Since taking the decision to develop its giant offshore North field in the early 1990s, Qatar has banked on the global gas market to provide it with its hydrocarbon wealth. Supported by estimated reserves of about 899 trillion cubic feet, the country has become the world’s largest producer and exporter of liquefied natural gas (LNG), achieving its annual production capacity goal of 77 million tonnes a year (t/y) in 2010.

Qatar [had to] change its LNG strategy. The US did not require imports, so Qatar diverted its LNG to Europe and Asia

Giles Farrer, Wood Mackenzie

To deliver its gas to markets around the world, Qatar has built infrastructure, including a total of seven LNG trains, among them the world’s four largest megatrains with a capacity of 7.8 million t/y. Its LNG shipping fleet consists of 25 wholly owned and 29 jointly owned carriers.

Backed by these formidable resources, Qatar has established itself not only as the largest, but as an extremely reliable supplier, a position it wants to capitalise on.

Gold standard LNG supplier

“Qatar has a strong track record, new plants and huge upstream resources. It is the gold standard as an LNG supplier, but because it is the gold standard it expects gold-standard prices,” says Giles Farrer, an analyst at UK-based consultancy Wood Mackenzie.

Demand growth for natural gas has been steady, with worldwide consumption increasing from 2.4 trillion cubic metres in 2000 to 3.2 trillion cubic metres in 2010, according to the BP Statistical Review.

Qatar’s business case for investing in LNG has been based on this long-term steady rise in demand for natural gas. Something that was not factored into the equation was a sharp increase in US gas output.

Qatar and global gas markets have been taken by surprise by the recent surge in US production made possible by new methods of hydraulic fracturing and horizontal drilling, which opened up vast previously inaccessible reserves of shale gas in the US. In 2008, shale production jumped by more than 70 per cent to 2 trillion cubic feet.

This trend is set to continue with the US Energy Information Administration more than doubling its estimate of proven reserves to 827 trillion cubic feet in 2010.

With export potential to the US rapidly drying up, Qatar was forced to rethink its plans.

“Qatar was forced to change its whole LNG strategy. Its megatrains were sanctioned on the basis that it was going to ship large quantities to the North American and Northern European markets, at prices that are not that dissimilar to today’s,” says Farrer. “The shale gas revolution changed that picture, the US did not require any imports, so Qatar diverted its LNG to either Europe or to high-grade Asian markets.”

Fortunately for Doha, self-sufficiency in one target market coincided with booming demand in another, Asia. Demand in the Asia Pacific region almost doubled to 567.6 billion cubic metres in the decade leading up to 2010, resulting in an increasing tightness in supply.

This trend is continuing unabated and is supported by the dearth of new available gas sources. It has been accentuated further by the tsunami that hit the Fukushima nuclear plant in Japan in March, prompting Japan to shift its power generation from nuclear to gas-fired power plants.

Experts warn of oversimplification, the disaster has not yet led to a significant rise in Qatari LNG exports to Japan. More important than immediate marketing potential has been the rapprochement between the selling and the buying side. Qatari natural gas sales to Japan in 2010 amounted to 10.15 billion cubic metres, not a small amount, but less than the 17.41 billion cubic metres sold to the UAE, which has one tenth of the population of Japan.

Japanese utilities were unhappy with the price quotes by Qatar, and the discrepancy in valuation prevented a greater flow of LNG to the Asian state. In the aftermath of Fukushima, Qatargas, the state-owned energy company, announced the dispatch of 60 additional cargos that amount to a total of 4 million tonnes of LNG over the next 12 months. These short-term deliveries have raised expectations of renewed dialogue between the countries that could lead to a broadening of the LNG trade between the two.

Energy exports

With China, and to a lesser extent India, also developing a rapacious appetite for energy, exports into the Pacific basin at prices deemed appropriate by the Qataris are likely to increase over coming years.

Much of this additional supply will come to the region at the expense of another export zone, the Atlantic basin, which consists of the North American and North European markets. Much of the LNG going into these markets is not sold under long-term contracts and is often simply sold as natural gas after being delivered to terminals at the destination. As a result, Qatar is able to divert its LNG streams at short notice to higher paying markets.

“The story of where Qatar is at the moment is really quite simple. They have this flexible portion of LNG, the market is tightening and that tightening has been strengthened by the trend away from nuclear as a result of the Fukushima fallout. This is going to provide opportunities for Qatar to divert LNG into premium markets under their long-term pricing strategy,” says Farrer.

The developing countries of Asia are willing to pay for industrial development; and higher LNG prices. Qatar insists on oil price indexation, where the price of LNG is coupled to the oil price. Analysts expect the link between the oil and gas price to weakenin future, with a more flexible gas market and a greater variety of sources resulting in a trend towards spot prices. In Asia, on the other hand, oil indexation is expected to remain the dominant guide for LNG pricing.

So far, there is no evidence of Qatar redirecting its LNG from the European markets to Asia, but Farrer believes this is most likely only a matter of time. Even if oil price indexation in Europe is upheld, the margins are already more profitable in the Pacific basin. Wood MacKenzie puts the LNG indexation levels in Europe at 11 per cent of Brent, in Asia the gas sells at 14-15 per cent of Brent.

With their options limited, Asian buyers will increasingly resort to entering long-term contracts based on oil indexation at Pacific basin markets rates.

“We expect the market to tighten between 2013 and 2015, as there will be little new LNG supply coming to market. As a result, we believe some buyers will be forced to turn to Qatar in this time period, as there will be no alternative supplier” says Farrer.

Malaysian energy company Petronas is an example of this trend, in July it signed a heads of agreement for a 20-year contract to receive 1.5 million t/y of Qatari LNG from 2013.

“It is the first time Qatargas has signed a heads of agreement for supplying LNG to the Southeast Asian market. We are very pleased with this achievement as it represents the first long-term agreement for supplying LNG to one of the world’s fastest-growing LNG markets,” said Khalid bin Khalifa al-Thani, chief executive officer of Qatargas at the time.

In spite of advantageous supply-demand fundamentals, there are indications that Qatar is softening on its price stance, and will fall in line with other suppliers. Its traditional gold-standard pricing can policy can backfire, as was demonstrated early in September, when Thailand’s state-owned energy company PTT announced it was reviewing a contract to buy 1 million (t/y) of LNG from Qatargas. PTT chief financial officer Tevin Vongvanich said prices for LNG had risen from $7-8 a million BTU to above $16 a million BTU in the wake of Fukushima, and that it is considering gas from two other suppliers instead. With Qatar actively seeking to expand into the Asian markets, it cannot afford to price itself out of the market.

Market correction

The Pacific and the Atlantic basin are not the only markets for Qatar, with rampant demand for energy a feature closer to home. Across the Gulf, oil producing countries have long neglected to harness their natural gas reserves, and are now facing a severe shortage of the most-efficient feedstock for power generation in the face of soaring usage of electricity.

Qatar already supplies the UAE and Oman, and experts believe they will be doing so for some time to come, in spite of efforts in both countries to develop their own sources of gas.

More favourable pricing will also be inevitable in the GCC. Gas currently flows to the GCC at below world market prices and future deals are likely to see a realignment. “The era of supplying cheap gas to its Middle East neighbours is over,” says one analyst.

With demand fundamentals in its favour, Qatar is sitting comfortably on its gas reserves.