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Sat 3 Jan 2009 04:00 AM

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Qatar steps on the gas

The small Gulf state is hoping that its natural gas reserves will cushion it from the worst of the fallout.

As the financial crisis sweeps across the globe and leaves most economies reeling in its wake, the small Gulf state of Qatar is hoping that its substantial natural gas reserves will cushion it from the worst of the fallout.

As gulf economies face slowing growth rates in the wake of the global financial turmoil, one Gulf state is hoping that its vast gas reserves will allow it to weather the storm more easily than its regional neighbours.

"Selling gas gives a much better outlook for Qatar than the rest of the GCC countries," says Philippe Dauba-Pantanacce, a senior economist at Standard Chartered Bank. "They have been doing a lot of heavy investments in terms of gas production, and they are yielding the benefits now."

Qatar boasts the third largest gas reserves in the world after Russia and Iran, and is the world's largest exporter of liquefied natural gas (LNG) - gas chilled to its liquid form for ease of transportation. Indeed, some experts predict that Qatar's economy could grow by more than 10 percent in 2009, bolstered by projected strong expansion of gas exports and helped by an expected drop in inflation.

"On the basis of most available growth projections this would make it the fastest growing economy in the world in 2009," analysts at Saudi bank Samba Financial Group wrote in a research note last month.

Such growth seems particularly remarkable when one considers that GDP growth in the UAE, for example, is expected to slow to below three percent.

"Qatar's economic growth will be the strongest in the region by some margin," insists Simon Williams, HSBC's chief Middle East economist. "The industrialisation process in Qatar is advanced, the infrastructure build-out programme has momentum, and financing is secured for many of the key projects."

While the oil price collapse has weighed heavily on other Gulf states partially dependent on oil exports for their revenues, economists say the slide will have no impact on Qatar's gas exports, which are based on long-term, locked-in price contracts.

The Gulf state is already one of the world's wealthiest nations, with per capita income expected to exceed $75,000 in 2008.

"Most of its growing LNG exports are sold on long-term contracts, many linked to a lower reference oil price than currently projected for 2009, and are thus not expected to be adversely affected by the current fall in oil prices," the analysts at Samba said.With new LNG facilities scheduled to come on stream from producers RasGas and QatarGas, Qatar's original aim was to more than double its production capacity to 77 million tonnes per year by 2010 - a target which now seems achievable by 2012.

This in turn will help boost the country's fiscal and current account balances.

Dauba-Pantanacce said that Qatar is expected to print the strongest GCC current account surplus in 2009, above 30 percent of GDP. He highlights the Dolphin Project - which recently started to pump gas from Qatar to the UAE via an undersea pipeline - as a prime example of a dependable "cash cow" for Qatar.

However, economists have sounded a note of caution, warning that Qatar's gas resources still do not mean it is immune to the global turmoil.

"In terms of top-line economic performance, Qatar is going to be one of the most strongly performing economies around the world next year," says Robin Bew, editorial director and chief economist at the Economist Intelligence Unit. "But it's important to point out that doesn't mean it has dodged the economic bullet."

Bew notes that the headline growth rate is going to look very impressive, adding that this clearly helps to generate revenue for the government and provides much-needed employment for the local population.

But, aside from the strength of its gas industry, he warns that Qatar is "suffering all the same strains we're seeing in the rest of the region."

"There is almost a two-track economy where you see this phenomenal growth in the energy sector, but the rest of the economy is being squeezed in just the same way," he says.

Indeed, that 10 percent economic growth projection for 2009 looks less impressive when compared with the growth rate forecast of 20 percent for 2008. The Qatari economy is just as exposed as the economies of other Gulf states to the scourge of tightening liquidity conditions, falling real estate markets and slumping stock markets. All this is certainly expected to dampen Qatar's growth prospects.

The burning question then becomes at what point these factors could pose a further threat to expected future growth figures. However, many economists remain confident that Qatar will still be able to finance further development.

"In terms of revenues coming into the economy, they are going to see a relatively more stable revenue base and that should help them going forward," says Robert McKinnon, managing director of research at Al Mal Capital. "So they should be able to continue a lot of their infrastructure spend, and in terms of the GCC it would be probably the safest place to invest in the coming year."Qatar is working hard on diversifying its economy, moving away from its heavy dependence on hydrocarbons to become a ‘knowledge' economy, with non-energy developments including the Qatar Financial Centre and the Qatar Science & Technology Park.

Its economy, however, is still heavily reliant on oil and gas with $90bn earmarked to be spent on the gas industry by 2012, according to Saudi British Bank. And if oil prices don't stage a recovery, this could affect the country's ability to fund investment, despite the huge surpluses accumulated in the era of peak oil.

Qatar's oil minister Abdullah al-Attiyah said at a petrochemical conference in Dubai last month that if the price of oil remains below $70, a number of GCC energy projects to boost future capacity would inevitably face delays.

Even without a further drop in oil prices, "a more pronounced contraction in business activity, particularly in real estate and infrastructure development, could put banks and financial under stress," noted the Samba report. "Public funds may then need to be diverted to support banks and the real estate sector with adverse consequences for growth."

At HSBC, although Williams says he still anticipates real economic growth in Qatar to be close to double digits in 2009, he points out that he has marked down his estimates as "more difficult access to credit and falling energy prices will have some impact on the pace of expansion."

Nevetheless, he adds, "it will remain well ahead of the kind of growth rates we'll see elsewhere in the region."

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