The impact of the current pandemic is expected to have cataclysmic consequences on the global gas market. The International Energy Agency forecasted “the largest recorded annual decrease in consumption since the natural gas market developed at scale in the second half of the 20th century,” estimating a four percent drop in 2020—twice bigger than during the last crisis in 2009, when demand fell by two percent.
While the oil price crisis’ impact on oil producers like Saudi Arabia was immediate, most of Qatar’s liquefied natural gas (LNG) revenues have been tied up in medium and long-term contracts, sparing Qatar from the instant shock, but the first consequences are expected to be felt by the end of this summer. However, as LNG spot prices have also significantly slashed, buyers are renegotiating long-term contracts with Qatar.
For more than a decade, Qatar has been a trend-setter of the LNG sector, dominating the market.
For more than a decade, Qatar has been a trend-setter of the LNG sector, dominating the market. But, its leading position has slowly eroded with the arrival of other players from Australia and the US, which came up with more attractive offers to buyers including looser and shorter contracts. However, Qatar’s recent moves clearly suggest that Doha is not ready to step down as a leading global LNG exporter and simply give away its market share to its competitors.
Even prior to the pandemic, Qatar announced it would significantly increase its production to a quantity of 126 million tons per annum (mtpa) by 2027, compared to 77 mtpa currently produced, according to Reuters. Moreover, Doha signed a US$19.2 billion-dollar deal with the three largest Korean shipyards for the construction of 100 LNG tankers—the largest-ever LNG shipbuilding program, according to Qatar Petroleum.
The new fleet of supertankers would allow Qatar to respond to the demands of the spot price market, directing the LNG carriers wherever needed and using them as large floating storage vessels in the case of unfavorable market conditions.
However, there is a fear that lower prices and renegotiation of long-term contracts may affect future LNG projects and some wonder whether Qatar’s expansion plans will pay off considering the current highly alarming situation.
Gas markets have been hit by the same forces as oil markets, explained Dr. Carole Nakhle, Chief Executive Officer at Crystol Energy, adding that international gas markets have been structurally oversupplied due to rapid growth in LNG export capacity long before the pandemic. The slowdown in economic activities due to COVID-19 lockdowns has added to this oversupply.
Unfavorable conditions forced Qatar Petroleum (QP) to announce a cut of its expenses by 30 percent in May.
Unfavorable conditions forced Qatar Petroleum (QP) to announce a cut of its expenses by 30 percent in May. Yet QP Energy Minister and CEO, Saad Sherida Al-Kaabi, assured that the reduction in expenditure will not be linked to a reduction in its gas exports, adding that QP is “going to expand.” Doha’s expansion plans are also supported by the country’s investments in LNG projects abroad, notably in Mexico and Ivory Coast, which is reminiscent of Saudi acquisitions in overseas oil companies.
For Dr. Jack Sharples, a Research Fellow in the Natural Gas Research Program at the Oxford Institute for Energy Studies (OIES), the announcement suggests that Qatar will maintain its course. Sharples believes this will pay off for two reasons: “Firstly, the global market is likely to have recovered from COVID-related demand slump by 2025, meaning there will be room on the market for Qatar’s additional LNG supplies. . . . [S]econdly, because Qatar is the world’s most cost-competitive LNG supplier—it was also the only supplier that was able to offset its losses in Europe with an increase in exports to Asia in May and June this year.”
Qatar’s plans are more about the longer term, according to Nakhle, who said although “this path may be lumpy, the long-term outlook for LNG is expected to be strong.” Dr. Howard Rogers, Chairman and Distinguished Fellow of in the Natural Gas Program at OIES, is convinced that gas and LNG demand will recover broadly to pre-pandemic growth trends over the next three to five years and demand growth should remain robust at least until 2035.
Rogers also believes that gas conversion to hydrogen in Europe and North America is likely to provide a longer-term role for gas. “‘Green hydrogen’ [via electrolysis using renewables] is a contender but the scale of the renewables resource for this in addition to meeting power sector demand in general – is questionable,” he told Inside Arabia.
The current oversupply has undermined the ability of many new projects to achieve Final Investment Decision (FID) – particularly those which require long-term contracts with customers in order to secure project finance. This, according to Rogers, has eliminated much of Qatar’s supply-side competition. “Qatar, with its low cost-base LNG, is uniquely advantaged against this backdrop of apparent longevity of demand for LNG in Asian markets – and probably Europe – with a reduced field of competitors on the supply side,” he noted.
Recent Doha moves may suggest that Qatar has adopted Saudi Arabia’s strategy of increasing production in order to gain market share and squeeze out higher-cost producers.
Recent Doha moves may suggest that Qatar has adopted Saudi Arabia’s strategy of increasing production in order to gain market share and squeeze out higher-cost producers. In Sharples’ opinion, the dramatic expansion in both LNG production and transportation capacity is evidence of Qatari confidence that they will be able to achieve this.
However, Rogers thinks that comparison with Saudi Arabia is more a case of “fortune favoring the bold.” “The key distinction between Qatari and Saudi behavior is that Qatar’s strategy is one of expansion of long term, ‘steady-state’ LNG supply which contrasts with Saudi’s short-term variation of oil output having created excess productive capacity,” Rogers explained. He has also seen no evidence to date that Qatar has operated at its full operating capacity.
While Qatar should have the ability to undercut rival projects if it so wished, Nakhle observes that an outright price war is unlikely to be in Qatar’s interest as it would undermine overall profitability of its output.
Experts suggest that Qatar will need around US$4 per Million British Thermal Unit (mmBtu) to fund expansion. Unlike the oil producers gathered in OPEC, gas producers face different market conditions, as they have no institutional tools to coordinate price reductions and support prices. As a consequence, gas prices have more than halved since last year to only US$2 per mmBtu, from $10 per mmBtu a year ago.
Qatar Petroleum is also unlikely to face pressure from competitors in relation to its investments abroad (for example, in the Golden Pass LNG export project in the US, and in gas production projects elsewhere) because it is doing so in partnership with other majors, such as ExxonMobil, Total, and Eni (Italian Energy Company).
Some reports speculated that Qatar may deepen its ties with Russia, to coordinate its gas policy after signing an agreement in December.
Some reports speculated that Qatar may deepen its ties with Russia, to coordinate its gas policy after signing an agreement in December, just like Saudi Arabia did to coordinate oil production cuts through the OPEC+ agreement. However, experts think that this cooperation as a copycat of OPEC+ is unlikely.
Rogers and Sharples both see Qatar and Russia as long-term competitors for key Asian markets such as China (pipeline gas and LNG) and Europe, noting that any agreement to cap LNG production would simply open up space for alternative supplies, namely those from the US.
Sharples also observes that there is such a huge disparity between their export volumes that the Qataris do not need to coordinate with the Russians. And thus it appears Qatar will keep the LNG throne despite challenging times ahead.