Qatar: Diversification efforts real, but hidden (page 1 of 2)

Last month, we discussed the fact that Kuwait has done little in terms of reform due to the fact that its huge natural resources will ensure a high standard of living for decades to come - something reinforced by the recent find of an additional 13 billion barrels of oil and 35 trillion cubic feet of gas, its first commercially viable gas find. As far as natural reserves are concerned, Qatar is in a very similar position.

In Qatar's case, it is gas reserves that dominate the country's wealth of natural resources. However, Qatar is clearly not resting on its laurels in the way that Kuwait is. True, while every other country is focused on diversification away from the hydrocarbon sector, in the short-term Qatar will become more concentrated on gas sales. However, this will only hide the fact that the government is making good progress on helping to nurture a stronger private sector.

In the short-term, the focus is going to be on the development of the country's hydrocarbon sector. This strategy has three thrusts. The first is to expand its sustainable level of oil production to 875 kbpd by the end of this year, up from actual production levels of 777 kbpd in Q2 2005 - good news for Asia as the majority of the country's oil is exported to Japan with Singapore, South Korea, Thailand and India also major importers of Qatari oil.

However, this is small fry compared to its plans for the gas sector. Qatar has the world's second largest proven gas reserves after Iran. There are two liquefied natural gas (LNG) projects; Qatargas and RasGas and Qatar Petroleum, which runs both projects, has set aside USD 33.5bn (almost equivalent to 2005 GDP) for a five-year plan starting in 2005 to expand the utilisation of its gas reserves. Under current Sales and Purchase Agreements (SPAs), this will result in almost a 60% increase in LNG exports over 2005 levels in 2010. If you assume all of other Heads of Agreement result in SPAs then the rise becomes over 250%.

The third area of expanding its short-term reliance on the hydrocarbon sector (although most countries in the region would list this amongst diversification strategies), is the industrial spin-offs from having an abundance of natural resources. Qatar also has the region's largest fertilizer company, a steel company, a petrochemical industry and a vinyl company, all of which are looking to significantly expand their operations in the coming 18 months.

In this backdrop, it is hardly surprising that the economy is expected to expand. Indeed, we expect the economy to more than double in the next five years, after tripling in size from 1998-2005. Meanwhile, the economy is expected to generate significant excess liquidity both for the government, in the form of tax and non-tax revenues, and for the country, in terms of huge current account surpluses.

Of course, such an economic performance would probably be good enough for most governments. However, in Qatar the government is also trying to put in a framework that will encourage activity in the private, non-hydrocarbon sector, particularly in the area of services. The foundations of this have been the usual business-related reforms that propelled Qatar to be being ranked first in the 2005 Arab World Competitiveness Report's competitive index.

On the harder side of the infrastructure requirements, the decision to build a new airport, along with the rising profile of the national air carrier, Qatar Airways, and the large investment into niche luxury hotel accommodation, signals the country's intent in the tourism industry.