Nov. 22 (Bloomberg) -- Qatar, the world’s largest producer of liquefied natural gas, expects the construction of a railway system will cost 17 billion euros ($25.3 billion) as the Persian Gulf state seeks improved transport links with its neighbors.

Qatari Diar Real Estate Investment Co. and German state- owned rail operator Deutsche Bahn AG formed Qatar Railways Development Co. today to build the network in three phases by 2026, Qatari Diar Chief Executive Officer Ghanim bin Saad al- Saad said.

Financing and the budget for the project will be announced “very soon,” he told reporters in Doha. Qatari Diar is part of the country’s sovereign wealth fund.

Gulf states are channeling crude-oil and gas earnings into railways and airports as they develop infrastructure to help economic development and attract foreign investors and tourists. Dubai, the second-biggest of seven sheikhdoms that make up the United Arab Emirates, in September opened the first metro system in the Gulf Arab countries. Oil-rich Abu Dhabi is conducting studies to build a rail system in the U.A.E. capital.

“The signing of this agreement shows that German expertise and German technology in the transport sector are in demand the world over,” Transport Minister Peter Ramsauer said today in a statement.

Linking Emirates

Qatar’s rail network will integrate projects such as a high-speed link between the gas-rich emirate’s capital Doha and its airport, and a link with Bahrain via a causeway, the companies said in a statement. Qatar will also get passenger and freight links between Doha and the industrial cities of Ras Laffan and Mesaieed, freight lines to other countries and a metro system in the capital.

Qatari Diar owns 51 percent of the rail company with Deutsche Bahn holding the rest.

“In the present difficult economic climate, such overseas projects help to safeguard jobs inside Germany,” Deutsche Bahn’s Chief Executive Officer Ruediger Grube said today in a statement.

The German rail operator hopes that success in Qatar will lead to more opportunities in the Arabian peninsula, where hundreds of billions of euros are due to be invested in railway projects over the next two decades, it said.

Saudi Arabia, the largest Arab economy, is building a $5.3 billion rail line that can transport 3 million people between the Islamic holy cities of Mecca and Medina and is expanding Jeddah international airport. The country is spending $400 billion over the next five years to increase oil production, build infrastructure and create jobs.

Iraq, holder of the world’s third-largest oil reserves, is seeking projects to repair and expand its southern sea ports. Yemen’s Ministry of Transport this month invited bids for a contract to manage construction of the country’s first railway, which will link the nation with its oil-rich Gulf neighbors.

To contact the reporter on this story: Robert Tuttle in Doha at rtuttle@bloomberg.net; Anthony DiPaola in Dubai at adipaola@bloomberg.net

Last Updated: November 22, 2009 10:27 EST