Knect365 is part of the Knowledge and Networking Division of Informa PLC

This site is operated by a business or businesses owned by Informa PLC and all copyright resides with them. Informa PLC's registered office is 5 Howick Place, London SW1P 1WG. Registered in England and Wales. Number 3099067.

Informa
Gas For all the latest developments in the Gas community.

Qatar's Impact on Global LNG Markets Explained

In a KNect365 Energy article early this spring, several energy thought leaders discussed the notion that the US was in line to become the world’s third largest exporter behind gas giants Australia and Qatar. We never anticipated the news that came out in early June, when Egypt, Saudi Arabia, the United Arab Emirates and Bahrain all severed their diplomatic and economic ties to Qatar. Although Qatar’s top clients were told that things would be business as usual, the ripple effects have been numerous – from Japan using the crisis to negotiate more flexible term contracts, to Russia’s Novotek aiming to challenge Qatar’s dominance declaring they want to be “just as large as Qatar…as one company”, to a general concern about reliability.

I contacted five experts in energy and geopolitics to get to the bottom of what the Qatar crisis means for Global LNG. These experts are: Sara Vakhshouri, President, SVB Energy International; Karen Sund, Founder, Sund Energy AS ; Susan Sakmar, Visiting Assistant Law Professor, University of Houston Law Center, Author, "Energy for the 21st Century: Opportunities and Challenges for LNG"; Ruth Liao, Editor, ICIS and Leslie Palti-Guzman, Director of Global Gas, Rapidan Group. The opinions vary, but all five of these analysts seem to be sure of one thing: in the coming months, as Susan Sakmar says, we should “expect the unexpected.”

Was the rift between Saudi Arabia and Qatar unanticipated, and why?

Karen Sund: It was certainly unanticipated outside the region, both in timing and severity.

Ruth Liao: Qatar began exporting LNG in 1997 and has not seen an interruption in production due to political changes. Pipeline gas is still flowing on the Dolphin pipeline between Abu Dhabi and Qatar. LNG cargoes are still loading from Ras Laffan, and Qatari-sourced cargoes continue to transit through the Suez Canal. Two Q-Max vessels were diverted round the south of Africa but this route has been taken by other Qatari LNG vessels and is not new. Qatari LNG has also been delivered into Egypt, although this is by intermediate traders rather than by Qatari producers. Commercially, LNG sellers RasGas and Qatargas have been able to fulfill their long-term contractual obligations. So while the Saudi Arabia-led sanctions against Qatar were unexpected, this has not impacted the trade flows of LNG.

Susan Sakmar: Tensions between Qatar and Saudi Arabia are nothing new and go back even before the 1995 coup in Qatar in which Hamad bin Khalifa al Thani replaced his Saudi-aligned father as emir. A 1996 counter coup reportedly had Saudi backing and Saudi Arabia has taken issue ever since with what they deem is a pro-Islamist and independent foreign policy pursued by Qatar. One of the main allegations against Qatar is that it funds terrorism by supporting groups like the Muslim Brotherhood and Hamas and also through its support of the news outlet Al Jazeera, which is based in Doha, Qatar. Saudi Arabia, Egypt and other Arab countries allege that Al Jazeera had a role in the Arab Spring, which toppled several regimes in the region, by giving dissidents a voice in the media. There’s a continued worry that more regimes are under threat and that Al Jazeera could be used as a tool to promote and encourage unrest.

Saudi leaders have also long opposed Qatar’s ties to Iran. Qatar and Iran share the world’s largest offshore natural gas fields – the North Field belongs to Qatar and the South Pars belongs to Iran.

Qatar spent many years developing its North Field natural gas resources and today, Qatar is the world’s largest LNG exporter. Qatar is also home to the world’s largest gas-to-liquids (GTL) facility.
The fact that Qatar shares the North Field/South Pars gas field with Iran makes it very difficult for Qatar to completely cut off ties with Iran. Moreover, Qatar’s LNG exports have propelled the tiny nation into one of the world’s wealthiest countries on a per capital basis. Qatar sits on the 14th largest sovereign wealth fund in the world, reported by Bloomberg to be worth $335 billion. Much to the dislike of Saudi Arabia and other countries in the region, this has given Qatar the ability to establish itself as a key player in the region’s affairs.

Despite the fact that tensions between Qatar and its neighbors have simmered for decades, this current dispute is unprecedented in terms of its scale and coordination between so many of Qatar’s neighbors. The dispute is also noteworthy for the mixed messages being sent by the United States, which maintains diplomatic and military ties with Qatar, Saudi Arabia and all of the other nations involved in the dispute.

In early June, President Trump issued a series of tweets on Twitter indicating that all fingers in the region pointed to Qatar as the main culprit of terrorism. The US State Department seemed a bit baffled by the reason for the dispute and issued a statement that as more time goes by, “we are left with one simple question: Were the actions really about their concerns regarding Qatar’s alleged support for terrorism, or were they about the long simmering grievances” between the countries in the region? This is a very good question that hopefully the State Department will be able to answer in the coming weeks.

Sara Vakhshouri: The historical, cultural, economic, trade and energy ties between Qatar and the GCC members especially with Saudi Arabia and its other Arab allies makes it hard to expect that the status quo would remain for a long time or the relation between these countries would worsen. Particularly that US largest military base in the Middle East is located in Qatar. However Saudi Arabia’s exceptions and conditions for resolving its diplomatic issues and rift with Qatar are not realistic and it’s hard to imagine a country that wants to maintain its sovereignty would agree to such terms and conditions. Hence unless the Saudis don’t reduce their expectations from Qatar, we could expect that the diplomatic conflict between these countries remains unsolved.

Now that this unprecedented rift has happened, can we expect any more unanticipated activity between Arab nations?
 

Karen Sund: The list of demands from Saudi Arabia may also be seen as so unreasonable that they are almost impossible to be met, which only brings further speculation on next steps.

There could be very many levels of “hidden agendas” in addition to the stated reasons, including money, energy, power, free speech and more. Qui Bono is a question to be asked – many possible benefits for Saudi to keep Qatar down, but what is the impact for the world, and who will stand up for Qatar?

The US involvement changing does not help the region, Iran brings more questions than answers after Trump…

Ruth Liao: It’s difficult to tell. What’s evident for gas markets is that Middle Eastern demand for gas and LNG will continue to grow. Qatar exported 77mtpa in 2016, according to LNG Edge. Of that, 12% was imported to the Middle East, including Pakistan, Egypt, UAE, Kuwait and Jordan. The relative rapid installation of floating storage regasification units (FSRU) has allowed for quicker entry into LNG imports. Bahrain, additional projects in Pakistan and Egypt and potentially in the UAE are developing demand areas in the Middle East. How these new import projects will source their LNG supply – whether from neighboring production Qatar or not – will have an influence on the region.

Susan Sakmar: Absolutely! When it comes to the Middle East, we should always expect the unexpected. After weeks of tension, Kuwait offered to mediate the dispute between Qatar and Saudi Arabia. As part of the mediation, the boycotting countries recently issued a list of key demands being made of Qatar. Prior to the release of the list, US Secretary of State, Rex Tillerson, indicated he hoped the demands would be “reasonable and actionable.” The list was released last week and a quick glance indicates the demands are far from reasonable or actionable. For example, the laundry lists of demands on Qatar include: shutting down Al Jazeera, scaling back ties with Iran, and closing a Turkish military base. To the Qatari’s, the list was proof that the blockade had less to do with combating terrorism and more to do with limiting Qatar’s sovereignty and foreign policy influence in the region.

Sara Vakhshouri: Historically there has been long time difference between Saudi and Qatar’s policy and approach toward Iran and conflicted areas in the region. However such a tough and bold stance toward Qatar from Saudi and its regional allies was not expected. As neighbors, most of Qatar’s strategic depth is located alongside the Saudi and UAE borders.

Do you think this a temporary thing, or will it persist and influence LNG in the coming months as Kent Bayazitoglu of Gelber & Associates has said to Reuters: the Qatar crisis “will further encourage international LNG buyers to include more American LNG…for reliability reasons”. And why do you feel that way?

Karen Sund: This will, for now, have a minimal effect on LNG – less buying from Qatar from some of the regional countries makes more available to other markets. Egypt and others can source from other suppliers, but not given they will be US these days.

 

If transportation from Qatar is fully blocked, that would impact markets more, but sounds more temporary than long term, if at all…

 

Reliability issues are less of a concern when LNG is global and commoditised.

Ruth Liao: It's hard to see any long-term impact on this situation because there’s not been a material impact on the number of cargoes exported or on the short-term price. It is worth noting, however, that the sustainability of foreign investment in Qatari energy infrastructure is a major consideration for global oil and gas companies.

This recent incident certainly raises the profile of contract re-negotiations taking place between Qatari sellers and their counterparties.

More than 30mtpa in Qatari long-term LNG contracts are due to expire by 2020, including 5mtpa with Japan’s JERA due to expire by end of 2017 and 3mtpa with Tohoku Electric due to end in 2018.

But LNG buyers have a growing choice of LNG to choose from – not just from the US or Qatar, but also Australia, east Africa, and in the longer term, Canada – and concerns over reliability will not be as substantial given the growing length of LNG in the market.
Furthermore, the announcement in April that Qatar was lifting its moratorium of more than a decade on new gas development sent a strong signal to competing LNG export developers. Qatargas and RasGas would be very competitive on price in comparison to other developing export regions.

For developers of US LNG, the challenge will be more on convincing buyers to take on the pricing risks of US Henry Hub-linked gas. For the first wave of LNG export projects, offtakers such as South Korea’s KOGAS from Sabine Pass and Sumitomo from Cove Point will be facing a new reality of working out how to sell US LNG in an increasingly competitive global market. Companies unwilling to take that long-term pricing risk may stay on the sidelines, particularly as other choices of LNG supply are being offered.

Susan Sakmar: We are three weeks in to the dispute (at the time of this interview) and in light of the unreasonable nature of the Saudi-led demands on Qatar, it seems likely that the crisis will continue and could escalate. Even Secretary Tillerson acknowledged that some of the demands placed on Qatar would be difficult to meet, although the US is still encouraging the countries to work together to reach a resolution. While it’s possible a resolution could still be reached, it’s hard to imagine what that resolution would be.

The mostly likely outcome is the blockade continues and Qatar continues to adjust as best it can. So far, the impact on Qatar’s economy and its energy exports, most notably its LNG exports, has been minimal. If tensions continue to mount, it’s possible that some of Qatar’s LNG buyers will get nervous about the reliability of Qatar as a supplier and will look elsewhere to secure LNG supply. Qatar’s largest buyer of LNG is Japan and a significant amount of Japan’s offtake is up for contract renewal. If nothing else, the current dispute gives Japan more bargaining power with Qatar to demand better contract terms.

In particular, Japan has stated it wants destination flexibility in all future LNG contracts. This is a key feature of US LNG export contracts and gives buyers the ability to send the contracted LNG volumes anywhere it wants. Historically, the contracts with Qatar and Japan required Japan to send the LNG to Japan and did not allow Japan to resell the LNG. In other words, Qatar limited the arbitrage opportunity of its buyers. US LNG is completely flexible – buyers can send the LNG anywhere they want and even resell it if they want. Japan has said it wants the same flexibility in future LNG deals and the current dispute could provide the bargaining power it needs to negotiate with Qatar.

Otherwise, Japan might decide to turn to the US or Australia for more of its long term LNG needs since both countries have massive amounts of supply coming on the market in the coming years. In other words, the LNG market is more liquid than it’s ever been and Qatar will need to compete with new suppliers offering better terms.

Qatar also supplies the UK and Europe with LNG and the current dispute also gives rise to an opportunity for the US to sell more LNG to its European allies to thwart Russia’s natural gas grip on Europe. This is something that some of the hawks in the US Congress have been keen to do.

Most recently, there have reports that the US intends to exert its “energy dominance” under the Trump administration. The current dispute between Qatar and its Arab neighbors could well provide the opportunity for the US to exert its “energy dominance” – at least with regards to US LNG exports.

Sara Vakhshouri:  Initially the diplomatic rift between Qatar and Saudi did not have a significant impact on the oil and gas supplies or prices in the market. During the past weeks, vessels and tankers could also continue co-loading oil from Qatar, Saudi and UAE. However if the tensions between the countries increase the tankers with Qatari cargoes would have to look for alternative bunkering sources which could increase the time of delivery and freight prices. This also could have significant impact on the bunker prices and market.

We don’t expect a major interruption of supplies from Qatar, Saudi Arabia or UAE due to their diplomatic rift since being a reliable source of supply is a key factor for all of these countries. Also increasing pressures on Qatar has economic and trade consequence for Saudi Arabia and its Arab allies. For instance if UAE doesn’t allow tanker coming from Qatar to fuel in Fujairah, its bunker stockpiles will grow rapidly.

The current tensions in the Persian Gulf area, either between Iran and Saudi Arabia or Qatar and Saudi Arabia, all increase the security of supply risks for energy consumers. Hence it encourages the consumers to look at alternative energy sources outside of this region. Oil and LNG supplies from US in particular are seen as a safe alternative source among major energy importers like Japan, even though if they have to pay higher prices in compare for that.

Leslie Palti-Guzman: For now the impact of the Qatari crisis is more inconvenience. If it prolongs (which is not currently my base-case) it becomes a trust and reliability issue for Qatari LNG which is a boon for competitors, including the US and Russia. However, ultimately LNG producers benefit from stability in the LNG market and a lasting disruption could harm the reputation of the global LNG market.

Don't miss Global LNG experts such as our keynote Sara Vakhshouri and over 40 more at our LNGgc London event this September.

 

 

LNGgc London
LNGgc London

Stay ahead with the latest news