The Future of Qatar’s LNG Market
Will the Qatar crisis impact Doha’s ability to keep up with the global demand for LNG?
The Qatar crisis raises major questions about liquified natural gas (LNG) markets, which the Arabian emirate has dominated since the 2000s. Observers of energy markets are asking if regional strife will impact Doha’s ability to keep up with the existing demand for LNG, and if such tension in the Gulf will further open the market for new suppliers.
There is speculation as to how Qatar will be able to continue as the world’s leading exporter of LNG under the new shipping constraints it faces as a result of fellow Gulf Cooperation Council (GCC) members’ embargoes. Qatar’s output, largely sourced from their portion of the South Pars/North Dome Gas-Condensate field, makes up roughly 40% of current global LNG exports. Qatar is attempting to squash the uncertainty about their distributive capabilities with the announcement of a massive expansion of production out of the South Pars/North Dome gas field, a 30% increase over the next seven years. Other GCC members depend on Qatari LNG, which, for example, accounts for 25% of the United Arab Emirates’ daily consumption. Their consumption levels, among other factors, will test the resolve of the Arab states taking action against Qatar.
As noted in an interview with a Bloomberg official, it is because of consumption levels that the UAE is not able to follow through on Saudi’s stance of banning Qatari shipping. The UAE recently eased its ban on ships embarking from Qatar to the fueling port of Fujairah. So long as vessels are not flying Qatari flags and are not Qatari owned, ships embarking from Qatar will be allowed to bunker at the port of Fujairah. This easement means that LNG companies such as Glencore, Vitol and Trafigura, which purchase massive amounts of LNG from Qatar, will be allowed to continue their business with Qatar despite the rift. These companies are already responsible for a large portion of Egyptian LNG demand and, hypothetically, could also apply the framework of their dealings with Egypt to the UAE tensions with Qatar escalate and threaten the supply of the Dolphin Energy pipeline.
As of now, the Dolphin Energy pipeline running between the UAE and Qatar continues to flow regularly despite the political grievances between the two countries. It is responsible for pumping 2 billion cubic feet of LNG into the UAE every day. Egypt is in a position similar to the UAE’s, but with less risk. One third of Egypt’s LNG importation comes from Qatar but they do not deal with the Qatari government directly. It is brought into Egypt through companies that purchase the LNG from Qatar yet can obtain the fuel from other sources to supply Egypt’s consumption. Another card in Egypt’s hand is their control over the Suez Canal. Although they cannot ban strictly Qatari vessels from using the canal, LNG traffic through the canal is predominantly Qatari. If Egypt decided to raise tariffs on LNG through Suez, it would be disastrous for Qatar’s LNG industry.
Thus far, there is little indication that the feud in the GCC is having a dramatic effect on Qatar’s LNG output to the global market. Two of the world’s top LNG importers – Japan and India – maintain that the events in the Gulf have not affected their LNG imports from Qatar. India, represented through Petronet, is currently rising as a leading importer of LNG and, potentially, home to the largest number of LNG import terminals. An additional threat Qatar will be forced to address as the feud drags on is the renegotiation of trade deals by their partners. This pressure is another effect of the doubt cast on Qatar’s hampered shipping ability. The longer the GCC crisis continues, the more likely it is that nations and companies currently trading with Doha will cite Qatar’s position of weakness as reason to vie for more favorable trade agreements.
The Emergence of the American Market
The largest effect that the events of the Gulf have had on the LNG market has not been to the output of LNG production; it has been to the perception of the markets stability. As previously stated, Qatar is battling this perception with the announcement of a 30% increase to their North Field production. This increase could prove problematic for President Donald Trump’s plans to expand the United States’ LNG production. Washington has secured contracts with South Korea and China, but it has been noted that these countries could just as easily use the agreements with the US as a “stick” to negotiate better prices out of cheaper exporters such as Qatar.
Nevertheless, if the UAE or Egypt were to take a heavier stance on the banning of Qatari exports to include LNG, demand for American supply — or for that of its potential competitor, Russia — would skyrocket. The US currently houses ten approved LNG export terminals producing 18 billion cubic feet of product a day. According to an official from the American Petroleum Institute, six similar terminals are currently under construction and there are eleven awaiting approval to begin construction.
Russia is bolstering its LNG production with the establishment of the Yamal field facility, and rumors of a new facility to emerge outside of St. Petersburg. The Yamal site is supposed to be the largest in the country once finished and is expected to be fully functional by 2020. Russian interest in LNG production spiked in 2009 with the Sakhalin II project, but, like the US, Russia had to scale back its LNG interests in the wake of the 2009 economic crisis.
Historically, the close connectivity of the LNG and oil markets has been a problem for the advancement of LNG as an alternative source of fuel in the United States. Although LNG is an excellent replacement, in terms of lowered costs and emissions, for conventional fuels such as heavy fuel oil, coal and diesel, the LNG market’s ties to the oil market keeps the future of gas one step behind the established utility and pricing of crude oil. This linkage is one of the main reasons that the world has not seen powers such as the US and Russia fully enter the LNG market as suppliers. There are indications that this stagnation will end under the new administration, which has already made strides towards the advancement of American LNG.
Trump’s presidency shows promise for American LNG. The administration has approved two additional facilities thus far, and the expansion of production and exportation falls in line with the president’s “Make America Great Again” campaign promise to reduce trade deficits. Similarly to the unpredictability currently surrounding Qatar, the world looks at Trump’s administration with uncertainty. Although the US has a large dormant supply of LNG that could be moved to market, there are questions whether demand will be high enough for American entry and whether or not the unpredictable Trump administration can be a stable supplier for the world market.
Qatar sees and welcomes the possibility of the US’ emergence into the market as positive. Although it would add competition, Qatar views America’s entry into the market as a stabilizing factor. Officials in Doha believe that the stability that US entry would provide will likely increase the number of customers and balance out any revenue lost due to competition. Qatar’s LNG is the cheapest on the market and would likely not be effected monetarily by a rise in supply from US entry.
The Wrap Up
The Qatar crisis, and the subsequent fall of LNG market predictability, is forcing non-GCC, LNG-exporting and importing countries to reevaluate their ability to produce or acquire LNG. This forced evaluation has caused doubt in the market and has created an opening for one or multiple new suppliers to come online and relieve Qatar from a portion of its market-dominating 40% world supply rate. We are already seeing the beginnings of an American market entrance with the early approval of LNG export terminals by President Trump — two thus far. Qatar’s statement that US emergence into the market would be a positive factor that would not only help to stabilize the market but also bring in new consumers is further validation of this perspective of Doha’s.
Russia will also be a player to watch as the world struggles to bring a state of normalcy back to the gas market. Moscow’s past interests and recent endeavors to strengthen LNG production is a signal to the demand countries of the globe that Russia is a more than possible alternative to Western and Middle Eastern production. Russia is also one of the few countries that can say it has amicable relations with all Middle Eastern countries. This position — along with the fact that Russia holds a quarter of the world’s reserve of LNG — gives Russia a powerful advantage in a region that could very likely have demand issues to compensate for if the rift within the GCC continues.
As the situation in the GCC remains uncertain, the world will be watching both the LNG market and the countries that are positioning themselves to pick up any slack left by the Gulf.
*[This article was updated on July 27, 2017.]
The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.