LNG has a long future

Qatar’s investment in developing liquid natural gas (LNG) for export looked ambitious in the 1990s, but is resulting in returns that are both lucrative and long-term as customers seek energy security

The biggest event in 2022 was the invasion of Ukraine by Putin’s armed forces, and one of the biggest economic side-effects has been to accelerate the quest for energy security.

Sanctions have had a significant impact. The opening of the Nordstream 2 pipeline, intended to supply western Europe directly from Russia, has been postponed, and European nations have begun an urgent quest to source energy from other suppliers. Qatar is perfectly positioned. With its North Field offshore natural gas reserves, it has the third largest known reserves in the world, after Iran and Russia. Its investment in developing liquid natural gas (LNG) in the 1990s is paying off handsomely. Qatar has signed long-term supply contracts with Sinopec of China, at 27 years the longest such contract to date; and with Germany (15 years). In December last year Germany opened its first specialist LNG terminal, constructed in record time.

Oil and gas are often categorized as a commodity export, but in the case of LNG it is a more sophisticated product than crude oil. Liquefying the gas so that it can be transported safely by sea involves advanced engineering, while only specialist facilities can handle the reverse process at the destination port, before the product is transported to homes and businesses via pipelines.

When Qatari investment began in the 1990s, it was a considerable undertaking, requiring partnership with major oil companies to provide the advanced level of expertise. At the time, the oil company as partner was able to negotiate better terms in return for its expertise, but as Qatar has developed its expertise and the LNG bet proved successful, that proportion has fallen. It is more a premium product with significant added value than a simple commodity, and an increasing proportion of profits are retained by Qatar.

In addition to the geopolitical turmoil that worsened in 2022, there are other features that have contributed to rising global demand for LNG. Although it is a fossil fuel, and major corporations and governments are committing to Net Zero targets to reduce greenhouse gas emissions, LNG is cleaner than oil or gas, so it is well positioned as a transition fuel. In Europe, while overall consumption of natural gas dipped in 2022, the proportion taken up by LNG increased sharply, up by 65% in the first eight months of the year, as supplies from Russia fell.

States and companies are prioritizing energy security as well as reducing emissions. While the availability and cost-effectiveness of many types of renewable energy are improving, it is always a risk to be over-reliant on one or two, or even three, sources of energy for electricity generation. It is wiser to have five or six sources, including some that are unaffected by the weather. The wind doesn’t always blow and the sun doesn’t always shine. Hydropower was badly affected by drought in the northern hemisphere in 2022.

Security is a strategic priority, often more important than prices, which tend to be volatile and unpredictable. In October the World Bank projected that oil and gas prices would probably decline in 2023 from the relative highs of 2022, affected by the conflict in Ukraine. But by 2024 coal and natural gas prices are likely to be double the average of the previous five years.

Developing expertise in LNG has proved to be a smart investment for Qatar.