Arab world

Qatar's Western grip

May 6, 2011: 5:00 AM ET

The tiny Arab nation is quietly making a name for itself in international finance and politics. But is the sparsely populated country a secure bet for Wall Street and Washington?

By Cyrus Sanati, contributor

FORTUNE -- Qatar may not have the gleaming exterior of Dubai or the great oil wealth of Saudi Arabia, but the tiny Arab nation is quietly making a name for itself in the realms of international finance and politics. This year, in particular, seems to be Qatar's coming out party, now that its energy infrastructure is up and running, pumping billions of dollars into the state's coffers.

But is the sparsely populated country a truly secure bet for Wall Street and Washington? Or will Qatar face the same financial and political temblors rocking its Arab neighbors?

Taking a stroll through London, it is tough not to run into something touched by the Qataris. The Emirate's sovereign wealth fund, The Qatari Investment Authority, along with its various offshoots that make up what is known as "Qatar Inc.," has snapped up property all over the city, from the famed Harrods Department store in the posh west to nearly a third of the Canary Wharf financial district in the east. It owns several other building littered around the city and is the majority owner of "The Shard," which, upon completion, will be London's tallest office building.

The QIA has also snapped up stakes in the London Stock Exchange, Porsche and most recently, German construction giant Hochtief. It reportedly made a billion dollars betting on Barclay's (BCS) stock at the height of the financial crisis in 2009, and holds a major stake in Credit Suisse (CS).

Now Qatar is stepping out of its comfort zone in Europe and the Persian Gulf and making its first foray into the United States market. It broke ground in April on a massive 10-acre mixed-use development in downtown Washington D.C., worth an estimated $700 million. It is expected to be the first of many more deals to be done in the U.S., according to people close to the QIA, which now has assets hovering around $70 billion.

The rise of Qatar, Inc.

So where is all this money coming from? Until a few years ago, Qatar was known more for having a hard-to-pronounce name than for being a rich emirate. The exploitation of a major natural gas field off its coast has unlocked a tidal wave of good fortune for the nation. Qatar's GDP has risen from just $8 billion in 1995 to an estimated $52 billion in 2010 thanks to the gas field, which it peacefully shares with Iran.

Energy companies and banks threw billions of dollars at the Emirate to help it tap the field. ExxonMobil (XOM) has invested some $16 billion over the years, while other major energy companies such as Shell (RDSA), ConocoPhillips (COP) and Paris-based Total (TOT) also have made multi-billion dollar bets. Banks like Barclays, BNP Paribas and HSBC (HBC) have helped arrange financing for the energy projects. Even the U.S. government joined in the festivities, with the Export-Import Bank of the United States approving a loan of $930 million to assist U.S. companies like KBR (KBR) and ExxonMobil export their services to the country.

So Qatar Inc. seems to have been partially, if not fully, funded by the West. All this debt adds up though. The nation's external debt jumped 277% from 2005 to 2010, to around $70 billion -- roughly equal to the total assets held by the QIA.

The Qatar Liquefied Gas Company Limited (Qatar Gas), a joint venture company set up by Qatar Petroleum and ExxonMobil Corporation, has expanded its facilities at the Ras Laffan industrial city natural gas liquefaction plant in Qatar.

Qatar Liquefied Gas Company's natural gas plant in Ras Laffan Industrial City, Qatar.

Creditors will be paid off over time from revenues collected on the sale of the natural gas. Any leftover cash will be diverted to the QIA, which then recycles a large portion of the cash back into Western markets in the form of investments. The arrangement works well when the two sides of the equation are balanced, but there is no guarantee that it will stay that way forever. LNG (liquified natural gas) contracts are long term, but the volatile nature of natural gas and oil prices cause the value of those contracts to fluctuate wildly. That means that not all of Qatar's receivables are guaranteed. For example, weak natural gas prices in the U.S., due to the proliferation of shale drilling in the country, has meant that Qatar needs to find a new home for millions of tons of LNG earmarked for the U.S. market. Qatar is now stuck with a lot of idle capacity, as there are only a limited number of ports around the world designed to receive and store LNG.

Despite the clear risks, these are still go-go times in Qatar's capital, Doha. The current bullish view held by the banks and the oil companies predicts that worldwide natural gas demand will grow unabated for years and that Qatar will be the dominant supplier of LNG. The country can now produce 77 metric tons of LNG, making it the largest producer in the world.

Going global

But the grand ambitions of Qatar don't end with energy exporting. Financing from the West has created a political animal out of Qatar's ruler, Sheikh Hamad bin Khalifa Al Thani. Sporting a Western suit, instead of the traditional royal Arab thobe and besht, Sheik Thani was all smiles when he was welcomed warmly in the Oval Office by President Obama last month. Sheik Thani had just committed a few fighter jets to help police the no-fly zone over Libya, giving what was seen as crucial Arab backing to a largely Western intervention in the North African Arab nation. Qatar, which has largely shied away from international affairs in the past, went a step further and became the second government, behind France, to recognize the rebels in Benghazi as the only legitimate government in Libya. It has even offered to help market oil for the rebels and is currently supplying them with cash and light weapons.

While the move raises the profile of the peninsula nation, it also opens it up to attacks. "Qatar is hardly a partner of any kind, it's more of an oil corporation than a true nation," a spokesman for Libyan leader Muammar Qaddafi told reporters this month. "And the Emir of Qatar is an oppressive dictator who does not represent any liberal values."

Emir of the State of Qatar Sheikh Hamad Bin Khalifa Al-Than

Sheikh Hamad bin Khalifa Al Thani

Sounds like the "oppressive" ruler of Qatar would be cannon fodder for Al Jazeera, the Arab and English language news network thathas played a crucial role in covering the Middle East and the recent Arab uprisings. Nearly every government in the Arab world has accused Al Jazeera of inciting discontent and fuelling protest, which have successfully pushed out autocratic rulers in Egypt and Tunisia. But Al Jazeera, which translates to "the peninsula" in Arabic, is owned and financed by Qatar. The network claims it operates independently from the state, but a leaked U.S. diplomatic cable posted on Wikileaks in December revealed that the U.S. believes that the news network is being used as a "bargaining tool" by Qatar's ruler to further its position internationally.

Al Jazeera has been an important source of news and information on the Middle East, so its blackout on covering anything remotely negative on its home turf creates a gap in information for investors and politicos needing to gauge the country's risk profile. Qatar has seen limited protests this year, but the population appears to be on lockdown by the state security forces. From most reports, the Qatari nationals -- who comprise only 20% of the nation's 1.7 million population -- seem to live pretty good lives and have the highest GDP per capita in the world, at $145,300 per person. But there is rising inflation, a key element to any modern-day revolution.

Nevertheless, a small population means that any discontent in the country could quickly spin out of control. Such a scenario was seen in neighboring Bahrain last month when the island emirate with around 1.2 million people was faced with mass protests calling for democratic reform. Bahrain's autocratic ruling family eventually had to call in troops from neighboring Persian Gulf countries, including Qatar, to help crush the uprising. To be sure, Qatar's demographics are quite different from that of its neighbor, but the call for freedom is an infectious one.

Betting on the future of foreign energy appetites

Sheik Thani doesn't seem to be worried about a possible uprising by his subjects at the moment. Neither, apparently, do the banks, oil companies, or even FIFA, which in December agreed to let Qatar host the World Cup in 2022.

The Sheik is now set to engage in a building boom rivaling the financially disastrous one seen in Dubai earlier last decade. The country's finance minister said last month that Qatar plans to invest around $170 billion on infrastructure and oil and gas projects in the next few years. That compares to just $75 billion it spent on projects from 2004 to 2010. And last week the head of Ezdan, which is the publicly traded real estate development arm of Qatar Inc., said it is studying plans to build the world's tallest building in Doha. This comes after Ezdan reported a 98% drop in profits in 2010, after having to mark down the value of its speculative real estate holdings.

A large chunk of the money needed to build these projects will come from LNG sales, but the Qataris still plan on directing most of those profits toward non-energy related investments in the West, a person close to the QIF said. That means the bulk of this $170 billion, which by some estimates is probably closer to $250 billion, will come from investors, most notably, Western banks. Funding will be easy as long as LNG demand and natural gas demand stays strong.

But of course that is a big if. New players, notably Iran, are set to enter the LNG market in the near future and advances in unconventional natural gas drilling techniques could further expand supply and depress prices across the world. All this could set the nation up for a debt crisis that could lead to major instability.

Qatar is emerging as player on the world scene and hopes its friendliness toward the West will be rewarded. But the tiny emirate with big aspirations could face a number of political, economic and social issues as it moves to shed the image that it is just one big repressive oil company.

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