Qatar and the LNG Conundrum

Qatar, in size, is only 0.5% the land/ocean mass of Saudi Arabia. Yet, despite its size, it punches well above its weight in the international arena, just like its neighbour. Most of this is down to one thing: liquefied natural gas. Qatar is the world’s leading LNG producer and exporter in the world, and that vast wealth has fuelled the dramatic transformation of its economy since 1996 when the first shipment of Qatari LNG set sail for Japan.

But uneasy lies the crown. There are usurpers to the throne. Australia, after over a decade of overstuffed budgets and overextended deadlines, is hot on Qatar’s heels. In some months of 2019, Australian LNG production and exports actually exceeded Qatar’s. And coming up both Australia and Qatar’s back rapidly is the US. The shale revolution not only transformed US oil industry; it did the same for the US natural gas industry as well. The abundance of onshore natural gas liquids has fuelled an LNG export boom in the US, with some two dozen projects in various states of completion and development. In 2019, the US accounted for more than half of new liquefaction capacity added worldwide. In the same year, the US leapfrogged Malaysia as the third largest LNG exporter in the world, and by 2025, its LNG production capacity could reach almost 15 bcf/d – eclipsing both Qatar and Australia.

The competition may be heating up, but that will not diminish Qatar’s importance. With its recent moves to tap into the vast natural gas resources in its offshore North Field and securing infrastructure though new deals for LNG ships, Qatar is prepared to defend its market share, which props up its riches. It is, after all, the Saudi Arabia of the gas world.

However, the similarities end there. While Saudi Arabia is the largest swing oil producer and the de facto leader of the OPEC and OPEC+ oil clubs, no such co-operation platform exists for natural gas/LNG. There have been attempts in the past to create one, but they have all failed. Which means that while market control and supply deals will always be an option in the oil world, the natural gas/LNG world is a cut throat business. Producers compete by offering long-term contracts for 10 or more years, locking buyers into a fixed sales cycle. Qatar was a great benefactor of this, sealing ultra-long deals with key buyers in Japan and South Korea over the 90s and 2000s, tying the price of LNG to crude oil…. a mechanism that sent its revenues into the stratosphere when crude prices breached the US$100/b level in 2011.

That advantage is disappearing from Qatar, as the riches its reaped attracted a whole new generation of LNG producers – from Mozambique to Mexico. These additional supplies shifted the LNG world from a seller’s market to a buyer’s one. When Shell completed its Prelude project (though it was massively delayed) and Inpex finished its Ichthys site, Australia became a true rival to Qatar, with the US waiting in the wings. The abundance of new suppliers has had loyal old clients pressing for more flexibility in LNG contracts, with Japan leading the fray by demanding renegotiation of contractual terms as the world’s largest buyer. The entrance of US LNG exporters has also changed the nature of the game, shifting LNG buying from ultra-long contracts to shorter-term ones in the 2-5 year range, as well as offering a more liquid spot market.

That would be have been fine, as global LNG demand was growing rapidly, fuelled by China and India. A rising tide lifts all. But then the Covid-19 pandemic occurred. And just as it has done for oil, the pandemic shifted the LNG market from oversupply to supply glut. With very little visibility on the timeframe for improvement, global natural gas/LNG prices have more than halved. Qatar is especially vulnerable to this development, since many of its ultra-long contracts are near expiry. If this was OPEC, it could convince its fellow exporters to curb output to support prices. But there is no OGEC. And Qatar, the vulnerable LNG king, has only two options: voluntarily curb its output to prevent the glut from getting greate or initiate a battle for market share by lowering prices. Sound familiar? That’s exactly what Saudi Arabia and Russia did in March, destroying confidence in the crude market and briefly sending WTI prices into negative territory. There is a legitimate worry that this could happen in LNG as well.

Caught between and rock and a hard place, Qatar’s next move will determine the immediate future of LNG. It already has some of the world’s cheapest LNG production, but even it will not be immune from low prices if it decides to push for market share. Sure, initiating a price war could wipe up the US’ developing LNG export industry, but just as we saw with shale oil in 2014 and even today, the US shale patch will always bounce back through flexible entrepreneurship. It will likely have to throttle output. But that risks rivals overtaking it sooner than expected, and its vast North Field Expansion project is already underway, increasing its LNG capacity by 45% by 2025. At stake is not just Qatar’s grip on the throne, but the entire global LNG complex. Hot gas brings hot rewards, but is intensely flammable as well.

Statistics: World’s Largest LNG Producers (2019)

• Qatar
• Australia
• USA
• Malaysia
• Nigeria

Market Outlook:

• Crude price trading range: Brent – US$30-33/b, WTI – US$26-28/b
• Saudi Arabia to slash production by an additional 1 mmb/d after talks with US
• IEA report suggest the ‘beginning of a fragile recovery’
• Reports from the US suggest shale producers are restarting rigs, as prices near US$30/b

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