Will Qatar remain the king of LNG?

LNG king Qatar faces formidable challenges. First a changing landscape in global gas markets with more competitors entering the scene

Dr. Naser al-Tamimi
Dr. Naser al-Tamimi
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Over the past decade, Qatar has provided the world with an economic success story that dazzled so many people. A country with just 11,500 square kilometers in size, a population of around 1.9 million, will host the World Cup in 2022. This small state also managed to achieve big things, recorded the highest economic growth rates in the world, enjoying the highest income of per capita and its sovereign wealth funds are hunting investment opportunities all over the world.

Although Qatar has significant proven oil reserves, the story of the country with gas is the interesting one. It has the world’s third largest gas reserves of 885 trillion cubic feet (25.1 trillion cubic meters), representing about 13.4 percent of global proven oil reserves. The country also produced 157 billion cubic meters (bcm), making Qatar the world’s fourth largest gas producer in 2012 according to BP Statistical Review 2013. Almost 80 percent of Qatar’s gas exports are in the form of liquefied natural gas (LNG), less than two thirds (62.7 percent) of which is shipped to Asia. Helped by rising global demand amid tight supply, Qatar has seen its LNG exports surge from over 18 million tons a year (mt / y) in 2002 to 77.41 mt / y in 2012, representing nearly one third (32.6 percent) of global supply last year. Japan is Qatar’s largest market, followed by India and South Korea. Japan and Korea are the world’s dominant LNG importers, consuming 52 percent of LNG supplied to the market in 2012 according to the International Gas Union.

As Qatar ramped up its LNG export capacity, the economy expanded at among the fastest rates in the world, with gross domestic product (GDP) growth averaging more than 13 per cent between 2002 and 2012. Subsequently, Qatar’s GDP, increased almost 10 times from $ 17.6 billion to $ 192.4 billion in the same period. Nevertheless, these figures may become a thing of the past. This year, growth will slow to 5.1 per cent. The IMF is forecasting average GDP growth of about 6 percent for the Gulf country over the next five years (2013-18).

LNG king Qatar faces formidable challenges. First a changing landscape in global gas markets with more competitors entering the scene and the emergence of new LNG-exporting hubs. Second, the increase in supply will lead to lower prices. Third, the availability of alternative supplies into Asia will allow buyers there to negotiate hard over long-term supply contracts. This may mean a challenge to the standard Qatari model of tying long-term contracts to oil prices rather than natural gas prices. As a result, competition from new suppliers of LNG could hit Qatar’s chief source of hydrocarbons revenue, resulting in downward pressure on pricing which Qatar has been resistant to reform from oil-indexed linkages.

LNG king Qatar faces formidable challenges. First a changing landscape in global gas markets with more competitors entering the scene and the emergence of new LNG-exporting hubs

Dr. Naser al-Tamimi

Globally, the construction of LNG plants will add 93.5 million tons of capacity to the existing 296 million tons by 2018, according to data compiled by Bloomberg Industries. In 2012, the Middle East produced 112.7mt / y (about 70 percent from Qatar) and Asia-Pacific 80.8mt / y. This trend is likely to reverse in the coming decade by what the Economist call it “The Next Qatar,” as new Australian projects are expected to come on-stream post-2015. According to the International Gas Union, Australia is building seven projects worth $200 billion; with a total capacity of 62m t / y that will treble its capacity to about 86m t / y and overtake Qatar as the world’s largest LNG exporter by 2018. Further capacity additions in Australia will dramatically slow down due to the high cost of new project; economic slowdown in Asia, labor shortages, high Australian dollar, infrastructure bottlenecks, tight environmental regulations, competition from North American, and the potential development of unconventional gas reserves in China and Japan endanger the future of new LNG projects in Australia. Nevertheless, Australia will displace Qatar as the prime LNG exporter with projects already under construction.

Beyond Australia, North America will emerge as an LNG-exporting hub from the end of this decade, especially in America The U.S. and Canada together may add as much as 77m t / y of capacity by 2020, an amount equal to the entire output of Qatar, according to Barclays Plc and Royal Bank of Canada (RBC). Amy Myers Jaffe the Executive Director for Energy and Sustainability at University of California, Davis and Edward Morse Global Head of Commodities Research at Citi argue in an article published last September in the Foreign Affairs that “by 2020, the United States could export as much as 61.7mt / y of LNG. That would make the United States the second largest LNG exporter in the world, next to Qatar. Other deals in the licensing queue are likely to push the total closer to 80 million tons per year, compared to Qatar’s current total of 77.”

Meanwhile, recent big offshore gas discoveries in East Africa have opened up the opportunity for LNG exports from Mozambique and Tanzania, most likely beginning in the early 2020s. Russia may also compete with Qatar in Europe if it goes ahead with Novatek’s planned 15m t / y Yamal LNG in project in the Russian Arctic. Russia already competes with Qatar, by selling LNG into the Asia-Pacific market and plans to boost output. As recent Stratfor analysis showed that “Moscow could challenge Doha by rapidly investing the capital necessary to take advantage of its comparative advantage in piped natural gas.” In addition of all of that, the possibility of a global slowdown, mainly in Asian export markets could hit Doha’s exports. Qatar will also be watching demand-side factors as well, such as the future of Japan’s reliance on nuclear power and how this will impact its LNG requirement. According to International Gas Union Nuclear generation, which previously accounted for 30 percent of Japan’s power supply, fell 43 percent in 2011 and another 89 percent in 2012. In the second half of 2012, nuclear power made up just 3 percent of electricity supply. These nuclear outages prompted a 12 percent increase in LNG imports in 2011 and an 11 percent increase in 2012.

If all these projects materialize, there could be a sizeable glut in the market, triggering much lower LNG prices. A surge in U.S., Canadian and Australian gas from shale deposits may depress prices for new LNG projects by 35 percent, according to Barclays Plc and RBC. For Doha this is a bad news. According to MEES calculations Qatar accounted almost 36 percent of total spot and short-term volumes, selling 21 million tons (About half of Qatar’s short-term and spot cargoes, 11.9m tons went to Asia) - 27 percent of its 77m t / y capacity. The majority of Qatar’s sales are oil-indexed; the prospect of much lower spot prices is a major concern. As the military tension in the Gulf region eases with Iran’s deal, the price of oil could be affected. The increased oil production in the United States, Iraq and the return of Libyan oil followed by pumping Iran’s oil to the world market may considerably increase downward pressure on world oil prices in short and medium terms. In the long run, with new supplies of gas from Australia, North America Russia and East Africa, due to come on-stream, Qatar’s ability to resist reform on pricing may be soon be under pressure.

The developing Qatari response

Qatar’s new emir, Sheikh Tamim bin Hamad al-Thani, delivered address early this month (November 5th) at the opening session of the Shura Council, outlines his country priorities by stressing the importance of economic diversification, remove obstacles to the private sector, encourage entrepreneurship and move towards a “knowledge-based economy.”

In this context, the establishment of economic zones is part of the Qatar’s drive to expand local manufacturing and non-oil exports. The Qatar Economic Zone Projects Company (QEZC) was created by the Ministry of Economy and Trade in April with an authorized capital of QR5bn ($ 1.4bn) to chalk out an integrated plan for the development of special areas for existing and future small and medium-sized enterprises (SMEs). In addition, major policy reforms should attract more foreign direct investment (FDI) to the non-oil sectors. The recent upgrade by Morgan Stanley Capital International (MSCI) of Qatar from frontier-market to emerging market status should help usher in further foreign capital in the future.

Qatar has already highlighted its desire to expand activity in the petrochemical and aluminum industries. Qatar’s ambitious plans to increase petrochemicals production to 23 million tons a year (t / y) by 2020 from 9 million t / y today. Qatar Petroleum (QP) and Qatar Petrochemical Company (Qapco) have officially awarded the U.S. Bechtel the project management consultancy (PMC) contract for a planned $ 7.4bn petrochemicals complex at Ras Laffan in Qatar. The construction tender and execution phases will follow in 2014-15. Completion is expected in 2018.

The Qataris also could strike back at their rivals. The IEA noted that producers such as Russia and Qatar, the largest current exporters of natural gas, have access to ample conventional reserves, immense production capacity, well-developed export infrastructure, low production costs and flexibility; these countries could undercut the prices offered by most other exporters on international markets. More interestingly, changing circumstances could push Qatar and Russia to cooperate in LNG market. One indication in that direction is the recent inauguration of Russian rival Gazprom’s representative office in Doha.

All in all, Qatar will remain a key LNG supplier but it should learn from its own experience, the United States, a market which much of Qatar’s LNG production capacity was built to supply, has already become virtually self-sufficient and will soon be competing with Doha in the Asian market. As energy historian Daniel Yergin once put it eloquently: “When it comes to energy, the rule of the game is to expect the unexpected.”


Dr Naser al-Tamimi is a UK-based Middle East analyst, and author of the forthcoming book “China-Saudi Arabia Relations, 1990-2012: Marriage of Convenience or Strategic Alliance?” He is an Al Arabiya regular contributor, with a particular interest in energy politics, the political economy of the Gulf, and Middle East-Asia relations. The writer can be reached at: Twitter: @nasertamimi and email: [email protected]

Disclaimer: Views expressed by writers in this section are their own and do not reflect Al Arabiya English's point-of-view.
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