Oil price decline: Challenging times for Qatar?

As Organization of Petroleum Exporting Countries (OPEC) holds steady on production levels and the oil price remains depressed going into 2015, what does this mean for Qatar?

As burgeoning shale energy supplies and increased competition in many of its target markets have marginalised its role as the world’s swing producer of natural gas, business has been more challenging than usual recently for the world’s leading liquid natural gas (LNG) exporter. But there may be succour for Qatar from an unexpected quarter.

 Indeed, with oil prices stuck in a bearish trend after the OPEC decided to hold steady on current production levels at its November meeting, Qatar may yet find relief for its global ambitions, providing benefits that more than outweigh the negative budget implications of a depressed hydrocarbons pricing complex. 

Until Brent oil broke down and consolidated under the USD90 (QAR328) per barrel (pb) level in July 2014, Australia was set to surpass the annual LNG-manufacturing capacity of Qatar by 2018, with a swathe of new liquefaction plant construction projects projected to triple its LNG capacity to 85 million tonnes by 2018, according to industry data.

Enjoying a comparative geographical advantage over Qatar – and corollary beneficial shipping rates – Australia seemed poised to challenge the oft-repeated strategic plans of Qatargas CEO Khalid bin Khalifa Al Thani to expand LNG exports to Asia in general, and to China and India in particular.

Speaking recently at a gas lecture organised by the Gas Exporting Countries Forum in Doha last month, Al Thani highlighted that although there clearly are opportunities for the firm in other continents, the fact remains that currently the bulk of these supplies are to Asia, which holds 75 percent of total LNG demand, and added that LNG demand in the Asia Pacific region by 2016 may well hit the 320 million tonnes per year level, having almost doubled since 2005.

Australia was regarded as an even more potent threat to these plans, given the longstanding high-level commercial contacts that were built up between it and Asia as a consequence of Australia’s being the biggest supplier of iron ore (used in steel) and a major source of coking coal to the region during the various construction booms seen there over the past few years. “No more so than in China and India,” highlighted Calvin Cobb, president of global energy consultancy Calvin Cobb and Associates, in Houston, to The Edge, “and these are key target markets – for business in general, not just hydrocarbons - for Qatar.”

This was again underlined by the fact that Qatar has even shifted the focus of the Qatar Investment Authority to the region, announcing recently that it plans to invest around USD15-20 billion (QAR55-73 billion) over the next five years in Asia. However, with spot oil prices still trading below the USD75-90 (QAR273-328) per pb level required for many Australian LNG firms to generate a 10 percent rate of return, some of these projects could – at the very least – be substantially delayed, Sam Barden, CEO of SBI Markets, in Dubai, told The Edge.

In this context, Woodside Petroleum’s chief executive officer, Peter Coleman, said in a speech in November that a prolonged oil price slump will hurt returns at existing LNG projects and threaten future developments, presumably placing at risk its target of approving the USD35 billion (QAR 127 billion) Browse LNG project in the second half of next year.

It is true, of course, that LNG projects generally have lives that span decades, thus allowing developers to focus on longer-term oil forecasts when considering investment decisions, and when up and running can generate significant cashflows for 20 to 30 years, said Wood Mackenzie LNG analyst, Robert Morris, in Singapore, as evidenced by the fact that when Chevron’s Gorgon LNG project was approved in 2009, the oil price was at almost record lows.