Low oil prices are driving Qatar, the world’s leading exporter of natural gas, to modify its commercial strategy by renegotiating the rigid long-term agreements for the sale of liquefied natural gas (LNG) so as not to lose its market share. For the country, the proceeds from the sale of hydrocarbons, amounting to 49% of total revenue and 90% of exports, reached an historic peak of $147 billion in 2013, when 13 million barrels of oil-equivalent were sold worldwide, at prices adjusted to a barrel of crude oil which, at the time, was worth around $100. Now that the price per barrel fluctuates at around $30, Qatar has only managed to place 5.75 million barrels of oil-equivalent on the market and revenues have fallen to $42.9 billion: less than 1/3 compared with 2013. For the first time in 15 years, the country will, this year, record a budget deficit of at least $12.7 billion. This estimate may be optimistic, given that it is based on an oil price of $48.
Developing LNG to deal with the oil decline
The collapse in oil prices, directly linked to those of natural gas, and the simultaneous increase in the production of LNG, together with the entry of new, aggressive competitors such Iran on the market, have pushed Qatar’s buyers to request the renegotiation of agreements at fixed prices, now off-market. Doha has been forced to rethink its strategy, given that 70%of LNG exports are based on long-term agreements. Despite the increasing competition and falling oil prices, Qatar, however, still has a great advantage over its competitors: it already has the necessary infrastructure and a fleet of 60 tankers capable of covering worldwide routes. Moreover, the production cost of Qatar gas is very low, amounting to around $1.6-2 per million British thermal units (MMBtu), compared with $2.5 for the US and $3 for Australia, as stated by independent analyst Naser Tamimi on the website “Middle East Eye‘. For this reason, Qatar can afford to be more flexible in negotiating agreements, thus maintaining its market share.
Renegotiation of fees and flexible agreements
In January, India’s Petronet successfully renegotiated its agreement with Qatar for the long-term supply of gas, halving the price from $12-13 MMBtu to $6-7. The Asian giant imports over 80% of its LNG needs from Qatar, while the volume of trade between Doha and New Delhi amounted to $17 billion in 2014. Doha has avoided asking the Indians for a penalty of $1.8 billion, provided for in the event of changes to fees. Experts consider this event as proof of the fact that Qatar is no longer able to dictate supply. The agreement with India has also set a precedent and now other buyers may also request similar changes to their agreements. Moreover, the changed market climate has made Doha more flexible in terms of customer demands. With China, for example, Qatar has decided to reconfigure shipments of LNG, despite the strict clauses that an agreement with a 25-year expiry may contain. The new “take-or-pay‘ agreement with Pakistan, worth $16 billion, will allow Islamabad greater flexibility in orders and the possibility of reviewing the purchase terms after 10 years. The agreement provides for the export of up to 3.75 million tons per year, accounting for approximately 20% of Pakistan’s gas needs. It is worth noting that the price of gas will be based on a percentage of 13.37% of the average price of Brent over the previous 3 months: in other agreements Qatar demanded 16%. In December, Doha also signed an agreement with the Turkish company Botas for the sale of LNG to Ankara. The agreement provides an attractive option for Qatar for the construction of a strategic LNG terminal in Turkey.
The entry of new competitors on the market
Doha must consider an increase in supply due to the entry of new “players‘ in the East and the shale gas “revolution‘ in the US. The first load of US LNG to be sent overseas, to Japan, will be shipped from Alaska in March. The simultaneous increase in production in countries such as Papua New Guinea, Australia and Indonesia could lead Qatar to seek other markets besides Asia. In Europe, however, the demand for gas does not seem likely to grow, despite the announcements by Europeans wishing to reduce gas supplies from Russia for geopolitical reasons. Even if this happens, other suppliers, such as the United States, Azerbaijan and Eastern Mediterranean countries such as Egypt, Cyprus and Israel - where huge gas fields have recently been discovered - could resupply the European market. The huge Leviathan natural gas field (450-600 billion cubic meters), located in the territorial waters of Israel, the gas reserves of the supergiant Zohr gas field (850 billion cubic meters), off the coast of Egypt, and the large quantities of gas found in the Cypriot gas field of Aphrodite (200-300 billion cubic meters) could potentially meet the energy needs of the Old Continent.
Cartel gas project set aside
Asian buyers, for their part, are increasingly inclined to obtain gas from nearby sources, in order to avoid any interruptions and delays in transport through the busy Strait of Hormuz. Many countries are also diversifying their energy portfolio, seeking a better balance between nuclear, coal, gas and renewable sources. Asian demand, therefore, no longer offers the certainty which Qatar was accustomed to. The fall in oil prices on the international markets has effectively frozen the project of Asian countries to create a “cartel‘ to rival the Organization of Petroleum Exporting Countries (OPEC), known as the Gas Exporting Countries Forum (GECF), to protect themselves from the high costs imposed by Middle Eastern and South American producers. Meanwhile, the Singapore Stock Exchange has launched an index specifically for LNG trade: an initiative that could mark the final demise of long-term agreements linked to oil prices. The new index could effectively cause a further shift of the global market towards the charging system used in North America, where natural gas futures are bought on the New York Mercantile Exchange (NYMEX) with a maturity of 18 months. The gas market could follow a similar fate to that of the oil system after the 1973 crisis, when long-term agreements were replaced with a more flexible mechanism.