Credit agency defends Qatar energy giants

by  — 21 March 2013

Doha will survive the LNG contracting shift as oil and gas prices decouple, a ratings agency says, which is essential with a weak market outlook taking shape.

Executives at the world’s largest gas firm Qatargas will no doubt feel positive that two global financial institutions have said that the country’s gas exporting leaders are on firm financial foundations.

The financial standing of Qatar’s giant energy producers will feel little effect from a high profile cost-saving shift on the part of natural gas importing nations to link supply contracts to short-term traded gas hub prices, according to a major credit rating agency.

The news would have made welcome reading for state-owned liquefied natural gas (LNG) producers RasGas and Qatargas, coming shortly before global investment bank Goldman Sachs predicted that short-term LNG markets, “will enter a bearish cycle,” in the 2016 to 2017 period, as a number of production projects are brought on line.

Ongoing controversy over the financial structure of gas supply contracts has been a talking point of the LNG industry for the past year. As reported in The Edge, Italian company Edison secured a reduction in the price of LNG under its long-term contract with Qatar’s RasGas in September 2012.

S&P has insisted that the credit rating of major gas producers was sufficient to weather the storm of disquiet being directed at oil-indexed supply contracts.

But oil prices are historically high, buffeted by long-term political uncertainty in the major oil producing nations – in effect, still displaying the price inflation that set in during the Arab Spring. Gas prices, on the other hand, are low, because of a relatively well-supplied market and a demand outlook that is unable to shake off the after-effects of the global recession. 

Importing nations are suffering under the price disparity. “In the current context of high oil prices and oversupply of gas in the European market, oil-indexed gas import prices have been well above European spot prices and parity levels for alternative fuels such as coal,” said Karim Nassif, analyst at Standard & Poor’s (S&P) in February. “With oil-indexed import contracts permanently out of the money importers have been forced to incur losses in their trading segments to be able to place contracted import volumes in the marketplace.”

And the contractual issue has increased in magnitude, with Russian state-owned supplier Gazprom refusing to bow to pressure from its customers to shift to hub-indexed pricing, a system that by its nature reflects the fundamentals of gas supply and demand closer than oil price movements do, and is therefore a more accurate barometer of the market place. 

But S&P insisted that the credit rating of major gas producers was sufficient to weather the storm of disquiet being directed at oil-indexed supply contracts: “We would expect the effects on gas producers RasGas’ and [Russian state-owned] Gazprom’s credit quality to be limited because their ratings already factor in a degree of price volatility and are not tied to currently high oil prices,” S&P stated.

It added that its ratings were based on a mid-term price scenario of Brent crude oil at US$80 (QR 291) per barrel, about 25 percent below the current price, leaving Qatar a lot of leeway. Moreover, S&P stated, its ratings had already factored in conditions in the market in relation to the decoupling of oil and gas prices, “are likely to persist over the short to medium term”.

US$80 - (QR291) The oil price upon which RasGas’ credit rating is based, 25 percent below the current level.

And the agency largely dismissed the RasGas court case: “The arbitration award was high but not material, in our view, in the context of RasGas’ overall financial performance in 2012,” it stated.

Qatar is heavily reliant on exports of LNG to fund its economic diversification programme – a nation-building project that will take time to shift the balance of national income away from gas.  So the news that its exporting leaders are on firm financial foundations is a boost, particularly as global prices for LNG look set to fall within three to four years, according to Goldman Sachs.

A report published by the investment bank mid-February stated that, “Assuming what is under construction on the liquefaction side [plants that convert natural gas into LNG for export] gets built, spot [short-term] markets can transition from 2015 into a bearish cycle…with excess supply expected to develop in the market in 2016-2017, as these projects ramp up supplies.”

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