Qatar faces fresh challenges to LNG dominance

A man looks on as a Qatari liquefied natural gas (LNG) tanker crosses through the Suez Canal. (Reuters)

LONDON: One of the big talking points in energy markets is how Qatar will handle the glut of liquefied natural gas (LNG) as the era of favorable long-term supply contracts comes to a juddering halt.
When Qatar came to prominence as the world’s largest LNG exporter in the early 2000s via a series of mega investments in resource-rich gas fields, it was a seller’s market and everything was to play for. Favorable 20-year contracts were par for the course and a seller’s dream.
Today, the globe is awash with gas as US shale producers and new Australian suppliers gatecrash the LNG market for the first time — throwing down the gauntlet to Qatar.
And buyers have become less accommodating. For illustration, in 2000 only about 5 percent of LNG deals were linked to spot prices or short-term contracts. But by last year that figure had risen to 28 percent, said Luis Barallat, global leader of the gas and LNG division at Boston Consulting Group.
Ten years ago, he adds, the average length of an LNG contract was 17 years; in 2016 it was seven years. You’ve got it: The buyers hold the whip hand.
Against this background, Qatar’s announcement in June that it intends to re-engage in new LNG projects by lifting the moratorium on its North Field development has come under scrutiny. Most gas analysts will tell you Qatar holds first-mover advantage and, as the world’s lowest-cost producer, remains a price setter, at least for now. Put another way, in any price war for market share, Qatar could more than hold its own.
But the International Energy Agency (IEA) has said the US is on course to challenge Australia and Qatar for global leadership among LNG exporters.
“The US shale revolution shows no sign of running out of steam and its effects are now amplified by a second revolution of rising LNG supplies,” said Dr. Fatih Birol, IEA director.
Still, the Oxford Institute for Energy Studies (OIES) said Qatar is in a prime position to compete with the established LNG exporters (as well as Russian pipeline gas): “The LNG market is decidedly different from that in which it concluded long-term contracts with Asian buyers in the 2000s,” it said. “Qatar is back in the business of new LNG supply, (but) in a more fractious market and with future price expectations somewhat foggy.”
But why is Qatar gearing up to furnish new supplies now? The OIES offers two theories. “On a ‘business as usual’ strategic/commercial level, the anticipated ‘gap’ for new LNG supply from the mid-2020s is an obvious enticement to Qatar. In response, competing higher-cost projects will either defer or cancel — especially if buyers are less likely to agree to the required (higher) break-even prices in anticipation of getting a better deal from Qatar.”
But there is a second, and arguably more intriguing possibility that may explain Qatar’s move, according to OIES — one that is more “existential” in nature.
Put simply, it says with LNG demand growth already less certain than in the past, in part due to the prevalence of coal and renewables in the planned future Asian energy mix, “the prospect of a plateau in gas and LNG demand in a world where there appears no shortage of gas as a resource must be of concern to Qatar.”
It added: “In which case, it may have revised its strategy of conserving its resource ‘for future generations’ — on the basis that within that timescale the market may be severely constrained.”
In an interview with Arab News, Bernadette Cullinane, Deloitte’s national oil and gas practice leader based in Perth, said a lot of LNG was about to hit the market, with the US and Australia bringing another 100 million tons per annum of new production between now and 2020.
Qatar had the potential to increase its output by some 30 percent, she said, with the country able to exploit an “amazing resource base as their gas was very condensate-rich which makes it attractive to produce — they have about 135 years of gas reserves.”
Put another way, Qatar has the ability to pursue a market share strategy similar to what the Saudis are doing with oil. In other words, their low cost of production allows them to push supply into the market and compete head-to-head with Australian and American suppliers.
But Cullinane points out Qatar is expected to lose its crown as the world’s largest LNG exporter before its expansion program is realized. Australia will hit 74 million tons exported in the year to the end of June 2019, following an investment of around $180 billion, according to the Australian authorities. That compares with Qatar’s 76.7 million tons last year.
Qatar, the US and Australia will be the LNG superpowers, and Cullinane said the US could one day become the marginal price setter for LNG due to low costs linked to shale production.
However, Chris Young, a director in the oil and gas team at KPMG UK, said Qatar has traditionally had a favorable cost position, “which should allow it to maintain market share with key buyers, with the flexibility to lock in longer term volumes.”
In the interim, one upshot of depressed prices is there are more buyers. An IEA report said in 2005 there were 15 LNG importing countries; now there are 39, including new buyers such as Pakistan, Jordan and Thailand.
Adrian Del Maestro, PwC strategy director and oil and gas specialist said, “Buyers have more commercial clout so some are looking to re-negotiate contracts they signed up to years ago.”
India’s Petronet LNG, for example, recently reached an agreement with Exxon to cut the price of LNG from its Gorgon project in northwest Australia.
In the US, half of its gas production growth will be turned toward LNG exports, Del Maestro added. “That keeps downward pressure on prices, and reinforces the move toward a more liquid, flexible market,” he said.
That flexibility was core to an announcement this week from Japan’s power group JERA, which said it was poised to sign an LNG contract, free of destination restrictions that prevent buyers from reselling cargoes.
These restrictions are designed to secure the pricing power of sellers. But in the summer, the Japanese regulator outlawed destination restrictions, opening up the LNG market to more players and allowing JERA to become an international gas trader rather than purely a user.
JERA has said it wants to cut the volume of gas it buys under long-term contracts by 42 percent by 2030 from current levels.
Yuji Kakimi, JERA’s president, told Reuters he accepted new LNG projects need to lock in long-term deals to secure financing for their multibillion-dollar plans. 
But he added, “Existing sellers (of long-term LNG), who have recouped their investments, can make various proposals to buyers not limited to long-term but also mid-term and short-term.”
One question for future Qatari energy policy may hinge on how accommodating it will be when buyers ask for short term contracts. That remains to be seen. Likewise margin erosion, in what is expected to be a ferociously competitive LNG market until the mid 2020s when demand is forecast to exceed supply once more.
Young concludes: “There will always be sufficient demand for Qatar to place its volumes in the markets, but the growing sophistication of buyers will limit its (and others) influence on pricing.”