Qatar bounces back - NGW Magazine
This article is featured in NGW Magazine Volume 2, Issue 14
Qatar plans to boost LNG output, while existing buyers are examining their contracts. Other companies and governments will have to hedge their bets.
Qatar’s announcement that it plans to increase LNG production from 77mn mt/yr to 100mn mt/yr in the next five to seven years shows that it is ending the period of stagnation, analysts have told NGW.
It came a month into the stand-off with the four Arab states – Saudi Arabia, Egypt, Bahrain and the United Arab Emirates (UAE) – which showed no signs of ending at time of press, despite US Secretary of State Rex Tillerson’s visit to the region from July 10-13. But LNG shipments were continuing as normal from Qatar, as were gas flows through the 2bn ft³/day Dolphin pipeline to the UAE and Oman.
The State Department said that getting the parties in the dispute to take directly to one another would be an important next step in resolving the crisis and that it would continue to support the Emir of Kuwait in his mediation efforts.
Energy and Middle East security expert Cyril Widdershoven said a regional Arab conflict could mean a direct and imminent danger to Qatar’s regional and global power projections; on the other hand Qatar does have some allies in overseas governments and in the corporate world: a number of majors have visited Doha, hoping for a slice of the expanded LNG cake.
“Arab countries already have openly discussed the option of blocking supply lines to Doha, interfering with, or constraining, shipping lanes to the peninsula; while potential investors and operators in Qatar could face an outright request by the likes of Saudi Arabia or Egypt to assess their own positions and allegiances,” he said.
“Companies working in the Middle East, such as Anglo-Dutch Shell, French Total, US ExxonMobil or Kremlin-backed Rosneft, could face a direct confrontation with regards to their local operations or investments, if they continue to be involved in, or linked to, Qatari operations.
“A full confrontation between Qatar and the Saudi coalition could, and most probably would, lead to a situation in which international companies will need to decide which investments or projects to put on hold or terminate, in order not to lose their access to the main Arab markets,” he said.
“Doha has at present no real negotiation room with the Arab countries as a large part of its national security and its continuing prosperity depends on good relations with Iran, with whom it has been told to downgrade its relations. Another ally, Turkey, has a base in Qatar, and is “at present fully behind Doha, not only economically but also ideologically. At same time, Qatar is playing its economic power position in its relation with Moscow, after underpinning state oil firm Rosneft’s share sale in December,” he said.
In the interim, the crisis might give buyers an opportunity to move their imports to other countries, lawyers at Akin Gump told a webinar audience in early July.
“If there were an interruption on shipping LNG cargoes from Qatar, the impact on Japan would be huge,” they said. “A third of Qatar’s cargoes have gone to Japan but contracts totalling 7.2mn metric tons expire by 2021. We expect Japanese buyers to use this situation for leverage when negotiating extensions. They will also be looking at other suppliers for security of supply, including the spot market,” they said.
The situation has created a “fair amount of uncertainty” for buyers in the region, even if the situation does not get any worse. They will be looking at the force majeure clauses in their contracts. Acts of war are standard excuses for not fulfilling delivery terms without penalty.
Expansion ‘a rational response’
But its unexpected announcement to boost output was seen as a rational response to developments outside Qatar and the Gulf generally.
A professor at the University of East Finland Andrei Belyi, said that Qatar’s stable output of 77mn mt/yr nominal, was going into relative decline, as output grew elsewhere. In 2010 Qatar accounted for 30% of the world’s supply but last year, just 20%; and by the end of the decade it could be down to 15%, he said: “Qatar does not want to lose out and so it has decided to abandon the moratorium.”
He said that additionally Qatar was looking to buy and trade LNG, on its own, or with ExxonMobil, and it has liquefaction capacity at Golden Pass in the US. This gives Qatar the opportunity to secure swap deals without delivering physical cargoes from the contract location, just as BP refines more crude than it produces and sells more refined products at the pump than its own refineries’ output.
An analyst who asked not to be named said that Qatar had always thought big: big jetties, big tankers and big liquefaction trains, in keeping with the proportions of the giant North Field. Qatar had been very cautious about North Field development owing to the effect of production on the reservoir pressure, and what this means for Iran, which shares the field. Given that Iran is one of Qatar’s few allies in the Middle East, the decision "to go long in an already long market" will not have been taken lightly, he said. But if it did not, then other suppliers would fill in the gap.
As well as Canada, onshore liquefaction projects in east Africa and Russia could also be hit by Qatar’s expansion; but Russian projects that are strategic would probably survive, even if the economics look weaker than ever. They are already expensive because of their location, he said. “My suspicion is it will hurt the Canadians most.”
The announcement, several weeks into an economic blockade by other Gulf Co-operation Council states, shows that Doha is not going to be pushed around, said another analyst, pointing out also that thanks to condensate sales, LNG projects in Qatar had a very low cost base; and part of the output increase would come from debottlenecking the liquefaction trains, also a fairly low-cost method. The previously announced 10% increase, and debottlenecking alone could raise output to 92mn mt/yr, he said.
“Qatar is telling Saudi Arabia: ‘We can survive, despite you and your sanctions.’” He said there would be no closure of the Straits of Hormuz, as that could precipitate an airstrike; nor would Egypt close the Suez Canal to Qatari LNG tankers, which the canal operator has since confirmed.
It said July 7 that the canal authorities are abiding by the Egyptian government's decision to sever relations with Qatar but that international treaties prevent it from barring Qatari ships from using the canal as a passage. They would however be barred from using Egyptian ports and the canal's economic zone.
Downgrading relations with Iran, along with shutting down Qatari national broadcaster Al Jazeera and the Turkish military base, and ending support for the Muslim Brotherhood – which briefly governed Egypt in 2012, during which time it received gifts of Qatari LNG – were all on the list of demands that Saudi has presented to Qatar.
Collateral damage
The analyst said the announcement could be bad news for projects in east Africa operated by Eni, Anadarko, Shell and Statoil that have yet to take final investment decisions (the Eni-led Coral floating LNG project offshore Mozambique announced its FID on June 1 – BP is the venture's offtaker). Such pending projects, however, could be saved if an Asian buyer saw them as a way of weakening Qatar or simply of diversifying away from Qatar.
“East African projects will not go ahead, except as strategic decisions, or with ExxonMobil and Qatar as the buyer,” he said.
Earlier this year, Exxon agreed to take a 25% equity interest in the Eni-operated Mozambican offshore Area 4, whose 85 trillion ft3 (2.4 trillion m3) reserves are enough to feed multiple onshore LNG export trains. As part of Exxon's farm-in, it was agreed that the US supermajor – not Eni – would lead the construction and operation of any onshore LNG trains to be developed onshore Mozambique. Anadarko and partners also have some 75 trillion ft3 offshore Mozambique, while Shell- and Statoil-operated consortia have almost 40 trillion ft3 of gas resources between them offshore Tanzania.
William Powell
This article is featured in NGW Magazine Volume 2, Issue 14