic policies of Russia and CIS states, written specially for Russia Confidential by PIR Center staff and invited experts Materials published in the bulletin should be treated as confidential for at least 30 days since the date of publication. During that period they may not be quoted or made available to persons or entities who are not Club members After a period of at least 30 days since the date of publication OOO Trialogue may choose to lift the exclusivity and confidentiality requirements for some of the materials published in the bulletin, in which case they may be reprinted in other PIR Center publications and quoted by Club members The bulletin is sent to Club members by on a monthly basis, in English or in Russian, depending on the individual club member s preference Upon request, Club members can also receive a hard copy of the bulletin in their preferred language. -6-