Despite the rising competition, Doha has a major advantage over other prominent natural gas producers
Qatar is the self-touted world's top liquefied natural gas (LNG) supplier and swing producer. But low natural gas prices are changing the game, with sellers no longer able to dictate prices, while global LNG production is ramping up, making for an increasingly competitive market with much lower revenue returns.
Qatar had ridden the proverbial crest of the wave of high energy prices. It had invested tens of billions of dollars in energy infrastructure, especially in LNG, with projects coming online at an opportune time when oil was at around $100 per barrel and LNG selling for up to $13 per million British thermal units (MBTU).
Doha's returns from hydrocarbons, which account for 49 percent of its revenues and 90 percent of exports, hit an all-time high of $147.9bn in 2013, but with oil now selling for around $30 per barrel, and gas more than halved on the spot markets to $5.75 MBTU, revenues this year are forecast at just $42.9bn.
For the first time in 15 years, Qatar will run a deficit of $12.7bn, if not higher, as the budget is based on a conservative $48 per barrel of oil. “If (energy) prices keep going down, that means the deficit for Qatar will widen, and could hit $20-$25bn. The link between oil prices and LNG is direct, and the more oil prices go down, the more LNG prices drop,” said Naser Tamimi, an independent Middle East analyst.
Buyers have seized on the price slump and heightened global LNG production to renegotiate long-term contracts that had locked them into prices way above current spot prices. For Qatar, this is prompting a strategy rethink, as 70 percent of its LNG exports are under long-term contracts.
“The pressure is mounting and Qatar has read the writing on the wall. They have renegotiated with India, and I think will do so with South Korea and Japan as they can't afford to lose the Asian market, which is nearly three quarters of Qatar's LNG exports. If buyers renew (contracts) it will be on their terms, not Qatar's,” added Tamimi.
Abritration: A harbinger of things to come
In January, India's Petronet successfully renegotiated a long-term gas deal with Qatar, with prices almost halved, from $12-13 MBTU to $6-7 MBTU. Indicative of Qatar no longer being able to dictate deals, a penalty of $1.8bn that Petronet accrued for buying below the contracted amount of LNG was waived.
“It is a bit of a harbinger of things to come,” said Justin Dargin, a Middle East energy expert at Oxford University.
But this was not the first renegotiation. “In the last few years there have been ongoing discussions with European buyers that have culminated in arbitration proceedings. The new part of the story is going beyond Europe to India,” said Karim Nassif, associate director at Standard & Poor's Ratings Services in Dubai.
The India deal has set a precedent for Asia, although Qatar was already being less rigid than in the past to retain customers. With China for instance, Qatar has a 25-year LNG contract, but with consumption spiking in winter, Beijing has to go to the spot markets to meet demand. “Qatar is trying to work to its clients needs, and reconfigured shipments to send more ships to China so they wouldn't have to buy from the spots. That is interesting as it shows that Qatar's willing to go beyond the contractual straight jacket, as until 2015, they wouldn't have wanted to do that,” said Dargin.
A further sign of Qatar's willingness to strike better deals was the inking of a $16bn long-term contract with Pakistan in February. Notably, it is a take-or-pay deal, allowing Islamabad flexibility in cargo orders that can be reviewed after 10 years - a more medium-term contract than with previous Asian contracts. The pricing of arriving LNG is based on 13.37 percent of the previous three-month average price of a barrel of Brent crude oil.
“Before Qatar was trying to get 16 percent,” added Dargin.
Global supply changing the game
It is not just low energy prices that are making buyers want to renegotiate. Global supply of LNG is rising with 81.6 billion cubic metres (bcm) of new LNG supply slated to come on stream this year, raising global capacity by around 20 percent, to some 469 bcm per year. The big new players are in the East as well as the US due to the “shale gas revolution”.
“We're already seeing less Qatari LNG going to Asia, and they were really affected by increased production from Papua New Guinea, Australia and Indonesia last year. That is going to increase, so Qatar will be forced to look for markets outside of Asia,” said Andy Flower, an independent gas consultant.
An issue is what markets Qatar will target. Demand for natural gas in Europe is currently flat, and despite Europeans' intentions to reduce gas supplies from Russia due to geopolitical tensions, this has been more hyperbole than reality so far.
But even if that happens other suppliers will be waiting in the wings. “Qatar is banking on European efforts to diversify away from Russian gas and potentially go into arms of Doha, but they would have to compete with US gas,” said Dargin.
Buyers, especially in Asia, are also wanting to get LNG from as close to home as possible in case of transportation disruptions, such as through the Straits of Hormuz, the top choke point for global energy supplies.
“From the Asian side even if some of the LNG exports from the US or Australia are more expensive, they need security and diversification. They don't want to rely exclusively on Qatar and the Middle East. It is happening with China, Japan and other countries. Asian demand is a huge uncertainty,” said Tamimi.
Countries are also diversifying their energy portfolios. “The issue is ultimately the balance of nuclear power, coal and gas, and with nuclear back on stream [60 power plants are under construction globally], it aggravates gas demand. We will need to watch very closely how the gas demand equation plays out as there's the expectation of an LNG glut, with an increase of a third by 2018. It is important for Qatar to figure out where there is a decline in its own end markets,” said Nassif.
Asia bites back
When prices were high, Asian states were in discussions to set up a buyers' club to rival the Gas Exporting Countries Forum (GECF), the equivalent of OPEC. That idea has been largely muted due to the lower prices. “There were informal meetings about a year ago (among Asian importers) to negotiate en bloc with exporters, as they were sick of paying top dollar on LNG pricing. This shows the push back, particularly against Qatar due to its rigid pricing,” said Dargin.
While a buyers' club has yet to materialise, change is already afoot with the launch in January of Asia LNG futures and swaps on the Singapore Exchange (SGX). “This is another nail in the coffin of both long-term contracts and a 'unique' Asian-Pacific price. The development of various Asian LNG trading hubs is a significant phenomenon,” added Dargin.
Such developments may well result in a move away from long-term contracts and, significantly, gas prices pegged to the barrel price of oil. Following Singapore's move there may be more appetite for an international pricing system to follow the Henry Hub system in the US - the price benchmark for the North American gas market - where natural gas futures are bought on the New York Mercantile Exchange (NYMEX) for delivery 18 months in the future, rather than through long-term contracts.
“An interesting game changer will be to see to what extent these buyers push for a Henry Hub based contract instead of oil based,” said Nassif.
If history is anything to go by this might well happen, as crude oil sales were based on long-term contracts until the 1973 oil crisis prompted a need for more flexibility in the system. “I'll go out on a limb and say that by 2025, the LNG market will closely mimic the oil market,” said Dargin.
Ride it out?
Despite the rising competition, Doha has a major advantage over other LNG producers. The massive LNG infrastructure that was bank rolled over the past decade is being paid off, and no major investments are planned requiring further capital expenditure. Qatar also has its own fleet of 60 LNG vessels - including 27 of the huge Q-Flex and Q-Max ships - that are able to cover the world. As such, Qatar has a good handle on the supply chain from start to finish.
“Qatar is in a strong position as production is cheap, at $1.6-$2 MBTU compared to $2.5 in the US, and $3 in Australia. The Qataris can afford to sweeten their contracts and be more flexible to keep their market share,” said Tamimi.