European court rules against Qatari gas company

Flashback - Doha, 2001: Qatar takes its first steps into an industry that, over the next two decades, will drive its astounding pace of development. As an exporter of liquefied natural gas (LNG), the Gulf state is beginning to expand on a global scale. RasGas inks a 25-year deal to supply LNG to Italian energy company Edison for the supply of 3.5 million tonnes per year of LNG. It is the first deal of such magnitude that a Qatari gas exporter has ever signed with a European company. Following the deal, a new energy landscape is in the process of being defined for the next two decades, with gas – and Qatar in particular – at the forefront.

In 2009 a second contract, upping deliveries to Italy’s Edison to 4.6 million tonnes per year is signed, helping to cement Qatar’s status as one of Europe’s most important hydrocarbon suppliers, and Europe’s status as one of Qatar’s most lucrative clients. Three years on however, in September 2012, a court ruling takes place that could throw into question the nature of Qatar’s energy relationships with European companies, and could drastically alter the terms around which the Gulf state will be willing to negotiate hydrocarbon supply deals in future.

A new reality

Paris, France, September 2012: The Court of Arbitration of the International Chamber of Commerce France ruled in favour of Edison in arbitration proceedings with RasGas regarding the price that the Italian company was forced to pay for Qatari LNG over the preceding 12 months. “The court decision has accepted the merits of Edison’s positions,” the Italian company said in a statement, estimating the amount it had saved at around EUR450 million (QR2.1 billion). The arbitration began in March 2011 within the renegotiation of Edison’s long-term contract, the company stated.

The controversy came to a head later that year when Edison earnings plummeted by 27 percent year on year, leading the company to point the finger at the comparatively high price of gas delivered under its contracts with Qatar. In a practice said to be adopted by many gas exporting countries, these contracts were linked to the price of oil, which was pushing towards historically high levels. “The natural gas market is still facing a critical period, both in Italy and internationally, due to the availability of huge quantities of spot gas [for immediate delivery] on the European hubs,” the company explained. This led to the premium on gas prices purchased under oil-linked long-term contracts to grow and grow – hurting Edison in the pocket, while allowing Doha to enjoy financial security. It marked the first time a European customer had taken RasGas to arbitration and won.

As comment on the ruling, a RasGas representative forwarded TheEDGE the following statement: “Ras Laffan Liquefied Natural Gas Company (II) acknowledges that an ICC (International Chamber of Commerce) Arbitration Award was issued in relation to its long term Liquefied Natural Gas Sales and Purchase Agreement with Edison S.p.A. allowing a decrease in the contract sales price for the price review period. The terms and conditions of the Award are subject to a confidentiality agreement between the parties.” Though further specifics are vague at the time of writing, the thinking behind the Court of Arbitration ruling – to allow Edison to compete on a level playing field – is clear. The ramifications for Qatar’s gas providers, however, could be severe.

Future ramifications

The value of Qatar’s gas exports stands at around QR140 billion annually, according to the most recent figures published by the Qatar Central Bank, therefore, a hit of QR2.1 billion, although substantial by any country’s standards, is not about to break the nation. Yet it could be a precursor to further such actions: “It’s a breakthrough win as it paves the way for other European companies in the same situation to renegotiate the gas price with Qatar,” Edison insisted in a second statement released after last month’s ruling.

“The price review success has the potential to reduce the final gas sale to businesses and households in Italy and also Europe as other companies might follow the same path in renegotiating contracts with their suppliers,” the company concluded. In short, therefore, the foundations on which Qatar will have based its assumptions of income could prove to be no firmer than the shifting sands that make up the nation. Doha has two options open to it if it wishes to avoid repeating an economically and politically damaging repetition of the Edison row, both of which it is in the process of undertaking.

Firstly, more of its gas can be sold via the short-term spot market as opposed to through long-term contracts that are more exposed to price disputes. According to The LNG Industry in 2011 report, published by the Group of Liquefied Natural Gas Importers, Qatar’s exports grew 35 percent last year, to 75.4 million metric tons. Of this, a substantial 27 percent was sold on a spot and short-term basis. Secondly, Qatar must continue the diversification of its customer base. This has been a firm policy adopted by Doha as it has continued to increase its global share of the LNG market. Last year, Qatar reinforced its leading position, supplying 31 percent of global LNG, according to the importers’ group report. Qatar accounted for 67 percent of global trade growth in 2011, supplying LNG to 23 countries spread across Europe, the Americas, Asia and the Middle East. And in recent months, a very clear trend has emerged for Qatar to target Asian growth markets, as opposed to the European nations, which, if the Edison situation is anything to go by, are more likely to wind up at arbitration. Fortunately for Doha, in line with free market principles, those places where LNG is needed the most also happen to be those places where the short-term price is the highest.

Footnote: RasGas recently delivered a spot cargo of LNG to EgeGaz in Turkey. The fully loaded cargo was supplied on board RasGas’ long-term chartered Q-Flex vessel, Al Sahla to Aliaga Terminal in Turkey. RasGas executive, Khalid Sultan Al Kuwari said “We are happy to continue to build our relationship with an important market like Turkey. This is another example where we demonstrate our ability to deliver a secure and reliable supply of LNG across most consuming regions.”