Qatar must commit to spreading its major asset around

Wealth from Qatar's North Field will fund the US$65 billion World Cup construction, a new bridge to Bahrain, a rail network and 140 new hotels.

Qatar has picked up European customers from the Russians, but has chosen not to engage in an all-out price war.

When the Spanish conquered South America and its rich mines in the 16th century, their noblemen built so many churches it was said they had discovered the magic formula for turning gold into stone.

Qatar has celebrated two conquests of its own this month. The first was its groundbreaking win of the right to hold the 2022 FIFA World Cup. The second was the achievement of 77 million tonnes per year of liquefied natural gas (LNG) capacity, after output increased by five times since 2003.

Qatar is now the world's largest exporter of LNG, which is simply gas chilled to minus 162°C so that it becomes a liquid and can be easily transported by ship. It is, of course, the wealth from Qatar's North Field, the world's largest gas accumulation, that will bankroll the US$65 billion (Dh238.74bn) of World Cup construction - carbon-neutral stadia with solar air conditioning, a new bridge to Bahrain, a rail and metro network and 140 new hotels.

But not all of Qatar's future is paved with gold. Becoming a world leader in gas has brought its own challenges, compounded by the worldwide economic crisis and the emergence of new competitors.

Concerned over an excessively rapid pace of development, Doha announced in 2005 a moratorium on new gas projects, now extended until at least 2013. Even after that, the priority is expanding existing facilities and using domestic gas for petrochemicals and other industries, not building additional LNG plants.

When the glut of recent projects was completed and the expatriates working on them left the country, Doha rents dropped by 30 per cent, emphasising just how closely the country's fortunes are tied to its gas resources.

More seriously, by being so clear about the moratorium, rather than following a policy of "strategic ambiguity", Qatar left the field open for competitors to forge ahead, confident they will not be undercut by the North Field.

As with Julius Caesar's account of Gaul, world LNG markets are divided into three parts: the US, Europe and Asia. Much new Qatari output was targeted at the US, the world's largest gas consumer: as recently as 2008, it was thought that US gas was in permanent decline.

But new technologies for producing gas from shales have led to a surge in production, set to rise by 20 per cent this year alone.

As a result, the US has largely disappeared as a market, except for dumping surplus cargoes at minimal profit. Indeed, North America may even become an LNG exporter.

Asia has long been the world's premier LNG market, including the world's largest buyers, Japan and South Korea, as well as fast-growing India and China. However, the Qataris have insisted on linking gas prices to oil, making them very expensive at current high oil prices.

The major international oil companies who are Qatar's partners in all the existing LNG plants were happy that the country did not aggressively target Asian markets, since that would have threatened their own lucrative operations in Indonesia, Malaysia, Brunei and especially Australia. The result is that Australia, although a higher cost producer than Qatar, has launched a wave of new LNG projects which will start up over the next five years, putting it in second place globally.

This leaves Europe. Here, Qatar goes head-to-head with the world's largest gas exporter, Russia. Instead of arriving in LNG tankers, Russian gas comes to Europe via long pipelines from west Siberia. When the economic crisis struck, European gas demand slumped - but remarkably, LNG imports soared.

Russian gas prices are linked by formula to oil prices, which are still high, while LNG is in oversupply and so preferred by buyers. Russia has thus taken the brunt of slumping European demand, while a pipeline explosion interrupted Russian imports from Turkmenistan, shifting some of the burden on to the Turkmens.

Qatar was glad to pick up European customers from the Russians, but chose not to engage in an all-out price war. Instead, lengthy periods of "maintenance" at the new LNG plants were announced to idle some capacity. As a result, the long-time system in which gas prices in continental Europe are tied to oil has survived, at least for now, but it increasingly makes little economic sense.

In the short term, there may be another squeeze in LNG markets about 2013, as few new projects were started during the financial crisis. In this breathing space, Qatar needs to think about diversifying its customers. More exports by pipeline to its neighbours, following the successful Dolphin project to the UAE, are an attractive option if Gulf consumers will pay competitive prices.

In the longer term, Qatar is squeezing a balloon that just pops up somewhere else. Just in the past few weeks, China announced successful production from shale, while gas resources large enough for LNG were found in Mozambique. Oil is still irreplaceable for transport, but in the key electricity market, gas faces viable competitors in the form of nuclear, renewable and coal power.

Given its vast, low-cost production, Qatari LNG will still be highly profitable, but not the gold mine it appeared until recently. Qatar needs to find the formula for turning its gas not into concrete, but into a sustainable, diversified economy.

Robin M Mills is an energy economist based in Dubai and the author of The Myth of the Oil Crisis and Capturing Carbon