[NGW Magazine] Editorial: Playing by the rules?

Fresh from its seven-year investigation into Gazprom, the European Commission has taken the initiative now to probe the terms on which Qatar sells its gas in Europe. Qatar Petroleum has said it will co-operate and that it places the highest importance on complying with the regulations in the places where it does business. 

Qatar is the biggest LNG supplier to Europe and is gearing up its output capacity, which will enable it to better to counterbalance Russian pipeline gas later next decade, and supply countries such as Spain and Portugal that have limited connections with other markets. So antagonising it in a market where LNG is generally regarded as a price-taker could have unintended consequences for a body that wants affordable energy for all its citizens.

As with Gazprom and Sonatrach in the past, the problem that the EC has hit on lies in the sellers’ prohibition on the buyer selling the gas elsewhere – so-called destination clauses. The EC probe is only looking at the impact the ban may have had on other EU states, not on redeliveries to countries outside. 

Unlike the probe into Gazprom which was initiated by a complaint from a former Soviet state, this one was launched at the EC’s initiative. And so it is worth asking what can it hope to achieve from this expenditure of time and effort now, as the gas world moves on into an ever oilier – short term and transparently priced, or commoditised – way of doing business? One consultant said it did appear to be shutting the stable door too late.  

Destination clauses are a distortion as they push up prices. Customers lose out and Europe’s industrial competitiveness has arguably suffered, but to some unknowable extent. 

Several questions are worth asking though, including the obvious one: if the clause was so financially onerous, why did buyers agree to it? One reason is that if everyone is in the same position in an oil-indexed, barely competitive world, does it make much difference? And if the end consumer minds so much nothing is stopping him using some other fuel such as crude oil products. Perhaps the loss is just too small to worry about, when compared with the advantages of gas; and over the years it all evens out. Some producers must also genuinely wonder what the purpose is in developing gas fields in inhospitable regions and building and maintaining all the miles of pipeline, just so the buyer can later decide that he is overpaying and demand a reduction. Surely being able to produce gas and sell it profitably is their reason for being. It is called a 'sellers' market', a situation the Qataris took advantage of too – while it lasted. And on the other side, the gas merchants knew that the clauses were a joke in many cases. They took title to Russian or other gas at a border point, and thereafter who was to say where it ended up. Holders of long-term contracts for delivery at Baumgarten could arrange for some of the gas to be rerouted to companies that Gazprom might want to sell to. Proving the breach of contract was very difficult.

With LNG, it was more obvious what was going on as it was all above-ground: the terminal operators had to develop reloading capacity, so that once the delivering tanker had sailed away empty from Zeebrugge, for example, another one could moor to be filled up with that same LNG for sale in Spain, where Qatar also had customers. Ship tracking websites can do that job, making it easy to prove what was going on, but there have been very few if any cases of Qatar suing customers for breach of contract on those grounds. On the other hand, it was happy to spend long months maintaining the ships and the plant, at times of low oil prices a decade ago. 

So what then really is the EC on about? Natural gas is one of very few commodities in everyday use whose geological distribution is uneven and whose transportation is highly capital-intensive, requiring a tight match of risk and reward on both sides, regarding volume and price. Despite the difficult operating conditions, Europe’s economy has benefited hugely from secure and reliable gas supplies, mainly nowadays from suppliers outside the Union.

And soon, perhaps, the US will join them. This year could be seen as the tenth anniversary of the shale gas revolution, and the US is now in its third year as an exporter, but you would hardly have known it looking at Europe, as the buyers are taking their Sabine Pass cargoes to Latin American, Middle Eastern or Asian Pacific markets in search of the best price, while Europe’s import terminals have been languishing.

This though is only the start. Analysts at IHS Markit say that US gas output rose by more than 40% in that first decade (2007-2017) while natural gas prices fell by two thirds during the same period. In a new report, it says: “In contrast to the assumption a decade ago, the US is now on track to become one of the world’s major LNG exporters, as capacity more than doubles in the next five years to at least 10bn ft³/d by 2023” – which is about the same as Qatar will have, post-expansion. 

Competition law is one thing but the EU should also do what it can to encourage sellers to its shores as there are plenty of other buyers out there.

NGW