Qatar plays a strategic LNG game

Qatar has spent a decade making a virtue out of LNG necessity. The tiny peninsular state signed off vast LNG expansion in the early 2000s to become the world’s largest (77mt/y) liquid player. It was deemed a low risk play, precisely because a gas hungry America was the target market of choice. No one – least of all Qatar – saw the shale gas revolution coming. US import demand hasn’t just gone; America will become an LNG export competitor with Qatar over the next five years. None of that was part of the original Qatari script, but what Doha has lost in the US, it has gained from a global perspective, by becoming the crucial swing player feeding European and Asian markets. Get its strategy right, and this will be a commercially and politically lucrative space for Qatar to occupy.

The nub of Qatar’s predicament is how to keep feeding European and Asian markets to its own gain. Its current strategy is to keep feeding European sport markets (principally the UK National Balancing Point) as a transitional step towards an Asian future. The basic idea is if Qatar keeps Europe well supplied, it can then continue to push for far higher (oil indexed) prices in Asia. When you consider that European prices typically trade at around $8-10/MMBtu compared to $14-18/MMBtu in Asia, it’s crystal clear where the best arbitrage returns rest. But where Qatar has been particularly smart, is grasping that this transitional game is about securing Doha’s long term political and economic stake in the global economy, not just worrying about short term spreads. By playing multiple markets and keeping its finger in the European dyke, Doha can hedge its global energy stake on the two fronts that ultimately matter – supply and demand.

For demand, read Asia. Qatar will look to place over 40-50m tonnes of LNG into Asian markets over the next decade, ramping up the 34m it already ships East. If things go according to plan, most of that will be under lucrative oil-indexed contracts to India, South Korea, Indonesia, Japan, and Malaysia, but the key growth market to secure remains China where gas demand continues to rocket up 5% a year. Beijing is proving increasingly difficult to nail down on price, thanks to its own eclectic sources of gas supply from Central Asia, Australia and domestic shale prospects. But as long as Qatar keeps feeding European markets, it is making clear China will have to pay a significant premium to ensure Doha turns most of its tankers East. It’s not as if Qatar needs to rake in the Remninbi to survive.

More importantly, it directly ties into the supply side picture. Given Russia is also increasingly keen to sell gas into China, Qatar is challenging Moscow at both ends of the ‘Eurasian pipeline’. Qatar not only gives Beijing another supply option to play over Russia’s East Siberian fields, it is wreaking havoc on Russian pricing preferences in Europe. Market share has been taken in Belgium, France, Spain and Italy, but more importantly, 85% of gas being traded on the UK NBP is Qatari sourced. Little wonder that only 56% of physically traded gas in Europe was done so under oil-indexed formulas last year – traders have a far cheaper and increasingly liquid pool to play with in Europe.

That makes for somewhat awkward Russian-Qatari relations, but also creates serious opportunities for Doha. Russia has made abundantly clear it wants Qatar to focus on Asia, to sell its gas under long-term contracts and stop feeding European spot market liquidity. Logical enough; but in return, Qatar would not only expect to get major Russian upstream stakes in Yamal, the Arctic and East Siberian plays (alongside access to Gazprom’s downstream stakes), it would need to ensure Russia holds back on Asian supplies. This would basically amount to a Russian-Qatari swap agreement between European and

Asian markets. Any significant Qatari shift towards Asia will see Russia’s spot market pressures eased in Europe; no other gas producer would be able to fill Qatari LNG gaps.

That might sound farfetched, but it’s not just Russia feeling the heat. Qatar is well aware the clock is ticking to secure long-term Asian deals, given 50 mt/y of LNG is expected to enter the market in the next few years across the Pacific Basin. The perfect storm for Qatar once Russia is out the way, is to sign Chinese contracts, stymieing a Pacific Basin LNG price war with the likes of Australia, and more tangentially, Canada and America sending LNG tankers across the Atlantic – both of which are likely to do so at highly competitive prices. Not only does Qatar need to stitch up Asian sales, they need to make it look like a strategic shift to help Moscow out of its European fix in order to exact maximum gains.

Sounds simple enough, but it’s going to be difficult for Qatar to pull off. Europe needs to be carefully handled as a transitional step, just as Russia remains Qatar’s crucial supply side relationship. Asia is ultimately where everyone has to do demand side business. It’s just a matter of what terms are brokered. Get its strategy right, and Qatar could sit at the epicentre of a liquid gas world. But a crucial caveat still applies on excess capacity once you factor in Qatar’s ongoing moratorium towards 2014: ‘Liquid players’ gain from ‘liquid markets’. Keeping volumes high and spot dynamics afloat, not just in Europe, but seeing them grow in Asia, is ultimately in everyone’s interests. If Qatar runs itself dry in China, having won prized oil indexed contracts from Beijing, that might be good for commercial interests, but it will never be as much fun for Qatar as playing a double Sino-Russian hedge. Or indeed as politically rewarding from feeding markets on all points of the compass.