New customers: The sector is increasingly seeking to diversify its markets

By asserting itself as one of the world’s largest exporters of gas, Qatar continues to play a vital role in global energy supply and security. One of the most important factors for the country over the coming years will be how it maintains this position and navigates a complex and highly politicised international gas market.

Leading Player

Qatar’s proven gas reserves of 890trn cu feet ranked third in the world, behind only Russia and Iran. Most of this is in the North Field, part of the world’s largest gas reserve, which the country shares with Iran. In 2012 the country was the world’s fourth-largest gas producer, extracting around 157bn cu metres, and the second-largest exporter, at around 120bn cu metres, according to the US Energy Information Administration (EIA). Nearly 85% of the country’s gas exports are in the form of liquefied natural gas (LNG), making the product the single most important factor in the economy – fairly remarkable as Qatar only started exporting LNG in 1997. The country now accounts for one-third of global LNG trade.

Qatar has the world’s biggest LNG capacity, at 77m tonnes per year (MMt/y) between its two producers, Qatargas (42 MMt/y) and RasGas Company (35 MMt/y). Between them, the firms have 14 LNG trains, five of which were added between 2009 and 2010. Most recently, Qatargas 4’s Train 7 came on-line in January 2011 and has a capacity of 7.8 MMt/y. As of 2012, 63% of Qatar’s LNG output goes to Asian countries, to which Qatargas’ output is aligned, with 30% going to Europe, a market that is dominated by RasGas, which used to export substantial volumes to the US.

New European Deals

Qatar will be ramping up LNG sales to Europe in 2014, with exports to the continent through medium- and long-term contracts expected to rise 22%, the biggest leap since 2009, according to a December 2012 report by New York-based shipbroker Poten & Partners. The state is also looking to capitalise on prices hitting their highest level since 2006 on the back of a European economic recovery. Poten expects Qatar’s contracted exports to Europe to reach 19.65m tonnes for 2013, with sales set to rise by a further 6.64m tones in 2014.

Qatar’s producers signed a raft of deals with European customers in 2013 that should help guarantee sales for several years to come. In October 2013 Qatargas 4 signed a five-year sales and purchase agreement (SPA) with Germany’s E.ON Global Commodities to supply 1.5m tonnes of LNG per year starting in January 2014.

The gas will be supplied by Qatargas 4’s Train 7, a joint venture between Qatar Petroleum and Shell, and will be delivered to the Gas Access to Europe (Gate) LNG terminal in Rotterdam. E.ON is one of the world’s largest power firms, and both companies, which have a relationship dating back several years, said they considered the deal to be an important part of the development of their respective global strategies.

Keeping Up

The previous month, Qatargas 4 signed another five-year SPA with Petronas LNG, the British wing of Malaysia’s state energy company, to supply 1.14m tonnes of LNG annually. The supply, also from Train 7, will be delivered to Petronas’s Dragon terminal in Milford Haven, UK. The deal builds on an existing 20-year agreement between the two companies which sees the Qatari firm supplying Petronas with 1.5m tonnes of LNG a year, including via the Gate Terminal in Rotterdam. In November 2013 Qatargas sealed an even bigger £4.4bn agreement with the UK’s Centrica, an energy company which owns British Gas, to supply up to 3m tonnes annually over the next four-and-a-half years. The contract is an extension of an existing £2bn deal between the two companies that will expire in June 2014. The scale of the deal is significant not only to Qatar, but in the UK as well.

Centrica says the deal could meet 13% of the UK’s residential gas demand and thus plays an important role in energy diversification in the country, where energy prices and sources have become politically sensitive in recent years as domestic gas reserves fall. Centrica has been seeking the deal for some years, and both partners should benefit from the medium-term nature of the deal, which guarantees supply for several years. Previously, most of the UK’s LNG imports were sold through the spot market. In 2012 the country was the largest purchaser of Qatari LNG in Europe.

Looking East

Qatar has been particularly keen to seal deals with European customers over the past year, in order to diversify its markets. However, the state’s gas companies have certainly not turned their backs on markets to the east. In July 2013 Qatargas announced that it had sold Qatar’s first-ever cargo of LNG to Malaysia under a spot agreement, in what the government and the company hope will be the latest stage in the growing relationship with Petronas focused on meeting Malaysia’s growing energy demand. “Qatargas sees the South-east Asian LNG market as an increasingly important growing regional market where it intends to strengthen its business activities,” the company said in a statement. To this end, Qatargas also signed a deal with Thailand’s PTT in December 2012, which sees Qatargas 3 supply the Thai company with 2m tonnes of LNG per year for 20 years starting in 2015, the first long-term LNG SPA in PTT’s history.

Deal Structures

In the past, Qatar tended to sell its LNG exports on long-term, oil-indexed contracts, though it has increased the number of short-term and spot-market deals in recent years, selling over 25% of its output through such deals in 2012, according to the EIA. In 2012 Qatar exported over one-quarter of its LNG through short-term or spot-market sales – 19.9m tonnes according to Qatar National Bank (QNB) – accounting for more than a third of short-term and spot-market sales in the world. Now around 90% of Qatar’s LNG output between 2014 and 2020 is locked into SPAs, so spot-market sales are likely to decline. QNB said in a 2014 report that Qatar’s spot-market LNG sales would fall by 40% in 2014.

In October 2013 Sheikh Khalid bin Khalifa Al Thani, the CEO of Qatargas, also said he expected his company and other LNG producers to continue making decisions based on long-term demand rather than the spot market, given the price risks associated with the latter.

Having the lion’s share of its LNG output locked into SPAs until the end of the decade is expected to work in Qatar’s favour in international markets, where countries such as the US and Australia are gearing up LNG exports. But even as supply expands, Sheikh Khalid expects demand growth to outstrip it, driven by demand in emerging markets in particular. While Qatar lowered LNG prices in 2013, the international price is expected to trend upwards in 2014, with Bank of America expecting the product to reach a record $20 per million British thermal units in mid-2014. Competition may be on the rise in global gas, with LNG capacity growing, shale showing potential and investments in upstream being made by countries like Azerbaijan, potentially adding to Europe’s supply in particular. But Qatar’s long-term view and reputation as a highly reliable international supplier should stand it in good stead.

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The Report: Qatar 2014

Energy chapter from The Report: Qatar 2014

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