Wednesday 19, April 2017 by Jessica Combes

Moody's: Qatar decides to resume North Field development


The latest report my Moody's looks at the announcement by the President and CEO of Qatar Petroleum that the company plans to increase gas production in the offshore North Field by 10 per cent relative to current levels.

The announcement marks the end of a 12-year self-imposed moratorium on new North Field developments, which was put in place to allow the company to determine the optimal development rate for the North Field gas reservoir. The North Field is the world’s largest non-associated natural gas field and accounts for almost all of Qatar’s gas production and about 60 per cent of the sovereign’s export revenue. The increase in production is credit positive for Qatar as it will boost GDP growth and government revenue once it materialises, in five to seven years.

While fiscal needs have increased, the timing of the announcement reflects primarily the development of the Iranian portion of the North Field, called South Pars, and liquefied natural gas (LNG) market dynamics. Iran's reserves in the North field are estimated at half of Qatar's reserves, and the acceleration in the development of South Pars will likely allow Iran's North Field output to overtake Qatar's in the next few years. Besides, the LNG market faces large additional supply with new Australian and US export capacity due to come on stream in the coming years. The additional North Field development will allow Qatar to defend its market share once this new supply is absorbed and when LNG demand picks up.

Renewed gas development will support real GDP growth and income levels natural gas production is a major growth driver in Qatar. Over the past decade, Qatar has been one of the world's fastest growing economies because of a strong expansion in the hydrocarbon sector, particularly in natural gas production. Natural gas production increased 260 per cent between 2006 and 2015, to 3.3 million of barrels per day of oil equivalent; this was accompanied by a 65 per cent increase in oil production, including crude oil, shale oil, oil sands and natural gas liquids, to 1.9 million barrels per day.

Annual real GDP growth averaged 12.3 per cent over the past decade, a significantly higher level than the 3.5 per cent Aa-rated median. However, since 2014 real hydrocarbon GDP has contracted and we anticipate that the sector's growth rate will remain close to zero in 2016-18, reflecting stable production. In the absence of output increase, we expect the economy to expand at around 3.3 per cent between 2017 and 2018, supported by non-hydrocarbon sectors of the economy.

Further development of the North Field will boost hydrocarbon real GDP growth when it comes on stream in 2022-24, with an estimated 400,000 barrels per day of oil equivalent expected from the new development. It will also add to Qatar's export capacity, though the Barzan project will provide a boost to hydrocarbon growth before then, its output is focused on domestic consumption.

According to the Middle East Economic Survey, the new development could add 15 per cent to Qatar's LNG export capacity, which currently is around 79 million tonnes per year, the highest in the world. Part of the additional increase could also be used to increase exports to other Gulf countries through the Dolphin pipeline.

GDP per capita in purchasing power terms stood at $132,870 in 2015, one of the highest in our sovereign ratings universe, after Abu Dhabi rated Aa2 negative, and Macao, rated Aa3 negative. Though levels started to fall in 2011-16 owing to very high population growth and the recent oil price decline, renewed production growth will reverse this trend. Qatar is currently the world’s leading exporter of LNG, accounting for almost one-third of global LNG exports.

In addition, according to the BP Statistical Review of World Energy, the country’s proven oil and gas reserves amounted to approximately 188 billion barrels of oil equivalent in 2015, the sixth highest in the world. Its reserve levels are even more remarkable when compared to the size of its population, at around 77,000 barrels of oil equivalent per capita, the largest in the world. This is three times more than Kuwait, which ranks second. At the current rate of production, its proven hydrocarbon reserves would last for almost 100 years.

Renewed production growth at the North Field should also provide fiscal funding for long-term government spending. Qatar has engaged in ambitious infrastructure projects, illustrated by the 2022 FIFA World Cup and in line with the government’s National Vision 2030. Increased gas production will enable the government to sustain higher expenditure and debt levels associated with these projects, even in an adverse energy price environment.

Public finances and the government's net asset position will benefit from increased production Higher export volumes from the North Field will partially offset the revenue impact of structurally lower hydrocarbon prices. Moreover, increased production will also lower Qatar’s fiscal break-even oil price, estimated by IMF at around $63 per barrel in 2017-18 and slightly above our expectation of a medium-term oil price band of $40-$60. We expect the debt ratio to peak at 53.6 per cent of GDP in 2016 from just 34.2 per cent of GDP in 2014, and start to decline gradually to around 40 per cent of GDP by 2020. Meanwhile, the accumulation of assets in the country's sovereign-wealth fund, Qatar Investment Authority (QIA) will resume from an estimated $300 billion, or 191 per cent of 2016 GDP.


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