Qatar flexes its gas trade muscles amid rising challenge from rival producers

Qatar, the world's largest exporter of liquefied natural gas, said yesterday it plans to ramp up LNG production by a third after lifting moratorium on its giant North Field. AP Photo
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Qatar, already a dominant player in world seaborne gas trade, said yesterday it plans to raise its liquefied natural gas (LNG) output by a whopping 30 per cent, to 100 million tonnes a year, which equates to just under 40 per cent of last year's global LNG trade.

The move had been foreshadowed in the spring, before the political row erupted between Qatar and several of its Arabian Gulf neighbours, when the sheikhdom said it would lift a 12-year moratorium on new development of the offshore North Field, the world’s largest gasfield.

But the size of Qatar’s increase stunned the market.

Qatar and a Saudi Arabia-led alliance, which includes the UAE, Kuwait and Bahrain, are in a tense stand-off over demands made by Qatar’s neighbours that it stop funding terrorist organisations, among other agitations. A deadline for Qatar to meet a list of 13 demands or face further action passed this week but was extended to today.

The news of Qatar's LNG gambit was announced in Doha by Qatar Petroleum chief executive Saad Al Kaabi, who  said that QP had decided its best option would be to double its planned North Field extension and earmark all of the extra output for LNG export, "thereby increasing the production capacity of the state of Qatar from 77 million tonnes to 100 million tonnes a year, which means a 30 per cent production increase."

Sanctions imposed on Qatar by the Saudi-led alliance at the start of the month have severely disrupted non-hydrocarbon sectors of its economy, such as airlines and shipping, but the opposing sides have been careful to keep the impact on the oil and gas sector to a minimum. The key Dolphin pipeline, for example, which runs between Qatar and the UAE – and also continues overland to supply much of Oman’s needs – has kept flowing.

While Qatar has been anxious to show that its economy can weather the dispute, the longer it runs the more vulnerable it will be, economists say.

“If the current situation continues, we expect the non-hydrocarbon sector to decelerate, inflation to accelerate, and the trade surplus to narrow as the import bill increases,” said Francisco Tang Bustillos, an economist at research outfit IHS Markit. Qatar has been one of the world’s fastest-growing economies for two decades on the back of its dominance of LNG trade. However, “if the political rift should last throughout 2018, we expect the economy's growth to slow down sharply,” Mr Bustillos said.

Qatar's LNG dominance has been challenged from various quarters, most recently the US and Australia.

Along with the news this week that Iran has signed with France’s Total to develop the latest stage of its own giant gasfield, South Pars, this underlines that Tehran has regional and world gas market ambitions as it emerges from years of sanctions.

“Ten years ago, Iran’s gas output was less than half that of Qatar’s,” said Homayoun Falakshahi, a senior analyst at Wood Mackenzie, an oil and gas consulting firm. With the planned next developments of South Pars, “in five to six years it will be producing 40 per cent more than Qatar”.

Although Iran is not yet a major player in LNG, it has signed recent deals to deliver “dry” gas via pipeline to Turkey and Iraq. It is negotiating a deal with Oman to deliver gas to its currently idle Indian Ocean LNG plant, although the sides are at odds as to who will control the exports.

Although the market is in glut, it is a highly sought prize longer run. World LNG demand has been growing at a steady clip and is expected to continue to do so as coal and other “dirty” sources of power are phased out.

Prices have declined by more than half in Asia over the past 18 months, and Qatar, as the world’s lowest-cost producer, does not want to cede market share.

“I think [yesterday’s move] is a clear signal that Qatar wants to maintain its lead,” said Menelaos Ydreos, a director at LNG trade body International Gas Union in Toronto.

There has been a big wave of capacity increase from plants in Australia, Papua New Guinea and the US.

“It’s the next wave of LNG projects that will suffer the most,” from Qatar’s massive increase in production, says Mr Ydreos. “There are five projects under construction in the US and we believe those will go ahead up to 2020/21. The question is what happens after that and the next wave of capital investments.”

Plant construction under consideration in the US, Canada, Mozambique and Russia, as well as Iran, might find it hard to justify the investment, and that is irrespective of what happens with local politics.