Qatari flexy time
Qatar’s LNG marketing strategy has shifted. It is now cutting deals to keep its market share
THE COUNTRY built the world’s premiere liquefied natural gas business with expectations of ever-rising demand for its product and a deep faith in the long-term contracts that would underpin its industry. But it misread the runes.
As Asian demand growth softens, prices fall and customers get picky, the emirate’s ability to dictate contracts – and lock in high prices – is being curtailed.
The early months of 2016 have seen a marked shift in the way that Qatar goes about marketing its impressive LNG endowment. In January, state-owned RasGas renegotiated a long-term LNG deal with India’s Petronet that almost halved the price, from $12-13 per million British thermal units (Btu) to $6-7/m Btu for 7.5m tonnes a year (t/y) of LNG.
In an act of unprecedented flexibility, the Qataris even waived the $1.8bn penalty clause Petronet might have paid for buying less gas than it agreed.
A month later came another big shift. Pakistan’s state oil company signed a deal with Qatargas-2 on 10 February to import 3.75m t/y of LNG for 15 years. The LNG in any particular month will fetch 13.37% of the preceding three-month average price of a barrel of Brent crude oil. In March, that would price the LNG at about $4.50/m Btu – either a reflection of Pakistan’s negotiating skills or a sign that attitudes have changed in Qatar.
Andy Flower, an independent LNG consultant, reckons it’s the latter, and says the Qataris have become “more flexible on pricing as a way of holding market share”. Indeed, under the take-or-pay deal with Pakistan, a price review is permitted 10 years after the start of supply, giving Pakistan added flexibility in cargo orders.
As for the Petronet contract, the Indian buyer didn’t just avoid its penalty; Credit Suisse, a bank, reckons the new terms amounted to a $1.1bn transfer of value from seller to buyer.
A fresh narrative
If more evidence of this new strategy were needed, just look at last August’s deal with China. Qatargas adjusted the 25-year 3m-t/y supply deal it struck with PetroChina in 2011, allowing for deliveries to be balanced towards the peak winter period, rather than delivering even amounts every month and lumbering Beijing with additional storage costs.
Doha wasn’t known for such pliancy in the past. But the change in tone makes sense for the world’s biggest LNG exporter. Aware of the wave of new supply to come, it wants to cement relationships. That way, it hopes to hold onto its historical benchmark of 70% of its LNG being sold under long-term contacts. It’s a simple mantra: Keep the customers happy and the contracts should keep writing themselves.
Threats to Qatar’s grip on Asian buyers loom everywhere. In March, the first US LNG cargo set sail for Japan, while recent big projects like BG’s − now Shell’s − 8.5m-t/y Queensland Curtis LNG project in Australia, a new 6.9m-t/y facility in Papua New Guinea and a 2m-t/y plant in Indonesia present clear and imminent danger to market share.
Doha wants to stay a step ahead of these rivals, let alone longer-term competitors from East Africa.
Qatar’s energy ministry still has a few tricks up its sleeve. For one thing, the country owns and operates a fleet of 60 LNG vessels, around half of them large Q-Flex and Q-Max tankers, lending it greater supply chain coverage than most of its rivals and giving it a distinct competitive advantage.
As the lowest-cost marginal producer, Qatar can also afford to price its gas at highly competitive rates. It costs RasGas just $1.60 to produce 1m Btu of gas, for example – lower even than Henry Hub gas, let alone the $13.50/m Btu costs faced by many Australian developers.
But its new flexibility is also physical. As the Asian market has struggled, Qatar has targeted Europe. The country sent 3m tonnes more to the continent last year than the year before, for a total of 19.2m tonnes, according to Cedigaz. Asian imports of Qatari LNG declined by as much as 7.5% in the same period, down by 4.1m tonnes.
Production, meanwhile, is holding up strongly. Qatari LNG exports in the first two months of 2016 reached 13.7m tonnes, according to Flower’s estimates.
That is higher than the 13.1m it exported in the same period in 2015. With flexibility, it seems, come renewed strength and a determined place in the market.
This article is part of an in-depth series on offshore production. Next article: Russia's slow trains.