State-run Qatar Petroleum (QP) and Royal Dutch Shell have signed a five-billion dollar heads of agreement to build the plant which would aim to produce 140,000 barrels a day of liquified fuel.
Qatar's Energy Minister Abd Allah Hamad Al-Attiya who is also QP chairman, signed with Sir Philip Watts, chairman of Royal Dutch Shell, at a public ceremony in the capital Doha on Monday.
The accord envisages the construction of a vast gas-to-liquid(GTL) plant in the Gulf desert emirate to produce naptha and environmentally friendly diesel fuels.
According to Qatar's energy ministry the contract would be finalised in the second half of 2004. A letter of intent was signed last year.
GTL technology is relatively untested, but energy companies are hopeful that the new fuels it produces could become increasingly popular, as demand grows for less polluting diesel vehicle engines.
Qatar has proven reserves of more than 900 trillion cubic feet, or 25.485 trillion cubic metres of natural gas. That is more than 15% of the total proven global gas reserves, and enough to last the tiny nation for about 250 years.