June 27, 2017

Diplomatic Rift May Weaken Qatar’s Negotiating Power in Asian LNG Markets

Qatar's Emir Tamim bin Hamad al-Thani, left, is greeted by Japanese Prime Minister Shinzo Abe prior to their talks at Abe's official residence in Tokyo, Feb. 20, 2015. (AP Photo/Toshifumi Kitamura)

Three weeks after the Gulf Cooperation Council’s worst crisis erupted, the diplomatic and economic boycott imposed on Qatar – the world’s largest exporter of liquefied natural gas (LNG) – has created only marginal logistical disruptions for international LNG markets and has had no impact on oil supplies. Qatar, one of the smallest producers in OPEC at around 600,000 barrels per day, represents just 2 percent of the group’s current production of 32.1 million barrels per day.

Qatar, which supplies 30 percent of global LNG, has maintained exports with relative ease by altering shipping flows to bypass countries barring it from traversing their waters and ports, albeit incurring slightly higher freight costs and longer travel times. The UAE emirate of Fujairah is the region’s most important ship bunkering hub and prior to the ban was the main fueling point for Qatari LNG and oil vessels before they head out of the Gulf to markets. Qatar has installed a temporary ship-to-ship fuel bunkering facility to circumvent the loss of access to Fujairah, according to Saad Sherida Al-Kaabi, president and CEO of Qatar Petroleum. ​

Meanwhile, Qatari LNG shipments to European markets, which typically travel via the Red Sea and Suez Canal, are also unaffected. While Egypt, which controls the canal, is part of the latest boycott of Qatar, it is bound by international law to allow unhindered transit. Qatar itself has continued natural gas exports via the Dolphin pipeline to the UAE.

Qatar’s Shifting Balance of Power in LNG Markets

Qatar LNG Market Share by RegionHowever, a prolonged crisis that sees Doha increasingly isolated may weaken the country’s negotiating position with its long-term LNG customers and accelerate the shift toward the more flexible spot market trade of LNG supplies at the expense of long-term, oil-indexed contracts favored by Qatar. Relations between Qatar and its Asian customers, which account for approximately two-thirds of the country’s LNG exports, are already under strain as buyers push back against the producer’s restrictive and uncompetitive long-term contracts amid growing global supply and more flexible and price sensitive contracts offered by competitors. Asian customers imported 53 million tons in 2016 out of total Qatari exports of 80 million tons per year (mt/y), with Japan the largest buyer followed by South Korea and India, according to the Paris-based International Group of Liquefied Natural Gas Importers (GIIGNL).

Long a seller’s market, LNG trade has become increasingly more competitive in recent years in tandem with new supplies from a growing list of countries. Current LNG export capacity is estimated at around 300 mt/y or about 35 mt/y above demand levels. Capacity is projected to increase by 45 percent between 2015 and 2021, according to the International Energy Agency. Australia and the United States are on track to provide 80 percent of the increased volumes. The surplus has weighed heavily on LNG markets, with Asian spot prices declining by a steep 75 percent from a 2014 peak to $5.40 per million British thermal units currently.

Qatar 2016 LNG Imports by CountryQatar has sold more than 90 percent of its production under supply contracts for 2014-20. In 2016 about 26 percent of its exports were linked to spot markets or short-term contracts, according to the GIIGNL. The bulk of its contracts, however, are both less competitive and less flexible, which has prompted some of its long-time customers to seek a renegotiation of terms. In the past when supply options were limited, Asian buyers preferred the security of long-term contracts but with the shift to surplus supplies the more expensive long-term contracts are less attractive.

Long-time utility customers in Japan, the world’s largest buyer of LNG accounting for one-third of global imports at just over 83 mt/y, hold 25-year contracts that run to 2021 but every five years there is a review period that allows for changes. Discussions on more flexible terms for contracts that expire in 2020, for approximately 7.2 mt out of the total 12.1 mt imported from Qatar, have been taking place for the past year. Japan’s JERA, a joint venture between Tokyo Electric and Chubu Electric that makes it the world’s single largest buyer of LNG, is seeking lower prices, shorter contracts, and more flexible terms that would allow it to resell cargoes as needed. Adding to its fire power, JERA joined forces with Korea Gas Company and China National Offshore Oil Corp to maximize their buying leverage with producers following the signing of a new memorandum of understanding for cooperating in the joint procurement of LNG.

Tough Negotiations All Around

Prior to the latest rift with its neighbors, Qatar Petroleum had been taking a hard line in the talks, reportedly warning it could force Japanese companies with stakes in the LNG projects out of the country if the utilities push too hard. Japan’s Marubeni Corp and Mitsui & Co each own 7.5 percent stakes in the Qatargas I project, which produces 9.6 mt/y. Mitsui also holds a 1.5 percent stake in Qatargas 3, with a capacity of 7.8 mt/y. Japanese companies, however, only hold a very modest stake in Qatar’s LNG projects, with ExxonMobil by far the largest shareholder.

The deterioration in Qatar’s relationships with long-time customers in Asia may also complicate Doha’s plans to expand production capacity following the April lifting of its 12-year moratorium on development at its prized offshore North Field, the world’s largest natural gas reservoir. In May, Qatar Petroleum hired Japan’s Chiyoda to study modifications needed to debottleneck capacity of Qatar’s LNG trains in the city of Ras Laffan before supply increases start to come from the North Field. Developing the field will be an extremely costly enterprise and likely involve one of its existing partners.

The latest diplomatic crisis surrounding Qatar is no doubt a stark reminder that security of supply is increasingly linked to diversity of supply sources rather than long-term, more restrictive contracts that lock customers in. Asian LNG buyers, with their negotiating positions already strengthened by the growing global supply surplus, will be further emboldened to win concessions from Qatar should the imbroglio with its neighbors persist. For Qatar, long facing headwinds from prevailing competitive market forces, long-term contract negotiations may be an unwinnable battle.

Qatar Selected Energy Infrastructure

Diane Munro is a non-resident fellow at the Arab Gulf States Institute in Washington.