The low oil price: Why Qatar should leverage contractual advantages

by  — 3 March 2015

Up until very recently, as the Brent oil price slipped down through the key USD90 (QAR328) per barrel (pb) level, Qatar’s position as the global liquefied natural gas (LNG) swing producer was under threat. But in direct contrast to its neighbours in the Middle East and to the vast majority of hydrocarbons-centric economies elsewhere around the globe, the decline of world oil prices has yielded more positives for Qatar than negatives, argues The Edge global energy editor Simon Watkins

Howard Rogers, director of the Natural Gas Research Programme for the Oxford Institute for Energy Studies in Oxford in the United Kingdom, explained to The Edge that given Qatar’s ongoing strategy involving the careful placement of its LNG output over an increasingly wide geographical spread (and through differing contract/price formation channels), the country is set to benefit even as many of its global competitors struggle.

The most recent illustration of this strategy in action was the landmark first delivery of LNG to Thailand’s Map Ta Phut LNG terminal under a long-term Sale and Purchase Agreement (SPA) between Qatargas 3 and Thailand’s energy giant, PTT. Indeed, Qatargas delivered the first commissioning cargo to Map Ta Phut (Thailand’s inaugural, and only, LNG receiving terminal) as early as 2011. Since then it has supplied 27 spot cargoes to PTT, making Qatargas by far its major supplier.

The SPA contract, signed in December 2012, stipulated the delivery of two million tonnes per annum of LNG for a period of 20 years beginning from 2015. It was Qatargas’ first such agreement in South-East Asia. Such agreements lie at the core of Qatar’s insulation against the worst effects of the ongoing downturn in the global hydrocarbons’ pricing complex, added Rogers.

“Volumes were placed under long-term crude oil price-indexed contracts with Asian buyers, through oil and oil product-linked priced long-term contracts with Southern European buyers, and via medium-term contracts,” he said. “Re-gas infrastructure investment enabled spot delivery to US and Northern European buyers and, from the outset, it was clear that volumes of LNG which were not subject to long-term contracts could be redirected and sold as spot or under short-term deals, under a dynamically managed sales strategy.”

This long-term pricing structure has given incumbent leading supplier Qatar an advantage over competitors in the next few years, most notably Australia and shale resources from North America. Overall, according to data from Norwegian consultancy Rystad Energy, this year companies will likely make final investment decisions on a total of 800 oil and gas projects worth USD500 billion (QAR1820 billion) and totalling nearly 60 billion barrels of oil equivalent.

But with analysts forecasting oil to average USD82.50 (QAR300) pb this year, around one third of the spending, or a fifth of the volume, it is unlikely to be approved, said head of analysis at Rystad Energy, Per Magnus Nysveen, in Oslo.

Australia was due to usurp Qatar’s number one global LNG supplier position by 2020, with at least 85 billion cubic metres per annum of new supply originally scheduled to come onstream between 2015 and 2018. However, with spot oil prices still unsupported by any prospect of a meaningful cut in output from Organization of Petroleum Exporting Countries (OPEC), benchmark Brent oil looks set to continue to trade below the level required for many Australian LNG firms to generate the 10 percent rate of return necessary for them to become viable.

Similarly, the much-vaunted shale gas revolution emanating from North America looks shaky, with plans for significant US and Canadian LNG exports from the fourth quarter of this year (and growing exponentially from 2018 onwards), looking less than certain.

Indeed, according to Rystad’s Nysveen, around one third of the projects scheduled for FID this year are ‘unconventional’ and, of those 20 billion barrels, a significant number are located in Canada’s oil sands. For example, French energy giant Total, recently decided to postpone the FID on the Joslyn project in Alberta, the cost of which industry sources estimate at USD11 billion (QAR40 billion).

The share of the gas in the global energy mix over the next 20 years is projected to increase from around 22 percent to 25 or 26 percent. According to Gas Exporting Countries Forum (GECF) secretary general Seyed Mohamed Hossein Adeli, Qatar is in an unusually good market position. “[It] has demand from the East and recently from the West, and also has the policy of moratorium up to 2018, which, if they continue this policy of a ceiling on production, then with the increasing of demand, Qatar’s LNG prices will hold,” Adeli explained.


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