Qatar takes the plunge [NGW Magazine]
Qatar Petroleum (QP) is looking to cement its lead in global LNG supply for decades to come, after formally sanctioning a $29bn expansion of its liquefaction capacity in February.
Following a year in which the global LNG industry was marred by project deferrals and cargo cancellations, QP announced a final investment decision (FID) on February 8 on North Field East (NFE), which will raise its production capacity from 77mn metric tons/year at present to 110mn mt/yr. First gas is scheduled for late 2025 and full capacity should be reached within two years.
As Wood Mackenzie notes, NFE is the single biggest LNG project ever sanctioned, and will likely be the largest upstream investment to be signed off on in 2021. But the FID is also no surprise. There was speculation that QP might downsize its growth ambitions when the coronavirus (Covid-19) pandemic first hit, but the company repeatedly hit back against such suggestions. Indeed, QP even began drilling NFE’s production wells in March last year, while reserving capacity at several Asian shipyards to build the super-sized carriers that will be needed to ship NFE’s output to market.
The formal approval came the same day that QP announced it had awarded the key onshore engineering, procurement and construction contract to a joint venture between Japan’s Chiyoda Corp and France’s Technip Energies. This award meant the Qatari firm could finalise its cost estimates. It went on to hand an engineering contract to Italy’s Saipem for upstream work weeks later. US Air Products was also picked to supply its liquefaction technology last summer.
QP’s confidence comes from its production costs, which it claims are the lowest in the world. NFE has a breakeven price of around $4/mn Btu, which is $2-3/mn Btu less than for most competing projects, Oslo-based Rystad Energy estimates.
Showing its ability to undercut the competition, in late February, QP was able to land a contract for spot delivery in April with Pakistan LNG, with an offer of 10.025% of Dated Brent, or just over $6/mn Btu at that discount. It beat traders and portfolio players such as Gunvor, French Total, DXT Commodities, Korean Posco and PetroChina.
“At a long-term breakeven price of just over $4/mn Btu, it’s right at the bottom of the global LNG cost curve, alongside Arctic Russian projects,” Wood Mackenzie research director Giles Farrer says. “Qatar is pursuing market share. This FID is likely to put pressure on other pre-FID LNG suppliers, who may find Qatar has secured a foothold in new markets.”
QP is also moving forward with preparations for a second expansion stage, North Field South (NFS), which would boost supply to 126mn mt/yr. It enlisted US engineers McDermott for front-end engineering and design (Feed) studies for NFS in January, and the company has suggested that eventually a third stage might also be possible.
With such a competitive edge, QP CEO Saad Sheriba al-Kaabi has said before that the company could proceed with the project alone. It could well decide to do this, but the exporter’s preference is to secure foreign equity partners to share the investment cost and provide other perks, such as market access or offtake deals. And with another partner invested, the two can more easily optimise on shipping costs, selling LNG from whoever’s vessel can reach the prospective customer sooner. This will become more important as the market becomes more like oil.
QP began shortlisting partners for NFE in 2019 and had hoped to finalise its choices last year. But the pandemic put the process temporarily on hold.
“Given the competitiveness of NFE, we would argue that they could go alone with this investment,” Rystad tells NGW. “But it’s still likely that Qatar will choose to proceed with the development through a partnership with other upstream companies.”
QP has said it is prepared to offer up to a 30% equity stake in the project, and partnerships are now on track to be finalised by the end of the year.
Potential candidates include ExxonMobil, Shell, ConocoPhillips and France’s Total, given their existing involvement in Qatari liquefaction. Italy’s Eni and Chevron are also eyeing a role in the expansion. Eni CEO Claudio Descalzi said in mid-February that the company had been in talks with QP on the project for the last three or four years.
“Clearly we are interested. We think it is a good project,” Descalzi said in an earnings call, noting that the $29bn investment estimate was much less than forecast at the beginning. QP has been “able to finalise very good contracts,” he said, declining to comment on what size a stake the major would take. “We will see in the next months what the tender is. We have been qualified,” he said.
Total CEO Patrick Pouyanne was a little more measured in his response when asked about the attractiveness of Qatar at an analysts’ briefing early February. "For me, at the end, it is a matter of risk and reward. We have a strong history in Qatar but it is not a matter of emotion." The cost of production and efficiency are in its favour, he said.
The majors are interested in securing LNG in recent years, as they shift their centre of gravity from oil to gas. Exploring and developing these projects might be cheaper in theory but they can take a long time to bring to a final investment decision as ExxonMobil has found in Mozambique; while QP has a proven ability to produce and market its gas abroad using its own tankers.
Eni is going for a 50% growth in its LNG portfolio but is only aiming at 14mn mt/year by 2024 and it has a long pipeline of projects in Indonesia, Nigeria, Angola, Mozambique and Egypt. But thereafter it might be an attractive partner for Qatar, as it develops a retail energy supply business in Iberia and elsewhere.
Cost is not the only factor that makes an LNG exporter competitive, however. Suppliers are increasingly competing to demonstrate their environmental credentials to ever-more climate-conscious buyers.
This is why NFE will be accompanied by carbon, capture and storage (CCS) facilities to lock away its emissions. QP has said before it wants to store as much as 7mn mt/yr of CO2 by 2027, hailing this as the largest CCS project in the Middle East and North Africa.
A significant share of NFE’s electricity needs will also be provided by the Qatari national grid, rather than onsite gas-fired generators. QP is building an 800-MW solar power plant to support this demand and wants to have over 4 GW of photovoltaic capacity operational by 2030.
A jetty boil-off gas recovery system will reduce NFE’s greenhouse gas emissions by a further 1mn mt/yr of CO2 equivalent, while NOx emissions are to be reduced by 40% using an enhanced dry-low NOx system.
QP also launched a new sustainability strategy in January that targets a 25% cut in the emissions intensity of its LNG facilities by 2030. It is striving to end routine flaring within a decade and limit fugitive methane emissions across the gas value chain by aiming for a methane intensity of only 0.2% by 2025.
The increased scrutiny of emissions is also beginning to be reflected in QP’s supply contracts. Last November it signed a 10-year contract to ship 1.8mn mt/yr of LNG to Singapore’s Pavilion Energy. It celebrated the deal as its first “with specific environmental criteria and requirements designed to ultimately reduce the carbon footprint of the LNG supplies.”
Information will be provided on how much CO2 was emitted in the production of each cargo under the contract. While neither QP nor Pavilion are obliged to offset these emissions, the idea is that disclosure will lead to action.