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Qatar on the Cusp

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Image 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

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.

And although Qatar's property market is quite soft, this inconvenience has cost the government just $7 billion in bank bailouts costs, a fraction of the likely final tab for Dubai.

The differences between Dubai and Doha run deeper still. Qataris keep nightlife restricted, have no interest in becoming a hub for mass tourism, and regret the loss of their past as fishermen and pearl divers. While Dubai has been racing to a western clock, Doha still does things in its own good time. Qataris continue to cherish the old custom of the majlis, the evening get-togethers where men (and only men) sip tea, smoke shisha tobacco, and solve the problems of the world through endless discussion. Grahame Maher, head of the local Vodafone (VOD) operation, had to master this age-old routine before he could win over the Qataris. Says Maher: "I learned a way to do business that we have forgotten in the West because it takes too much time."

Qatar is trying to invest its riches in human capital, the sort of initiative that, throughout the Gulf, seldom seems to make the leap from glossy brochure to hard reality. Qatar's Sheikh Hamad bin Khalifa Al-Thani, a big, affable man who overthrew his father in 1995, set up the Qatar Foundation that year to turn Qataris into financiers, engineers, and biotech specialists. The sheikh's wife, Sheikha Moza bint Nasser Al Missned, runs the foundation, whose green-tree logo is ubiquitous.

The foundation has persuaded some quality schools to establish Qatar campuses. Weill Cornell operates a medical school, Texas A&M churns out petroleum engineers, and Georgetown has a liberal arts program that graduated one of the ruler's sons. Virgin Health Bank, part-owned by British entrepreneur Richard Branson, has the sheikha's backing to establish a stem cell bank. Virgin Health CEO Rajan Jethwa wants to create a regional cell hub that attracts biomedical research firms. "There is no more powerful motivator than being part of the Qatar Foundation," he says.

It's too soon to say whether these efforts will pay off. Like most of the Gulf, Qatar is short of qualified people and has to attract them from outside—far from a sure thing. Some U.S. universities here have struggled to fill their classrooms with qualified applicants. "The high-tech diversification requires not only people but a massive development of human capital overnight," says Rachel Ziemba, senior analyst at Roubini Global Economics in New York. Because of the difficulties in training workers, "Qatar should not be an industrial hub."

It won't be a financial one. Although the Qatar Investment Authority has had a string of hits, its Qatar Financial Center has attracted only token commitments from the big banks (Credit Suisse is the exception). In finance, "Qatar is not comparable to Dubai or even Bahrain," says Emad Mansour, deputy CEO of Qatar First Investment Bank. Nor has Qatar been immune to real estate disease. Its population has more than doubled over the past six years. Bets that the trend would continue prompted overbuilding that drove prices and rental rates down 25% last year, according to Century 21 Qatar, a branch of the U.S. real estate firm. The government projects a 50% population jump by 2030, which may prove optimistic. But that may not matter as long as the North Field yields its riches on schedule. Dubai, in the end, has many things that people want. Doha has something they need.

Federal Reserve Bank

WALL STREET JOURNAL

U.S. Bureau of Economic Analysis