Morten Frisch - Qatar, Iran and the North Field Development: A Gas Industry View

This article, by Morten Frisch, explains the development of the North Field, how the LNG market has developed since 2005, Qatari sales of pipeline gas to the UAE and Oman and how these North Field based activities have formed Qatar’s relationship with Iran; all from oil and gas upstream and gas industry points of view. 

Lifting the North Field moratorium

During a press conference April 3,Qatar Petroleum’s president and CEO Saad Sherida al-Kaabi announced the lifting of the moratorium on North Field developments imposed more than 11 years back in the autumn of 2005. What is the significance of this for Qatar and the global LNG industry? To answer this question one needs to look at the years building up to this decision for Qatar and what has happened in the global LNG market in this period.

More than a decade had passed since the imposition of the moratorium and these years have been anything but uneventful for Qatar and its role as a global LNG producer.  A large part of its 77mn metric tons/yr of flexible production capacity, originally developed for the “import-hungry” US and European markets, was at grave peril back in 2009 when US and European gas market developments led to this no longer being attractive.  

On one hand, UK and continental European gas demand was slowing down by a combination of economic recession, cheap US and Russian coal imports and substitution of gas – previously the power industry’s fuel of choice – with a high volume of subsidy-supported renewable energy.  

On the other hand, the US was experiencing its shale gas revolution, and overseas LNG volumes were no longer required. During the summer of 2010, LNG spot prices in Far East Asia had fallen to $5.00- 5.50/mn Btu. This LNG spot price recovered to some $10/mn Btu during the winter of 2010/11, but likely would again have fallen to around $5.00/mn Btu during the summer of 2011. The expected economic returns from Qatar’s LNG exports were potentially at stake. 

But then, the devastating Fukushima tsunami came on March 11, 2011 and Japan’s shift to gas to replace lost nuclear generation capacity signalled a new era for the Qatari merchant LNG export industry. In the aftermath, spot LNG traded at above $20/mn Btu, a far cry from the situation the previous summer.  

In addition to Japan’s increased LNG purchases after March 2011, Egypt became a net LNG importer. LNG supply-side problems elsewhere and rising demand, not only from the “new” markets of South America, but also China, India, southeast Asia and the Middle East, further contributed to the re-balancing of Qatar’s export position.  

Spot LNG prices rose to levels signalling higher returns for LNG developers and a number of LNG projects were born as a result.  A flood of new LNG is now coming on stream, but its impact will be most notably felt in the 2018-2021 period as project delays and increased Asian demand has delayed the expected LNG supply/demand imbalance caused by a combination of these new projects and production from existing projects coming off contract.  

GasTech 2017 in Japan – the world’s No 1 buyer

At the time of the Qatar Petroleum (QP) press conference in Doha on 3 April 2017, on the eve of the GasTech 2017 conference in Japan, the main gas industry topics were LNG buying consortiums, LNG pricing in an oversupplied and therefore low priced LNG market, the need for more flexible long term LNG contracts and how the commercial structure of US LNG supplies could be used as an example of how the international LNG market was changing.  

Furthermore, these topics were then, and still are today, actively being discussed among LNG buyers at a time when Qatar has long term sales of 7.2mn mt/yr of LNG with Japanese buyers expiring in 2021. 

This represents a volume of LNG not only Qatar, but also Australia, Papua New Guinea, the US and even Nigeria would like to supply.  The timing of the QP press conference announcing the lifting of the North Field gas development moratorium which also included the statement Qatar was planning to add some 2bn ft³/d of additional feed gas supplies, was no coincidence. The announcement was likely meant to deflect attention away from the above topics. 

It is understood the Qataris, at least to some degree, managed to achieve this objective.  The announcement admittedly gave the CEO of QatarGas, Sheikh Khalid Bin Khalifa Al-Thani a positive platform for his key note address to the conference.  

The North Field/South Pars balance

Al Kaabi’s announcement of the lifting of the North Field development moratorium the day before GasTech 2017 started was not as unexpected as some might think. To understand this, one would need to first go back to the 2003 – 2005 period and the reasons behind the introduction of the North Field moratorium in the autumn of 2005:

The North Field is a gas/gas condensate field with retrograde condensation. Due to its size, the field was initially developed for production without a full field development plan. The field is part of the same structure as the South Pars Field in Iran but the two fields have never been unitised. If the North Field/South Pars Field should be produced in such a way that large pressure drops developed in local areas, then retrograde condensation would set in and such a development likely would have led to the loss of large gas and condensate reserves. 

Qatar and Iran have maintained regular technical meetings about the North Field/South Pars but sanctions have stopped Iran from developing its share of the reservoir at the same speed as the North Field and this for many years caused concerns in Iran. The Iranians were stating prior to the Qatari announcement of the moratorium in autumn 2005:  “Qatari production might lead to a pressure drop in the South Pars field north of the median line and this in turn could lead to the loss of Iranian gas reserves.” They had a point.  

In the early 1990’s and over a period of some 15 years thereafter, Qatar made at least three serious attempts to sell pipeline gas from the North Field to neighbouring countries. These projects were stranded as a result of a border dispute, problems with obtaining permits for the gas export pipeline to cross a third party country and on one occasion the base price offered by the buyer was insufficient for the non-Qatari project promotors to get the gas export project approved by their parent companies. 

These experiences led the Qataris down the LNG route which at that point in time already had given the country positive gas export experiences. As a result in late February/early March 2005 a number of new gas production and LNG projects based on North Field gas were entered into. Examples are QatarGas 2, 3 and 4 and RasGas III. The Pearl gas to liquids project, the world's largest, was sanctioned at the same time. The location in the North Field of the gas production wells for some of these projects had a high concentration towards the median line with Iran. 

It is understood work on a reservoir model for the North Field had started prior to these big project signings in early 2005. However, this proved much more time consuming and complex than had been anticipated, a view confirmed with the drilling of production wells. 

The combination of an increasingly acute need for a reliable reservoir model, political pressure from Iran and also what prudent operators in the oil and gas upstream industry would call “good housekeeping” led to the introduction of the moratorium in late 2005.  For the reasons stated above, the moratorium was initially meant to be in place for some three years, but actually lasted in excess of eleven years.  

So why lift the moratorium now? Technical and political developments in the last few years seem to have facilitated this decision. It has been observed that QP now has a much better knowledge of the reservoir itself, and has an advanced ability to optimise the hydrocarbon recovery and production from the North Field. For an overall economic optimisation to be possible, technical and commercial optimisation decisions need go hand in hand as will be discussed below. The Qataris have clearly been making such decisions already, and the further development of the North Field should enhance their position.  

On the Iranian side, the development of South Pars is now also gaining pace following the lifting of the nuclear sanctions. However, Al Kaabi’s statement that the [inshore part of the North] field the company is developing is the furthest from Iranian border underlines the Iranian sensitivity. 

Using more of North Field

How will gas from new North Field developments be utilised? It is no secret that Qatar is running low on gas for domestic use. The last development of the North Field, the $10bn Barzan Gas Project operated by RasGas, has been rationed for power generation and desalination projects; the new airport; football stadiums for the 2022 World Cup; and related infrastructure such as hotels.  

It is understood that industrial projects such as expansion of Qatar Steel has not been given a gas allocation, and therefore did not go ahead. The new gas production projects when available for consumption could potentially support new industrial projects. 

Both RasGas and QatarGas have experienced feed gas shortages, particularly during winter months when the capacity of LNG trains at Ras Laffan can increase by some 10%-15% during periods of low ambient temperatures. As a result of this feed gas shortage, it is understood Qatar, at least during some winters, has been missing out on winter opportunities to boost LNG production at Ras Laffan when spot LNG prices have peaked. With the new gas production projects on stream this can be corrected.  

Furthermore, the UAE has been importing increasing volumes of LNG, particularly during the hot summer months given its shortage of gas. Qatar is connected to the UAE by the Dolphin gas export pipeline with a capacity of 3.2bn ft³/d. The Dolphin pipeline serves two long-term gas export deals: The UAE with 1.8bn ft³/d and Oman with 0.2bn ft³/d.

Qatar has also during recent years operated additional short term gas supply deals with the UAE. When the new North Field production comes on stream likely in some five years’ time, Qatar will be in a position to further increase pipeline gas exports to the UAE through the Dolphin pipeline. 

Such an increase is likely to be concentrated during summer months when gas demand in the region is at its highest.  On October 4 2016, QP and Dolphin Energy signed a new gas sales agreement for additional supplies of pipeline gas to the UAE via the Dolphin pipeline, with the additional amount earmarked for Sharjah Electricity and Water Authority (SEWA) and Ras Al Khaimah. 

To support these new gas deliveries, Dolphin is in the process of expanding its gas pipeline system in the Northern Emirates of the UAE. The quantities involved and the time table for the expanded gas deliveries were not announced during the signing of this new gas supply agreement. 

During summer months which normally have low seasonal spot LNG prices, Qatari exports of pipeline gas to the UAE are likely to yield a higher return than short term and spot LNG sales.  Increased export of pipeline gas during summer months when LNG trains normally undergo maintenance and feed gas requirements for LNG production as a result are reduced, could be balanced by increased LNG feed gas requirements at winter time; hence this is likely to be a good commercial optimisation of available Qatari gas production. 

One should not assume that additional gas production from the North Field will lead to the construction of new LNG liquefaction capacity other than de-bottlenecking and modernisation of existing trains. This view was confirmed by QP’s al-Kaabi at a press conference in Doha May 31, when he announced the signing of an agreement with Chiyoda Corporation to conduct a detailed study to identify the modifications that are required for debottlenecking the capacity of Qatar’s LNG trains, located in Ras Laffan Industrial City. 

The LNG train upgrades resulting from this engineering study which is due to be completed by year end 2017, could increase the LNG production capacity at Ras Laffan potentially by up to a tenth, giving Qatar a total LNG export capacity of some 85mn mt/yr. This together with the maximising of LNG production during the winter could potentially help Qatar retain its position as the largest LNG producer in the world at the time of the year when this matters most. In the current crude oil price environment, building more GTL capacity is unlikely to be economic. 

Finally, the additional gas production will lead to increased natural gas liquids (NGLs) and condensate production. Condensate is a light crude oil which can be exported outside Opec quotas.  In the current oil market environment this is also an important economic consideration for Qatar. 

Iran’s reaction 

Qatar no doubt had discussed the lifting of the North Field development moratorium with the Iranians prior to the press conference April 3.  It would make sense for the lifting of the moratorium to have previously been agreed with Iran. Iran’s inauguration of South Pars Phases 17 through 21 which took place on 16 April – just a few weeks later – is further evidence in support of this view. It would have been difficult for Qatar to lift the moratorium had Iran not been able to make good progress with South Pars Phases 17 through 21.  

According to press reports from the South Pars inauguration ceremony last April, the Iranian minister of petroleum Bijan Zangeneh welcomed the lifting of the North Field development moratorium and QP’s announcement that a development of the Southern and inshore part of the field would now be planned. 

Qatar’s future position as a world class LNG supplier

The current LNG market environment is challenging for all producers, and Qatar is no exception.  However, compared to new LNG producers, Qatar has a clear cost advantage.  By lifting the North Field moratorium and making additional gas production of some 2bn ft³/d from new North Field developments available, Qatar should be in a position through low cost de-bottlenecking and up-grades of its existing LNG infrastructure to better optimise the utilization of its gas resources and the economic returns from these. 

Furthermore, the new North Field gas production should in the future enable Qatar to defend its position not only as a reliable, but also as a flexible supplier of LNG to evolving world markets.  If the Chiyoda study confirms the debottlenecking and modernisation potential for Qatar’s LNG trains and the project is sanctioned in early 2018, the new LNG liquefaction capacity should be available in 5-7 years’ time.  Based on current LNG projections of LNG supply and demand, the 2023 to 2025 period could prove an optimum time for Qatar to bring additional LNG production to market. 

Morten Frisch is the Senior Partner of Morten Frisch Consulting (MFC) (www.mfcgas.com).  Over the last 25 years he has on a regular basis been involved with pipeline gas and LNG issues in the Arabian Gulf area.  He can be contacted by email sent to office@mfcgas.com.