Qatari expansion: Build it and they will come?
The major brake on the Gulf’s state’s ambitions may not be resource, but rather customer appetite
Qatar lifted its 12-year moratorium on further development of the vast offshore North Field in April 2017 and, three years later, is steamrolling forward with the largest LNG expansion the industry has ever seen.
If it so desired, Qatar could fund and construct almost unending expansions to what is already a 77mn t/yr, 14-train liquefaction operation. Qatar Petroleum (QP) has emphasised the vast scalability by continuing to broaden its growth plans. The 2017 North Field East expansion (NFE), initially targeting 100mn t/yr export capacity, was upped again to 110mn t/yr in 2018.
Then, as if the NFE was not enough, the North Field South (NFS) expansion aims to take capacity to 126mn t/yr. While this figure acts as a best—rather than base—case scenario for medium-term Qatari export capacity, the message is the same: Qatar is unconcerned about cost-based competition in its determination to maintain a vice grip on global LNG markets.
With the lowest production costs in the world—aided by stripping condensates from the North Field’s rich gas—a geographically enviable location and a stellar balance sheet, the real question is not Qatar’s ability to build this capacity, but how it will find a home for the output.
Recent contracts with US industrial gases heavyweight Air Products call for a four 7.8mn t/yr mega-train NFE—for which engineering, procurement and construction (EPC) contracts should be finalised toward the end of 2020. The Covid-19 pandemic is likely the biggest factor in an approximately one-year delay relative to the original timeline.
Despite the delay, site preparation and development of incremental gas production are already under way. QP aims for an ambitious 2025 startup of the four trains.
QP may have to accept the inevitability of greater contract flexibility for buyers than in previous agreements
Although part of the NFE should come online in that time horizon, S&P Global Platts Analytics expects overall commissioning of the new facilities to mimic Qatar’s last major expansion in 2009-10, with all four NFE trains not fully online before 2027. While QP stresses its commitment to building an incremental six, not four, trains, the additional two NFS producers are absent from the current EPC process. Platts Analytics views this further expansionary phase as likely, but not within the current medium-term outlook.
Commercial progress may be no earlier than 2028, after which Platts Analytics research shows the global LNG supply-demand balance will incentivise incremental capacity buildout—of which Qatar is arguably the most competitive.
QP still faces the challenge of marketing this significant incremental volume. Unlike previous expansions, Qatar is moving forward without having NFE’s capacity underpinned by new long-term contracts, similar to how it is proceeding with its Golden Pass joint venture with ExxonMobil in the US.
This is not a trend isolated to QP. The precedent was set with Shell’s LNG Canada in 2018 and, more recently, in Senegal/Mauritania, where all the 2.5mn t/yr offtake from Greater Tortue LNG is destined for BP trading’s portfolio. For Qatar, though, the task is mammoth, with QP facing in excess of 50mn t/yr of uncontracted supply in the next six years—31.2mn t/yr of new uncontracted capacity (not counting its 11mn t/yr Golden Pass equity share) and 23mn t/yr of expiring contracts, 60pc of which are with Qatar’s traditional Asian customer base.
Just 15mn t/yr of new end-user backed contracts were signed globally in 2019, emphasising the challenge Qatar faces. And Qatar’s comfort with—in some sense its dependence on—long-term oil indexation will further complicate its task.
>50mn ty/r – QP uncontracted supply over next six years
QP’s new volumes will compete against a growing field of portfolio supply, much of which will clear the market at spot LNG indexes, such Henry Hub in the US, TTF in Europe and S&P Global Platts' JKM in Asia. Platts Analytics does not see the Asian benchmark breaching $7/mn Btu (annualised, real 2019 $) before the end of the decade. In contrast, QP has realised an average price of $9/mn Btu for its sales into northeast Asia since 2016.
Qatar must now prepare itself for sales prices below what it is used to achieving. Indeed. this may be what driving the ever-increasing scope of its capacity buildout.
Given the scale of the challenge, Qatar will rely on yet-to-be-confirmed project partners to market or, in a best case, contract for some of this incremental output. QP is therefore very likely to seek an Asian regional energy player or end-user as a cornerstone partner, a strategy that could simultaneously deepen economic ties with China.
It is also hedging its bets, expanding its European “put option” through securing 100pc of regasification capacity at Belgium’s Zeebrugge terminal and strengthening its own in-house trading capabilities to enable greater spot selling and optimisation. But QP may have to accept the inevitability of greater contract flexibility for buyers than in previous agreements if it wants long-term contracts to provide a level of offtake security for the new capacity with which it will be comfortable.
Samer Mosis leads S&P Global Platts Analytics' work on European, Middle Eastern and African LNG and is the author of 'The Financial Markets of the Arab Gulf: Power, Politics and Money' (2018)