Qatar Today - - INSIDE THIS ISSUE - BY MARC HOWSON Se­nior Man­ag­ing Ed­i­tor LNG Asia, S&P Global Platts

Es­tab­lished op­er­a­tors like Qatar will still ben­e­fit from re­la­tion­ships with LNG im­porters rooted in decades of his­tory.

Anew rule book char­ac­terised by the sup­ple­ness of sup­ply and au­ton­omy for buy­ers of LNG is emerg­ing. An over­sup­ply of LNG and sub­se­quent ‘soft' prices – espe­cially for oil-in­dexed con­tracts – means buy­ers can flex their pur­chas­ing mus­cle to de­mand a big­ger ‘menu' of con­trac­tual op­tions than ever be­fore. As such, the long-term sup­ply con­tracts with desti­na­tion clauses that have been the bread and but­ter of the LNG mar­ket since the first ma­jor ship­ment from Al­ge­ria to the UK in 1964 are di­ver­si­fy­ing into shorter term spot deals.

The tena­cious com­pe­ti­tion from sup­pli­ers gain­ing strength across the At­lantic, Pa­cific and In­dian Oceans means buy­ers have more op­por­tu­nity to cher­ryp­ick deals than ever be­fore, even though coun­tries like Qatar will still ben­e­fit from re­la­tion­ships with LNG im­porters rooted in decades of his­tory.

Pure LNG spot trad­ing – car­goes de­liv­ered within three months of the trans­ac­tion – ac­counted for 18% of to­tal im­ported LNG vol­umes in 2016, ac­cord­ing to in­dus­try group GIIGNL, up from 15% in 2015. China, In­dia and Egypt drove the growth, with spot trade vol­umes reach­ing around 47 mil­lion met­ric tons in 2016. In

2000, short-term LNG con­tracts – deals for less than four years – rep­re­sented 2% of the mar­ket. It is now around 30%. This trend will only be­come more en­trenched as many long-term con­tracts ex­pire in the medium-term, par­tic­u­larly in Ja­pan, the world's big­gest LNG im­porter at 32% of global LNG pur­chases in 2016. Ja­pan's Jera, the world's big­gest sin­gle LNG im­porter, plans to re­duce its long-term im­ports by 42% by 2030, for ex­am­ple.

A bet­ter un­der­stand­ing of how to ad­just to cus­tomers' needs is in­te­gral to enabling the Middle East's LNG ex­port pro­file to flour­ish, ac­cord­ing to just un­der half of re­spon­dents to a GIQ In­dus­try Sur­vey in April. Qatar espe­cially needs to take note if it wants to re­tain its crown as the world's big­gest LNG ex­porter and the dom­i­nant sup­plier in the Middle East.

Ris­ing vol­umes from the US and Aus­tralia threaten to knock Doha from its pole po­si­tion and ring-fence cov­eted mar­ket share by 2020, espe­cially in Asia. Both coun­tries stand a good chance of suc­cess. Global LNG ex­port ca­pac­ity is fore­cast to rise by 45% be­tween 2015 and 2021, with 90% orig­i­nat­ing from the US and Aus­tralia, ac­cord­ing to the In­ter­na­tional En­ergy Agency (IEA). The US' Che­niere-owned Sabine Pass de­liv­ered its 120th LNG cargo last May af­ter load­ing its first com­mis­sion­ing cargo in Fe­bru­ary 2016 – this marks an ex­tra­or­di­nary rate of growth. Two of the US' car­goes landed in Dubai and five in Kuwait, which il­lus­trates a side is­sue that the Middle East needs to re­solve. How can coun­tries in a re­gion that is home to 80% of the world's nat­u­ral gas re­serves face gas short­ages? Qatar will also have to de­fend its ti­tle against Rus­sia and Iran. The lat­ter is home to the world's sec­ond-largest nat­u­ral gas re­serves and aims at ex­pand­ing its piped and shipped gas ex­ports fol­low­ing the lift­ing of most of the Western-im­posed sanc­tions eigh­teen months ago.

As sup­pli­ers jos­tle to charm in­creas­ingly se­lec­tive buy­ers, Qatar has sharp­ened its com­pet­i­tive edge by lift­ing a 12-year mora­to­rium on de­vel­op­ment of the coun­try's North Field. The move could in­crease pro­duc­tion at the world's largest nat­u­ral gas re­serve by up to 10% if it starts pro­duc­tion in the early 2020s.

But flex­i­bil­ity of vol­ume is only part of the story. Desti­na­tion clauses – spec­i­fy­ing the lo­ca­tion of de­liv­ery – are a his­tor­i­cal bug­bear for many Asian LNG im­porters. The clauses pre­vent buy­ers from di­vert­ing and re­selling cargo in a mar­ket that is pay­ing a pre­mium, even if the buyer has sur­plus sup­ply. Yet, car­goes from the new and in­creas­ingly in­flu­en­tial kid on the block, the US, can go any­where in the world. The need for other sup­pli­ers – in­clud­ing those in the Gulf – to rapidly match this level of flex­i­bil­ity into their game plans be­comes clear.

Therein also lies the in­cen­tive of float­ing stor­age and re­gasi­fi­ca­tion units (FSRUs). Rel­a­tively cheap en­try points, and an abil­ity to side-step most po­lit­i­cal and nat­u­ral chal­lenges that piped gas can­not, means the global cap­i­tal ex­pen­di­ture for float­ing fa­cil­i­ties is ex­pected to rise by an ex­tra­or­di­nary 264% to to­tal $41.6 bil­lion be­tween 2016 and 2022, ac­cord­ing to Dou­glas West­wood's World FLNG Mar­ket Fore­cast. This is com­pared to $11.4 bil­lion be­tween 2011 and 2015.

A need for greater flex­i­bil­ity also ap­plies to re­gional deal­mak­ing, with the Middle East's gas de­mand ex­pected to dou­ble by 2040. It is lit­tle sur­prise that Saudi Ara­bi­abased Api­corp ex­pects in­vest­ments as­signed to build­ing LNG im­port in­fras­truc­ture across the Middle East and North Africa (MENA) in the medium term to to­tal $10.3 bil­lion. The Middle East's three main im­porters – Kuwait, Is­rael and the UAE – re­ceived 6.1 bcf of gas equiv­a­lent in 2014. This fig­ure quadru­pled in just two years to 24.5 bcf in 2016.

Sup­pli­ers that can apply the great­est flex­i­bil­ity in the least time for the best cost will shoot to the front of the com­pet­i­tive curve. As more elo­quently put by an Arab proverb: “Ex­am­ine what is said and not he who speaks”

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