Qatar Back in the Game

Speaking at an energy conference in Tokyo almost six months ago, Qatari Energy Minister Mohammed Saleh Abdulla Al Sada said, "global LNG market is entering a period of uncertainty as the current low price environment deters investment in new supply projects."

Only after six months, on April 3, Qatar hit the headlines with a plan to lift its self-imposed North Field moratorium and to restart development of world's biggest gas field after 12-year freeze.

Qatar holds the world's third largest natural gas reserves after Russia and Iran, and is the largest supplier of LNG. Qatar's proven natural gas reserves stand at approximately 25 trillion m3, the majority of which is located in the massive North Field. That offshore field covers an area almost equivalent to Qatar itself, and extends across its maritime border into what Iran calls South Pars.

Just four days before Qatar's new plan to supply more LNG in the world markets, President of the Russian Federation Putin made a statement on 30 March that the Russian Federation not only can - but will - become the world’s biggest LNG producer.

In other words, Qatar's decision to lift a 12-year ban on new projects at the offshore North Field coincided with Putin's statement that Russia will become the world’s biggest LNG producer.

What a coincidence!

4 Lions in the Jungle

There are 4 important players in the future global LNG trade.

With exports of 77 million tons per year (mtpa), Qatar continued to be the largest LNG exporter, a position it has now held for over a decade. According to 2017 World LNG Report of IGU, however, Qatar’s global market share has dropped to just under 30% as its production remains stable while other countries have grown.

The current leader, Qatar, will be overtaken by Australia in 2017 (17.2% of the global market in 2016) where the largest growth in non long-term supply in 2016 came from. With more than 55 mtpa of capacity online and more than 30 mtpa expected online in the next two years, Australia is expected to become the largest liquefaction capacity holder in 2018.

Although some argued back in 2011 that LNG isn't likely to be a major theme for the US over the next few years, the U.S. is expected to become a net exporter of natural gas on an average annual basis by 2018 and LNG exports expected to drive growth in U.S. natural gas trade.

The U.S. is now building five projects totaling 74 mtpa, and further expansions can increase this capacity making the U.S. primary source of incremental liquefaction capacity over the next five year.

The U.S. already has about 70 mtpa of LNG capacity coming online, Meg Gentle, Tellurian’s CEO, said in an interview at the CERAWeek Conference in Houston in March 2017. That compares with Australia’s 87 million and Qatar’s 82 million tons, respectively, she said and added, “The U.S. will be the cheapest source of new LNG, so we believe a lot of that 100 million tons will come from the U.S.” .

According to 2017 World LNG Report of IGU, together, the US and Australia will be the main contributors to new liquefaction capacity. Australia will have the largest liquefaction capacity in the world by 2018, with capacity expected to grow to 85 mtpa, up from 43.7 mtpa in 2016.  

We can add Russia to this list not only taking into account Putin's statement on March 30 to become the top exporter, but also the draft law "On Certain Matters Pertaining to Sale of Gas" ("Draft Law") prepared by the Russian Ministry of Energy.

In February 2017, the Ministry of Energy of Russia prepared the draft law which envisages that Gazprom and its affiliates will be permitted to sell their gas at non-regulated prices to companies that export such gas as (i) LNG or (ii) products resulting from the refining and chemical utilization of natural gas, from facilities commissioned after 1 January 2017. The Draft Law is reported to be primarily aimed at stimulating new LNG projects between Gazprom (and its affiliates) and foreign partners.

Russia currently has only one operating LNG facility, the 10 million ton per year liquefaction plant operated by the consortium of Gazprom, Shell, Mitsui and Mitsubishi (Sakhalin II). In addition to Sakhalin II, Yamal LNG, a joint-venture of NOVATEK, TOTAL, CNPC and Silk Road Fund is under construction. It is planned to be built in three phases, with the first phase scheduled for start-up in 2017.

In the summer of 2016, Gazprom signed a letter of understanding with Shell concerning a potential LNG project at the Russian port of Ust-Luga on the Baltic Sea. The project is reported to include a two-train LNG plant and a pipeline connected to the Gazprom network. The Baltic LNG plant, according to publicly available materials, will have a capacity of approximately 10 million tons of LNG annually with an option to expand to 15 million tons and is currently planned to commence operations in 2021.

It is worth stating that Mozambique and Tanzania are two new potential suppliers. The discovery of large gas reserves offshore East Africa has resulted in multiple liquefaction proposals in Mozambique (53.4 mtpa) and Tanzania (20 mtpa). 

Global Gas Market Share Wars

Qatar's Ending 12-Year Moratorium in the North Field is the Kick-off Whistle

I believe Qatar's decision can be evaluated as the official kick-off for the competition for higher market share in global gas trade. 

Qatar's move comes at a time when Qatar's position as the predominant global LNG supplies is under threat, with increasing competition from LNG exporters in the U.S. and Australia. 

Therefore, similar to major oil producers like Saudi Arabia, Iran and Iraq with a strategy aimed at gaining maximum oil market share and driving other weaker players out of the market, Qatar and Russia seem to have no choice but to compete with the major gas producers, the US and Australia. 

According to some experts, further development of North gas field means the expansion of the world's lowest cost new supplies, which will allow Qatar to grow its market share which faces competition from Australia and the US.

“A project of this size will increase the current production of the North Field by about 10 per cent, which will add about 400,000 barrels per day of oil equivalent to the State of Qatar’s production”, said in a statement Qatar Petroleum's President and CEO, Saad Sherida Al-Kaabi.

Although global activity levels and costs are low, and the market presently looks over supplied, some analysts believe that now is a good time to add new capacity as by the time new capacity is commissioned, in 5-7 years time, new pre-FID LNG supply is "likely" to be required in the global market. 

Some argue that Qatargas may even be able to inexpensively de-bottleneck existing trains, rather than having to construct new ones at a cost of some $14 billion.

Qatar entered into a direct competition with Iran too. In 2016, Dolphin Energy, the joint venture between Mubadala Development Co., Total and Occidental Petroleum Corp., signed deals to sell more Qatari gas through its underutilized pipeline to the UAE running to Oman. With Qatar lifting its moratorium on its North Field, more gas (around 2bn ft3/d, or 400,000 b/d of oil equivalent (boe/d) additional production) can be exported to the UAE and Oman through existing pipelines. Oman is currently negotiating with Iran for a 1 bcf/d pipeline. Moreover, Iran offered gas to the UAE too.

The story is more complicated.

North Field accounts for nearly all of Qatar's gas production and around 60% of its export revenue and Qatar shares the giant field with Iran, where it is called as South Pars. Iran allowed Qatar a head-start in development, and only has about a third of the combined field reserves within its waters. However, mainly due to sanctions and economic problems, Iran has had to delay South Pars production. Until French Total SA signed a preliminary agreement to develop a further phase of South Pars in November 2016.

The easing of sanctions against Iran in 2016 removed some obstacles to foreign investment and participation in Iran’s gas sector, and there has been a revived interest in Iranian LNG exports as a result. However, the country’s LNG ambitions remain challenged. 

On the other hand, Total became the first Western energy company to sign a major deal with Tehran since the lifting of international sanctions. Minister Al Kaabi said the decision to lift the moratorium has nothing to do with Iran's plan to develop its part of the shared gas field.

"What we are doing today is something completely new and we will in future of course... share all this with them (Iran). For us this has nothing to do with Iran's production."

In conclusion, Qatar's recent decision to continue to be a dominating force in the global LNG market will have important consequences on the political dynamics in the region as well as the global LNG market parameters.