Will Qatar win the battle to sell natural gas?
This decade will see a grand battle to sell natural gas to growing nations. In the blue corner, with an established infrastructure, targeting the booming Asian markets: Qatar. In the red corner, with projects coming online from 2014, also targeting thriving Asian demand: The World.
The decade ending in 2020 has already been termed as the “golden age of gas” by the International Energy Agency (IEA). In this era, the world will see gas-producing nations vying against one another for the most lucrative supply contracts, the hydrocarbon dollars and the power and influence that accompany bilateral deals on the global stage.
Qatar today is in an extraordinarily dominant position, one it has maintained for the past two years. But competition, on a grand scale, is imminent. If we view the fight for control of the world’s liquefied natural gas (LNG) supply industry as a grand boxing match between Qatar and the rest of the world, then let the bout commence…
In the Qatar corner
December 2010: As the year drew to a close, in Ras Laffan Industrial City, Qatar realised a long-standing ambition by raising its LNG production capacity to 77 million tonnes per annum (mtpa). The milestone was the culmination of years of investment in infrastructure and expertise which propelled the nation from an LNG production capacity of zero to the magic 77 million figure – a target put in place by HH Sheikh Hamad bin Khalifa Al Thani, the Emir – in just 14 years.
Celebrations were held across Qatar. As speeches were made, officials reflected on what it would mean for the tiny state to boast what was at that time, by far, the world’s largest means of LNG production. LNG exports would earn Qatar many hundreds of billions of Qatari Riyals over the coming years, which would be invested globally and pumped back into the domestic economy, ultimately benefitting home-grown businesses.
Qatar’s 77 million tonne achievement was called “a defining moment in Qatar’s history as a gas producing and exporting nation” by RasGas managing director Hamad Rashid Al Mohannadi. Ras Laffan director Abdulaziz Al Muftah called it a “great achievement, which makes a vision a reality,” while Exxon Mobil Corporation chairman and chief executive Rex Tillerson termed it “truly an inspiration for the world”.
In 2011 Doha-headquartered energy giants Qatargas and RasGas exported 76 million tonnes of LNG, accounting for 31 percent of the global market. The second largest exporter was Malaysia with 24 million, less than one-third of the Qatari total.
Round one to Qatar.
Round two: The Golden Age
2010 to 2014: At the begininning of 2013 we find ourselves mid-way through the second round.
As the globe’s dominant producer, the first round went to Qatar. The next stage of the fight from Doha’s standing is about consolidation: preparing for the longer term, ensuring a range of customers across the globe that are geographically, politically and economically diverse enough to ensure a steady flow of exports regardless of what happens in the rest of the world.
With the United States (US) still only scratching the surface of its unconventional gas revolution – one that has pulled down US gas prices and is already changing the global energy economy (see map) – Doha has chosen to look to South America, Europe and, most notably, Asia.
In 2011, 47 percent of Qatar’s LNG exports went to the Asia Pacific region and 42 percent to Europe, according to a recent Qatar National Bank (QNB) study. And the growth markets of Asia remain Qatar’s primary target today. The region “is characterised by a shortage of hydrocarbon resources combined with rapidly rising demand for gas-fired power generation”, the QNB study stated.
The push for diversity has yielded results. In 2007, Qatar exported LNG to eight different countries, while just four years later, in 2011, it exported to 23 countries, from the United Arab Emirates and Kuwait to Argentina, the United Kingdom and Japan.
And, as reported in The Edge last month, Qatar has now added Southeast Asia to its order book, with the the signing of a long-term sales and purchase agreement between PTT, a state-owned energy company in Thailand, and Qatargas. Doha has made no secret of its Asian intentions: “Qatargas sees the Kingdom of Thailand as an evolving LNG market and recognises its potential within Southeast Asia to absorb significant quantities of LNG in the future,” the company said in a statement.
Having developed a taste for Southeast Asia, Qatar is also eyeing the Singapore market, having inked a deal to supply a commissioning cargo to a Singapore terminal – the first ever to enter the city-state – mirroring an approach taken by the company in its dealings with PTT.
Finally, long-term supply agreements are under discussion with India, Pakistan and Turkey, QNB says. Doha is mid-way through a golden age of LNG exports.
Round two, without a doubt therefore, goes to Qatar.
A 6.9 mtpa project is under construction in Papua New Guinea, South-East Asia, called the PNG LNG project, which like Qatar, is targeting the Asian market.
Round Three: The fightback
2014 to 2017: The latter part of this decade is the period in which the deals being signed today by Doha will need to be sustained, if Qatar is to maintain its dominant position in the face of a global battle for the world’s LNG supply routes.
Elsewhere in the world, the fightback has already started. Major LNG production capacity is under construction in many locations, most notably in Australia, while final investment decisions are to be taken soon regarding projects in North America.
There are two basic stages in the export and import of LNG: liquefaction and regasification. At the liquefaction stage, gas is extracted from the earth and cooled to allow it to liquefy and be transported via tanker. It is then heated and regasified at the receiving port, so that it can be distributed to areas of demand via pipeline or reloaded and distributed by smaller vessels.
In Australia, which most recently completed a 4.3 mtpa Pluto LNG project operated by Woodside Energy, no less than eight extraction and liquefaction schemes are under construction. They will boost the nation’s production capacity from 24 mtpa today to 60 mtpa in 2017, according to the Australian energy department, although cost overruns have begun to plague the projects. Investment decisions are also pending on a further three schemes.
Barclays energy market research head Trevor Sikorski tells The Edge. “After 2014 it gets interesting, because you’re talking about some of the big Australian facilities coming on line in 2015, 2016 and 2017, plus you’re looking at exports of United States (US) gas beginning over the same three-year period, so you can see a time, depending on how fast regasification comes on line, where you start to see more LNG.”
And the US is also set to join the fray, transforming its new volumes of unconventional gas into hydrocarbon dollars, adds Sikorski. Qatar can expect fierce competition from other quarters too. Angola, on the west coast of Africa, commissioned a 5.2mtpa LNG project in April, which was intended to supply the US market, although the investment decision was taken before North American gas prices nosedived. The attention of the project’s investors is now turning to Asia, although according to Sikorski, the project is yet to sell any gas. On top of this, a 6.9 mtpa project is also under construction in Papua New Guinea, Southeast Asia, called the PNG LNG project, which is also targeting the Asian market. Exports are expected to begin in 2014.
The IEA says that, assuming no delays to existing project schedules, global LNG production capacity will have reached 358 mtpa by 2017, slashing Qatar’s share from 27 percent at the start of 2011 to 22 percent in 2017. On the flip side, Australia stands to gain the largest share of production capacity, up from just nine percent in 2011 to 17 percent in 2017, just five percentage points short of Qatar.
Round three, in the grand LNG battle, will thus go to Australia.
Round Four: Fighting for survival
2017 to 2025: With the post-2017 loosening of the global supply picture, the LNG sector will undergo a fundamental change. It will transform from a seller’s market – one which proved highly lucrative for Qatar in the first half of this decade – to a buyer’s market, in which the giant Asian consumers will be negotiating hard to secure the best price, with a range of suppliers never before seen in the LNG sphere. To survive in the new competitive world of LNG post-2017, Doha will need to take a long, hard look at its contractual pricing strategy.
Qatar has traditionally supplied LNG through long-term contracts index linked to oil price movements – if oil becomes more expensive, so does its LNG, whereas if the price of oil falls, so Doha’s income declines.
The state has done well out of the arrangement, particularly over the past two years with oil prices generally holding above US$100 (QR364) a barrel. This has led to some high-profile legal cases, particularly in Europe, with energy companies facing Qatar through the international arbitration courts.
“Qatar has a lot of long-term contracts in Asia so its market share is not going to disappear overnight,” Sikorski says, “but a lot of the marginal, short-term or mid-term…will eventually be either replaced or supplemented with new forms of LNG, particularly if they are not willing to price in a way that is more competitive.”
The alternative pricing arrangement, and one which consuming countries are crying out for, is to tie contracts to gas hub prices. For example, a firm in Europe may pay a price linked to the short-term market price for gas across a number of European energy exchanges, so ensuring that the price they pay to Qatar moves in line with an index that it has a lot more in common with fundamentally.
Despite the increasing competition, Sikorski says, the country will still have advantageous options. “Qatar has by far the most marginal cost of production, particularly when you compare it to some of the new facilities coming on in Australia,” he says, explaining that production in Australia will be relatively expensive.
“So if Qatar want market share, they can go and get it, if they are willing to price accordingly.” Round four will be a tough slog, but it might just be Doha’s cost of production – if it is prepared to give some ground on contractual pricing – that swings the global battle for LNG in Qatar’s favour.
Whoever will emerge victorious by 2020 remains to be seen, but what is clear is that Qatar and the rest of the world will soon find themselves increasingly in a struggle for control of the new LNG economy.