Qatar on the Cusp

By bringing its vast gas reserves to the world, and turning gas into liquid oil, the tiny emirate is making some investors forget all about Dubai

Doha's skyline, funded by energy, is working through a real estate downturn Thomas Haley/Sipa Press

By Stanley Reed and Robert Tuttle

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A lesser Dubai: That's the first impression a visitor gets touring downtown Doha, the capital of the Gulf emirate of Qatar. Dubai (population 1.4 million) has its famous ultramodern skyline and man-made islands, its wild young rich kids, and—since the real estate boom went bust—plenty of empty office space. Qatar (population 1.5 million) has semi-vacant glass towers and its own artificial island, a handsome Islamic museum designed by I.M. Pei, and young men racing through the streets in Ferraris and Porsches.

But the differences between the two are vast. Dubai became an entrepreneurial hot spot and global real estate play precisely because it lacked the natural resources that are now making Qatar one of the region's most important places. After more than a decade of careful, costly development, the Qataris are starting to reap the benefit of having in their territorial waters the world's largest natural gas deposit, the North Field— 900 trillion cubic feet of reserves, two-thirds the size (in oil barrel equivalents) of Saudi Arabia's reserves of crude.

Natural gas these days is extremely cheap: Crude sells at a 300% per-Btu premium to gas, almost double the average spread of the past five years. Qatar's gas is especially hard to monetize because it lies far from Europe and Asia. So the Qataris are now completing the last two of 14 plants, several of which are larger than any elsewhere in the world, that cool natural gas into a liquid that can be transported by ship to distant markets. And Royal Dutch Shell (RDS) is aiming for an even more splendid alchemy with a $19 billion project that turns gas into liquid oil products such as jet fuel. These oil spin-offs fetch as much as $90 a barrel and form a hedge against low gas prices.

To achieve all this, Qatar has opened itself up to foreign investors with an enthusiasm rarely seen in the Gulf. Shell, ExxonMobil (XOM), Total (TOT), ConocoPhillips (COP), and others have already spent more than $100 billion on Qatari energy projects, according to the U.S. embassy, with an additional $120 billion expected by 2020. Qatar retains the majority stake in most of these projects, ensuring it will profit from a near-tripling of oil and gas exports from 2005 to 2010, to a projected $67 billion by yearend, according to estimates by the International Monetary Fund. IMF analysts peg the growth in Qatar's gross domestic product this year at 18.5%.

Careful and deliberate may turn out to be winning qualities in the Persian Gulf of the 2010s. While Dubai's Sheikh Mohammed bin Rashid Al Maktoum is laboring to resolve a $109 billion debt crisis that is hobbling Dubai World and Dubai Holding, Qatar has been scoring in the financial markets. At the depth of the global crisis, the Qatar Investment Authority bought about 9% of Credit Suisse Group (CS). Since then the value of Qatar's stake in the Swiss banking giant has jumped some 50%, to $4.6 billion. Qatar also made a killing in shares of British banking group Barclays (BCS), netting about $1 billion in profits when it cashed out part of its stake. With Credit Suisse, the Qataris are underwriting $1.2 billion of Prudential's (PUK) rights offering, which will help finance the British insurer's purchase of American International Group's (AIG) Asian insurance operations.