Going global

“I came to Qatar after ConocoPhillips merged in 2002 with the goal of marketing natural gas to the US. QatarGas 3 is the basis of our large footprint here,” says Mike Stice, president, ConocoPhillips – Qatar. “Today we have a 30% equity ownership in QG3 and a variety of different equity ownerships in petrochemical and related shared facilities here.”

The integrated QG 3 project comprises upstream natural gas production facilities that produce approximately 1.4 BCFD (gross) of natural gas over the 25-year life of the project producing 7.8 mtpa of LNG and approximately 70,000 barrels per day of liquefied petroleum gas and condensate from Qatar’s North field.

The engineering, procurement and construction (EPC) contract covers the requirements for a large-scale LNG train, and associated onshore facilities to make all products ready for market. The LNG will be shipped from Qatar in a fleet of large, state-of-the-art LNG carriers and is destined for sale primarily, but not exclusively, in the United States. The first LNG cargos are expected to be delivered to the US from QatarGas 3 in 2009.

ConocoPhillips were early movers in seeing the potential to sell gas to the American market. As mature fields in the US have depleted, the demand for imported LNG has steadily risen. “Typically North America drilled very high volumes of sweet gas with barely any contaminants at all, but then as those volumes declined, more difficult reserves became the norm. It’s now got to the point that new gas deposits in North America are found in tight sands requiring cmpanies to be very clever with drilling and stimulation techniques to bring the gas to the surface,” he says.

With sour and tight gas field development comes much greater cost, so the abundance of Qatar’s sweet gas, combined with increasingly efficient shipping technology, made the collaboration for the US market appealing.

“We were the first to sell the US market to the Qatari’s. The companies that moved before us were typically focussed on selling gas to Asian markets, mainly to countries that did not have their own domestic energy supply, such as Japan, Korea, and Taiwan.”

The whole Qatar export infrastructure up to that point was designed to send LNG East, or to Europe . North America was being served by its own domestic production. “It was a quite a paradigm shift to consider shipping west at that time,” muses Stice.

Soon after ConocoPhillips announced their strategy, other IOCs saw the potential and aligned their Qatar models to capture a slice of the trans-Atlantic business.

“Just months after our deal was signed, other major companies moved in on the US trade. ExxonMobil announced its own two train project through Ras Gas3. This was followed by Shell and the QatarGas 4 deal, in which some of that volume was targeted at the US.”

Since the deal was inked, engineering has progressed substantially for both the onshore and offshore sectors. Platform jackets have been fabricated and installed, and onshore construction has advanced to the drilling stage and beyond.

In January 2007, the drilling campaign began with the spudding of the first of 33 planned wells on three offshore platforms.

In order to capture cost savings, Qatargas 3 is executing development of the onshore and offshore assets as a single integrated project with Qatargas 4, a joint venture between Qatar Petroleum and Royal Dutch Shell.

This includes the joint development of offshore facilities situated in a common offshore block in the North field, as well as the construction of two identical LNG process trains and associated natural gas treating facilities for both the Qatargas 3 and Qatargas 4 joint ventures.

With the opening of North American opportunities, Qatar’s Deputy Prime Minister and Minister of energy and industry, Abdullah Al Attiya announced a new grand marketing vision for QatarGas. One third of volumes were to be sold the US market, another third to the European and UK market, with the remaining third destined for Asian customers.

“This vision was insightful for several reasons. Firstly it was designed to satisfy all the primary markets. Secondly, all of the markets are priced differently, through various market structures (such as national pool pricing, or crude-linked pricing structures). So the strategy diversified regional markets, but it also diversified pricing risk and exposure,” says Stice.

“The third aspect is political. By playing with everyone you have an extremely powerful political tool by strategically placing yourself as the energy provider to each of the key markets.”

That portfolio is being fine-tuned now to maximise the revenue stream for Qatar, and ConocoPhillips remains actively engaged with helping Qatar reach that goal. The undertaking in Qatar has been huge in scale, covering the entire remit of the gas value chain, and ConocoPhillips remains active in developing that chain to best serve Qatar’s interests.

From installing the offshore platforms, drilling, bringing the gas to the surface, managing the gas and condensate phases, bringing it to shore via a subsea pipeline, removing the liquids from the gas, taking the liquids to market, taking the gas to the liquefaction train, chilling it to -160C, turning it into liquids, right through to export and final regassification and delivery has all been incorporated into the project.

However, developing the exploration and production of LPG and LNG fields is only half the battle. Until recently the infrastructure has not existed on a global scale to get these energy products to market. In marketing the fuel, ConocoPhillips is also marketing energy solutions further down the value chain.

“In some countries that requires new market access. A new market may be hungry for energy, but they may not have the necessary infrastructure to handle LNG or LPG. So then it’s a case of developing berths that can offload the product, then generators that burn the fuel too. It’s a much more complex and integrated form of marketing than just product sales.”

In the US, access points had to be created for LNG. Terminals, regasification plants and new distribution infrastructure, and now those projects are coming on-line, but smaller economies have proved more nimble in gearing up for the LNG opportunities Qatar presents. “A good example is Thailand. It’s a relatively small market, but they have proven very strategic in their thinking,” says Stice.

“In Thailand there have been several gas discoveries, but because their economy is growing so fast they don’t want to rely solely on that domestic production. They have looked ahead and started to develop a more diversified energy programme.”

The fleet

The only aspect of the value chain the IOCs have been exempted from is the delivery and shipping, which has fallen exclusively under the remit of Nakilat, which has financed the purchase of a massive fleet of natural gas carriers.

“The Qatari government saw the need that each of these projects had for shipping. Each project needed 8-10 ships, and there are six mega-projects, so it made more sense for them to order all the ships together. That leveraged much greater purchasing power so they ordered all 50 plus vessels.”

Nakilat was established in 2004 and is owned 50% by its founding shareholders and 50% by the public as a result of an IPO in 2005. It is currently building a large fleet of vessels dedicated to transporting LNG produced from Qatar’s North Field. By 2010, Nakilat expects to own up to 56 LNG vessels, making it one of the largest LNG ship owners in the world.

The vessels range in size from 145,000 m3 to 260,000 m3 capacity each. In December 2006 Nakilat formed a strategic alliance with Shell International Trading and Shipping Company Limited (STASCO), a leading International vessel owner/operator with extensive experience in operating LNG carriers.

STASCO currently manages more than 30 vessels, which represents more than 15% of the worlds LNG Fleet. Under this alliance, STASCO will provide a range of shipping services, including ship management.

Human element

“I have a lot of involvement in things other than projects. Probably half my time is spent ensuring we have the right people here. It’s quite a big human resources undertaking, especially in the current environment,” says Stice.

“The good news here is that the government is very responsive to the needs and challenges thrown up by such a rapidly expanding economy, so they’ve been quite adaptive to our collective needs. Most IOCs use a market survey to ascertain employment packages, but the problem is that these are only a flash-look in time. If housing costs rise by 30% in a year, that market survey is out-of-date before it is printed. Every company here is having retention issues, because the competition is so stiff.”

Stice says that in spite of steep inflation and rising salary bills the industry has not yet breached a stress point. “Because the commodity prices have continued to rise and outstrip those other cost increases, the stress is there, but it’s not yet crippling. When that ceases to be the case, you may reach an economic situation that is very difficult to manage.”

Rising staff and housing costs are not the only inflationary elements impacting business operations in Qatar. “Growth always comes with, and is fuelled by construction. This brings other commodity prices into focus, such as steel, concrete, and the contractors who are skilled in that work.”

Welders, fitters, riggers and crane operators are all in short supply, though projects abound. “When contractors have several jobs to choose from their prices go up and that’s what we’re seeing. What’s crucially missing is the necessary slack to deal with the current bubble of activity. When there is no slack in the industry you get inflation.”

Looking forward

Development of the North Field in Qatar is just the first step in the global ambitions ConocoPhillips has for its business unit in Qatar. Getting that gas to global markets and maximising revenue opportunities is the next challenge for Stice and his team.

As pressure grows on governments to use cleaner burning fuels and look for diversified energy solutions, the pre-eminent position the company has carved for itself certainly seems a shrewd move.

“It’s a big challenge, but one we’re very excited about here. The opportunities are great and we’re very confident we’ve got the right mix of people in the right place at the right time to make the most of that position,” concludes Stice.