Qatar’s ‘risky’ LNG ramp-up

Doha faces ‘di­min­ished mar­ket con­fi­dence’ that could push down the price of its liq­ue­fied nat­u­ral gas, says US an­a­lyst

Arab News - - OIL & GAS - RICHARD WACHMAN

LON­DON: Qatar’s de­ci­sion to sig­nif­i­cantly ex­pand out­put of liq­ue­fied nat­u­ral gas (LNG) from the mas­sive North Field in the Ara­bian Gulf car­ries sig­nif­i­cant risk, ac­cord­ing to US-based re­search group Rap­i­dan En­ergy Group.

Even though mar­itime routes through the Gulf, Strait of Hor­muz and the Suez Canal have re­mained open to tankers car­ry­ing Qatari LNG in the wake of the dis­pute be­tween Doha and some of its Arab neigh­bors, ini­tial fears they could be closed will not be lost on po­ten­tial buy­ers, said the con­sul­tancy’s New York di­rec­tor Les­lie Palti-Guz­man.

Speak­ing to Arab News, she said buy­ers could lobby for a “risk dis­count” on price as the stand­off had ex­posed Qatar’s geopo­lit­i­cal and ge­o­graphic vul­ner­a­bil­ity.

“At the end of the day, the LNG busi­ness re­lies on the safety of ship­ping lanes but there is di­min­ished mar­ket con­fi­dence in Qatar,” said Palti-Guz­man.

Qatar’s de­ci­sion ear­lier this year to boost ca­pac­ity to 100 mil­lion tonnes by 2022 would mean over­sup­ply­ing an al­ready glut­ted mar­ket — some­thing that would prob­a­bly keep down spot prices to about $6 per mil­lion Bri­tish ther­mal units (mbtu), or per­haps even $5 per mbtu, she added.

Ex­tra Qatari sup­ply would also likely lead to lower global liq­ue­fac­tion uti­liza­tion rates at soon-to-be launched fa­cil­i­ties, mak­ing them less eco­nomic.

A de­ci­sion to lift a 2005 mora­to­rium on ad­di­tional pro­duc­tion from North Field was made be­fore the stand­off with other Gulf states, which erupted in June. But since then, Qatar has de­tailed an ag­gres­sive ex­pan­sion strat­egy — one that was likely to be only “half suc­cess­ful,” said Palti-Guz­man.

North Field cur­rently ac­counts for nearly all of Qatar’s gas pro­duc­tion and around 60 per­cent of its ex­port rev­enue. On the ba­sis of North Field re­serves, Qatar has grown its LNG ex­ports from 1.9 mil­lion tonnes in 1997 to a record 78.7 mil­lion tonnes last year, ac­cord­ing to Platts.

A ma­jor chal­lenge for Qatar is re­new­ing 8 mil­lion-plus tonnes of ex­pir­ing long-term LNG con­tracts.

“Th­ese days, buy­ers want flex­i­bil­ity and they want short-term. They are not look­ing for a 20-year long-term sup­ply con­tracts; buy­ers will want to hedge in or­der have en­ergy se­cu­rity,” said PaltiGuz­man, al­lud­ing to Qatar.

The LNG mar­ket has be­come fe­ro­ciously com­pet­i­tive. Not only is there a threat from US shale but also a sig­nif­i­cant chal­lenge from Aus­tralia, trad­ing houses and over-com­mit­ted buy­ers which, like Qatar, are tar­get­ing po­ten­tial cus­tomers in South Asia and the Mid­dle East.

Ad­di­tion­ally, new play­ers such as In­dia and Ja­pan are up and com­ing, while in the Mid­dle East, the Rus­sians have been in­creas­ingly ac­tive.

Putin said ear­lier this year Rus­sia wanted to be the world’s largest LNG pro­ducer. Ac­cord­ing to Rus­sian me­dia, Bahrain has been hold­ing talks about buy­ing LNG from Gazprom, Ros­neft, or both.

While Qatar is cur­rently the world’s largest LNG ex­porter and low­est-cost pro­ducer, it re­mains to be seen how well it can adapt to new mar­ket con­di­tions.

One de­vel­op­ment that sug­gests it can is its in­volve­ment in an ex­ten­sion project at Golden Pass LNG ter­mi­nal in Texas. The ex­pan­sion would en­able the fa­cil­ity to ex­port LNG as well as take in im­ports. The ven­ture is a part­ner­ship be­tween Qatar Pe­tro­leum In­ter­na­tional and ExxonMo­bil af­fil­i­ates.

Palti-Guz­man said Golden Pass shows Qatar can achieve two goals. One is be­ing able and will­ing to by­pass the geopo­lit­i­cal risk around the Strait of Hor­muz by hav­ing sup­ply out­side Qatar for the first time. The sec­ond would al­low it to op­ti­mize its port­fo­lio by open­ing up ar­bi­trage op­por­tu­ni­ties be­tween dif­fer­ent global LNG mar­kets.

“So there is a com­mer­cial as­pect, but the main driver re­mains very strate­gic,” she said.

Less promis­ing, Palti-Guz­man said, is Qatar’s de­ter­mi­na­tion to stick to oil in­dex­a­tion and a re­luc­tance to ac­cept emerg­ing Asian hub-based prices. That il­lus­trates Qatar’s re­sis­tance, on some lev­els, to the grad­ual shift to flex­i­ble pric­ing — re­sis­tance that may have to be ad­dressed in the not-too-dis­tant fu­ture, she added.

Buy­ers of Qatari LNG could lobby for a 'risk dis­count,' one an­a­lyst said. (Reuters)

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