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MEOG CommentAry MEOG
Warnings sounded over Qatar’s LNG strategy
A warning has come this week that Qatar may need to shut in LNG production if it is to avoid a battle for market share that could tank gas prices.
QAtAr
WhAt:
Qatar may have to choose between curbing LNG output and risking a market share battle that hurts gas prices.
Why:
Trying to fight for market share would put further downward pressure on already low gas prices.
WhAt next:
Qatar appears to have the edge over rival LNG producers but may have no choice but to cut output.
LNG market conditions are already unusually challenging owing to the combination of global oversupply and downward pressure on demand from the coronavirus (COVID-19) pandemic.
Now warnings have emerged that leading LNG producers vying for market share could exacerbate the situation, potentially leading to a collapse in gas prices that could mimic that recently experienced by crude oil.
Qatar appears to have the edge over its rivals, given the low cost of its LNG production, as well as its proximity to markets in both Europe and Asia. however, even Qatar would come under pressure if gas prices were to fall further still, and may find itself with no choice but to cut output temporarily.
Chasing market share
Qatar is on a major push to increase its liquefac- tion capacity from 77mn tonnes per year cur- rently to 126mn tpy by 2027 in two phases.
While state-owned Qatar Petroleum (QP) has said it would postpone the start of the first phase to 2025, the company has maintained that it will not downsize its expansion plans because of the LNG oversupply weighing on the market currently.
QP also recently warned of looming cuts to jobs and spending – the details of which have yet to be disclosed – but comments made by com- pany officials at the time still indicated that its development plans would not be affected.
This comes after it was reported at the start of this year that Australia had temporarily dis- placed Qatar as the world’s largest LNG pro- ducer. The Middle Eastern country is likely back in the lead now, as this is dependent on fluctuat- ing capacity utilisation, but ultimately its LNG growth ambitions are far greater.
As well as Australia, Qatar faces rising com- petition from the US, where new liquefaction capacity sanctioned in recent years continues to come online, as well as Russia. Later this decade, new African liquefaction capacity will also be added to the market.
Against this backdrop Qatar – like other LNG exporters – has found it increasingly difficult to find a home for its cargoes as COVID-19 has hit demand across different parts of the world. In
February, Qatar began redirecting LNG cargoes away from Asia as China’s lockdown took a toll on demand there.
Instead, these cargoes were initially sent to northwestern Europe. This did not go on for long, however, as European gas storage filled up and the continent soon found itself to be the new epicentre of the COVID-19 outbreak.
Catch-22
The Middle Eastern country now faces a dilemma. In an increasingly oversupplied mar- ket where demand remains depressed and is not expected to rebound quickly, Qatar must decide whether to continue pursuing market share, for example by slashing the price of its LNG, or whether to shut in some of its production.
On one hand, the country depends on the rev- enue generated by LNG sales, and this is already under pressure because of the oil collapse, which will soon start to be reflected in oil-indexed LNG contracts such as those favoured by Qatar.
If QP responds to this by lowering its LNG prices, this could also be welcomed by some of its buyers that have been pushing Qatar to rene- gotiate supply contracts. For example, India was vocal about wanting to renegotiate the terms of its LNG supply agreement with Qatar earlier this year, but the Middle Eastern country rejected the request. Thus India may jump at the opportunity to secure more favourable terms.
On the other hand, there is concern over what will happen to already low natural gas prices if Qatar cuts its LNG price. It has been suggested that in a worst-case scenario, gas prices could drop into negative territory the way West Texas Intermediate (WTI) crude did last month.
Impossible choice
“Either Europe doesn’t want it and therefore the cargoes are stuck in Qatar, or they will have to shut in production,” an energy associate at har- vard University’s Davis Center for Russian & Eurasian Studies, Thierry Bros, was quoted by Bloomberg as saying. “If they force cargoes into Europe, you’re going to have exactly the same as what we’ve seen in Cushing, which is negative prices.”
While lower gas prices could prove
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