Qatar 2.0: adapting to a more competitive hydrocarbons environment
With Qatar’s own estimates for 2016 showing that it is set to run its first overall fiscal deficit in 15 years, it seems logical that the country is making an effort to retain its existing long-term customers, writes The Edge’s global energy editor Simon Watkins.
This includes reducing the pricing and delivery parameters of liquefied natural gas (LNG) deals that had already been contractually agreed by clients. Case in point: for the third time this year, Qatargas delivered a Q-Flex liquefied natural gas cargo between multiple ports for a single customer, rather than the standard industry practice of loading one cargo for delivery to one location.
At the end of December, the Q-Flex carrier Duhail delivered a single cargo split between the Chinese terminals of Zhejiang and Tianjin, following similar style deliveries in August to China’s Fujian and Tianjin terminals and in March to terminals in the United Arab Emirates and India. “This flexibility on delivery has so far only been made for three of Qatar’s biggest clients but it is highly likely that other major customers will start to demand the same, with negative impact on costs that this implies for Qatar going forward, as the global hydrocarbons industry remains a buyers’ market,” Sam Barden, CEO of Middle Eastern energy consultancy and trading firm, SBI Markets, in Dubai, told The Edge.
Even more dramatically, and negative from a short-term revenues’ perspective, is the announcement at the beginning of this year that the long-running attempts by India to renegotiate the pricing on its long-term LNG import contracts have been spectacularly successful from India’s side. In a deal that marks Prime Minister Narendra Modi’s biggest diplomatic win in the energy sector since coming to power last year, India’s biggest gas importer, Petronet LNG, will now buy LNG from Qatar’s RasGas at almost half the original contact price, which will save the country about USD605 million (QAR2.2 billion) a year.
Under the new deal, RasGas will supply LNG to Petronet at USD6 to 7 (QAR22 to 25.5) per million British thermal units (mmBtu) as from January 1 this year, against the USD12 to 13 (QAR 44 to 47) per mmBtu agreed in the original contract, according to a statement by Indian Oil Minister Dharmendra Pradhan, New Delhi. Underlining the shift in power in the global hydrocarbons sector from sellers to buyers even further is the fact that RasGas has also waived a USD1.5 billion (QAR5.5 billion) penalty against Petronet for lifting less gas than had been agreed in the original contract signed in 2004 that envisaged the sale of 7.5 million tonnes of LNG per year over a 25-year period, although the amount has now been increased to 8.5 million tonnes per year.
While the deal is good news for India – the cheaper rates will be a huge and timely boost for the profitability of the country’s local refineries, and its power and fertiliser companies, in particular – the message that Qatar is willing to renegotiate on existing contracts is unlikely to be lost on Qatar’s other LNG customers. “If you have a major LNG contract with Qatar, or you are considering entering into one, why wouldn’t you attempt to negotiate it lower and, if Qatar says no then there are plenty of other energy supply options out there,” said Barden.
It would appear, though, that this point has not been lost on Qatar’s energy authorities, as the middle of January saw Pakistan sign an LNG supply deal with Qatar instead of Royal Dutch Shell, with the Qataris seemingly winning out based on a willingness to lower prices. Although the deal is not the same as the long-running indecision by Pakistan to choose an LNG supplier for a 15-year contract, it is an important indication of the way the bigger deal may go.
According to senior oil and gas industry sources, Pakistan was to buy 60 LNG cargoes from Shell after the oil major submitted the lowest price in a tender finalised late last year but, before the deal had been formally signed, Qatargas came in with a more favourable deal, even though it was not involved in the original tender. According to the sources, Qatargas will supply the cargoes at a price of 13.37 percent of a barrel of crude oil, matching the price at which aggressive trading house Gunvor will deliver another 60 cargoes to Pakistan over the same 2016 to 2020 period.
“It was a very sharp deal by Qatargas, and seems to point to a real change in attitude from Qatar, based on being a lot more aggressive and adaptable in the global energy markets, which is exactly what is needed in these very difficult, ultra-competitive times,” concluded Barden.