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Qatargas/RasGas LNG merger driven by need to cut costs

* Creating international LNG giant within 12 months
* Focus on cost savings, marketing clout
* Shifts company's restructuring focus from oil to LNG

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Qatar Petroleum will merge its two LNG operating subsidiaries in a move aimed at cutting costs and presenting a "unified face" to the world for Qatar's major industry, the national petroleum company's head announced Sunday.

The process of combining Qatargas and RasGas into a single entity, to be named Qatargas, will start immediately, with completion expected within 12 months, and will create the world's biggest LNG company by a large margin, Qatar Petroleum's president and CEO Saad al-Kaabi told reporters in Doha.

"The integration aims to create a truly unique global energy operator in terms of size, service and reliability," Kaabi said. "This will confirm and restrengthen Qatar Petroleum's superiority in the LNG business, reducing operating costs."



"These companies [Qatargas and RasGas] are numbers one and two in LNG in the world. This is about creating a bigger number one."

A new CEO for the combined company will be appointed after completion of the integration process, with "seamless business continuity" being the top priority during and after the merger, Kaabi said.

The merger will not affect the two companies' joint venture LNG production facilities in Qatar, which will continue to operate with current staff and ownership structures, and there will be no impact on gas flow to customers, he insisted.

Nonetheless, Kaabi predicted that combining the two separate organizations responsible for managing Qatar's LNG production units and other core business functions such as marketing would yield hundreds of millions of dollars in annual savings -- another top priority for QP in the current economic climate.

"Everybody in the oil and gas business wants to become more competitive," Kaabi said, referring to the global petroleum sector's focus on efficiency in response to low oil and gas prices since mid-2014.


COST-DRIVEN DECISION


QP's cost-driven decision to merge its two most prominent operating units will also have other advantages in areas such as marketing and the ability to attract top talent, Kaabi said. This is especially important for Qatar as a key LNG supplier in the increasingly competitive Asian market.

The Persian Gulf emirate is currently the world's leading LNG exporter with at least 77 million mt/year of production capacity.

Qatar is also an OPEC member, but its LNG business has increasingly eclipsed its oil production over the past decade, with its oil output falling consistently below 700,000 b/d to as low as 640,000 b/d in recent months.

However, international gas prices have suffered even more than oil prices in the current market downturn, with LNG margins being tightly squeezed due to much higher production and transportation costs than pipeline gas.

S&P Global Platts data show benchmark JKM LNG prices recovering recently to around parity with crude on a heat-equivalent basis, from a significantly lower level.

This has had a knock-on effect on the domestic economy of Qatar, hurting the emirate's previous reputation as one of the world's wealthiest nations with the Gulf region's highest per capita GDP.

The government expects a $12.8 billion budget deficit this year, its first in over a decade, and has predicted further deficits for at least the next two years. Local newspapers have reported the layoffs of tens of thousands of white-collar workers, while financial problems afflicting real estate contractors have resulted in mass strandings without pay for expatriate construction workers.

Qatar's long-term plan to develop a world-class LNG business based on efficiencies of scale and the massive resources at its North Field offshore gas deposit -- the emirate's side of the world's biggest conventional gas reservoir, shared with Iran -- was conceived at a time when an uptrend in US and European LNG imports was expected.

However, the US shale gas boom since 2008 and European economic stagnation have in practice left Qatar largely dependent on the competitive Asian gas market for LNG sales. Moreover, unlike most competing international LNG suppliers, QP has been unable to offset lower gas prices in recent years with savings on transportation costs, as it operates its own fleet of LNG carriers.

QP holds stakes of approximately 70% in each of Qatargas and RasGas, although the exact ownership structures are complex.

Qatargas, in its current form, operates four joint venture production units with international partners ExxonMobil, Total, Shell, ConocoPhillips, Mitsui and Marubeni, each with a separate partnership structure and a combined capacity of about 41 million mt/year.

RasGas, with about 37 million mt/year of LNG production capacity plus helium plants, was established solely between QP and ExxonMobil.

According to Platts Analytics, the two companies combined accounted for 77 million mt of Qatari LNG production in 2015 and are expected to produce 78 million mt of LNG in 2016.

The planned merger of the two companies is the latest step in a broad restructuring of QP that was launched in 2014.


'EXACT SAME BUSINESS'


Recapping the course of the restructuring program to date, Kaabi said the national oil company had integrated its international business and had taken back responsibility for marketing all petroleum products previously handled by Tasweeq, Qatar's state-owned petroleum and petrochemicals marketing company.

"Now we are shifting focus to LNG," he said. "Qatargas and RasGas have been performing extremely well in the exact same business."

Following the recent announcement of the purchase by Qatar Investment Authority and Glencore of a combined 19.5% sake in Rosneft, Kaabi said QP was not involved in that transaction, but was open to doing business with Rosneft or other new international partners as a means of further expanding QP's international presence.

Elsewhere in the Persian Gulf region, the leading UAE emirate of Abu Dhabi, which has most of that country's oil and gas resources, has followed a similar path.

State-owned Abu Dhabi National Oil Co. has announced it will combine its two current offshore oil-producing units into a single entity and will also merge several other operating subsidiaries that provide oilfield services. The Abu Dhabi government has also announced plans to merge state-owned industrial and petroleum group Mubadala Development and International Petroleum Investment Co.

On the other hand, Saudi Arabia, the biggest oil producer in the region, is not yet following suit, even as it announces wide-ranging plans to revamp and integrate the country's petroleum and minerals sectors. At a recent petrochemicals conference in Dubai, Saudi Arabic Basic Industries Co. CEO Yousef al-Benyan said there were no current plans for a Sabic/Saudi Aramco merger.

--Tamsin Carlisle, tamsin.carlisle@spglobal.com
--Marc Howson, marc.howson@spglobal.com
--Edited by Alisdair Bowles, alisdair.bowles@spglobal.com