Qatar’s LNG presence in Asia under challenge

A part of Qatar’s strategy to gear up to an ever-changing energy market, is well illustrated by a long-term LNG contract signed between the Gulf state and Pakistan on February 26, 2021. The 10-year agreement was signed on Friday by the Pakistani Energy Minister Omar Ayub Khan and his Qatari counterpart, Saad Sherida al-Kaabi, and aims to fulfill Pakistan’s energy needs with 3 million tonnes of liquefied natural gas (LNG). It also demonstrates how a traditionally leading power in the LNG market is now making sincere efforts to preserve its superiority, particularly in Asia, amid challenges originated from other LNG suppliers and new unconventional gas resources. Qatar seems to diversify and enhance its LNG network, by establishing long-term partnerships with prominent customers, as it witnesses a rapid emergence of Australia as a major LNG supplier to Asia, while the United States have dramatically increased their LNG exports since the shale gas revolution.

The 2021 deal between Qatar and Pakistan was a historic agreement signed by the two Muslim states, which share a warm and cordial enduring relationship. As a matter of fact, Pakistan will receive its supplies at an almost 31% cheaper price than the existing contract signed by the previous government with Doha in 2015. Mr. Nadeem Babar, Special Assistant to Prime Minister on Petroleum at Petroleum Division stressed that the agreement will begin in January, 2022, with two ships per month loading about 200mmcfd, which will later rise up to four ships of 400mmcfd at a rate of 10.2% of Brent. In comparison, the previous LNG contract was for a 15-year period, beginning with one ship per month of 100mmcfd and going up to 5 ships of 500mmcfd at a rate of 13.37% of Brent. He added that the new LNG agreement includes a provision of price renegotiation after 4 years. This is a significantly beneficial deal for Pakistan, as  the country would pay about $316million less annually when compared to same volume under the existing long term contract, which means that the country will save almost $3 billion in ten years. It will also provide $170 million letter of credit (LCs) under the existing contract compared to $84 million under the new deal, which is also almost half. Therefore, the provisions of the newly signed deal will ensure price stability for Pakistan along with supply security and an additional decrease of the country’s national budget.

Qatar’s economy is driven by exploitation of natural gas and petroleum resources, representing two-thirds of its GDP and almost 80% of export earnings. Qatar, with just one huge gas field, the North Field, holds about 12% of the world’s proven reserves of natural gas, the third largest reserves in the world, following Russia and Iran. However, the state-owned Qatar Petroleum Co. traditionally leads the LNG market, being the largest exporter worldwide, while in terms of natural gas pipeline exports, the kingdom has been ranked as the second major exporter after Russia. According to the data of the Planning and Statistics Authority (PSA), Northeast Asian markets including Japan, South Korea, India, account for 75% of Qatar’s liquefied natural gas (LNG) exports. Unfortunately, a number of formidable challenges have emerged in recent years, and it seems that their impact poses a threat to Qatari interests. The US and Australia are the major rivals in this race for leadership in the LNG market, particularly in the region of Asia, where the most valuable clients of Qatar are located.

Although the United States are not directly threatening Qatar’s dominance, the shale gas revolution, along with the results of advances in production techniques, has made it possible to extract gas at commercially viable rates from previously unyielding rocks. Indeed, U.S. gas production started rising dramatically and since 2011 it has been breaking new records every year. The extraction of shale gas in the U.S. reached over 23 trillion cubic feet in 2020, and is expected to note a further leap by 2040. It becomes apparent that such a growth rate could affect Qatar’s LNG exports in the coming years. Moreover, U.S LNG exports to China decreased during 2019 due to tariffs imposed by Beijing over 2018 and 2019 in retaliation for US tariffs on Chinese goods. However, China decided in February 2020, to accept applications for tariff exemptions on U.S LNG, from March 2, in a move that allowed it to meet purchase targets under the recent US-China trade deal. Therefore, LNG exports to Asia increased by 67% in 2020, accounting for almost half of all U.S. LNG exports. Exports to other major customers in Asia, including Japan, South Korea and India, also noted an increase in 2020 compared to previous years. Global demand for energy is rapidly increasing, particularly in Asia, due to population and economic growth, especially in large emerging countries such as Japan and China. The shale gas ‘revolution’ in the US has the potential to change the global gas picture, by effectively responding to this growing demand for energy. It seems likely that the US’s excess supply of natural gas will increasingly be exported to Europe and Asia in the form of liquefied natural gas (LNG), affecting the composition of domestic markets in those regions and consequently Qatar’s interests.

Qatar’s top position in the LNG market is currently under challenge by another competitor. Australia is getting ever closer to overtake Qatar, as it exported a record 78.0 Mt of LNG in 2020, compared to 77.6 Mt of Qatar.Australia is a country with multiple sources of natural gas, between conventional and unconventional distributed in both North West and East shelves. The main client markets are the big ones in the Pacific basin, including China, Japan and South Korea, turning Australia into a strong competitor in East Asian markets. In contrast to Qatar, Australia holds the benefit of proximity, as it is located at the Asian Pacific basin. On top of that, between 2014 and 2016, Australia signed Free Trade Agreements (FTA) with Japan, China, and South Korea, eliminating tariffs on major exports, including natural gas. This provided greater certainty for Australia, which can offer more affordable prices, by reducing taxes from the total price of LNG to these major customers. In other words, Australia gained a competitive advantage over Qatar and the rest of LNG exporters in the Asian energy market.

This intense competition forced Qatar to come up with and adopt sufficient strategies and measures that would enable the Kingdom to reclaim and re-establish its status as the leading exporter worldwide. Qatar acknowledges that Asian countries will account for an ever-growing share of gas and LNG demand in the coming years. In an increasingly competitive LNG market, Qatar has an interest in solidifying ties with importing states in SouthEast Asia. Australia’s dominating status is set to change within the next decade, following Qatar’s approval of  the world’s largest LNG project in terms of capacity, North Field East Project (NFE). The state-owned Qatar Petroleum announced on February 8, 2020 it had taken the final investment decision to develop the North Field expansion project, which will raise the nation’s LNG production capacity from 77 Mtpa to 110 Mtpa and will put the country on track to return as the world’s largest LNG producer. The project is expected to start production in the fourth quarter of 2025. Qatar also plans a second expansion phase, the North Field South Project (NFS), set to further increase Qatar’s LNG production capacity from 110 Mtpa to 126 Mtpa by 2027, enough to meet the total import needs of both Japan and South Korea.

In addition to that, Qatar employs a segmented approach to LNG marketing, pursuing a steady price for long-term contracts, that will not be affected by any future shifts of demand. For example, Qatar Petroleum has already shown a preparedness to cut prices to secure deals, as it happened with Pakistan. LNG to Pakistan was priced at a 10.2% of Brent crude oil compared with a 13.37% of Brent of the previous 15-year deal signed in 2016. In fact, this is one of the lowest-priced deals ever signed. Last month, Qatar Petroleum entered into another long term sale and purchase agreement (SPA) with Vitol to supply 1.25Mtpa of LNG to Bangladesh, by offering competitive prices. In terms of Qatar’s marketing and pricing strategies, the Kingdom has exceptionally low LNG supply costs, very large scale plants, ships and marketing operations. The plants are already constructed so there is no exposure to rising costs or overruns. As the world’s lowest-cost producer of LNG, Qatar may be more able to endure lower prices than many of the new supply points operating. However, the advancement of US shale, offers the chance to the United States and possibly other suppliers to compete withQatar, undermining its ability to exercise pricing power. The increase in energy demands, paired with the availability of alternative gas producers will likely allow buyers in Asia to negotiate hard over long-term energy contracts, provided by Qatar, seeking shorter, more flexible agreements.

It goes without saying that significant developments and rules’ changes are yet to take place in the LNG industry. The recently signed agreement between Qatar and Pakistan denotes the Kingdom’s sound efforts to secure its network in the region of Asia and to reclaim its grip on the No. 1 position of the LNG market. Qatar, which is highly depending on natural gas exploitation and has successfully being active since 1997, is now confronting with a series of challenges, including more competitors entering the market and the emergence of new LNG-exporting hubs. It is safe to assess that Qatar, acknowledging the presence of emerging risks to its vital interests, will take all the proper steps not only to reverse dynamics that took place lately, but also to prevent greater alternations, that would likely threaten its status quo as the major LNG supplier. The key for Qatar in the long run is to ensure it maintained market share by adapting rapidly to changing market dynamics.