Qatar goes offshore to preserves global LNG dominance

Qatar’s LNG development policy has been a matter of considerable international consternation. Why invest tens of billions of dollars to become the world’s leading exporter of the fuel, and then jeopardize that dominant market position by indefinitely extending a moratorium on most upstream gas development?

Research and consulting company Wood Mackenzie thinks it has the answer to that conundrum.

In an April 16 report entitled “What next for Qatar and LNG?”, the Scottish consultancy suggests Qatar may be deliberately restricting its domestic LNG production capacity in order to avoid competing with itself as it prepares to join what could be a rush of  US LNG exporters.

“Development of new LNG capacity in Qatar could be value destructive,” Wood Gundy says. “Restricting new Qatari LNG capacity helps protect the value of Qatar’s existing contracts, some of which expire within the next 10 years and will be subject to price negotiations.”

When those contracts were signed in the previous decade, Qatar did not expect to compete in the premium Asia-Pacific gas market with a potential flood of new North American export capacity propelled by massive shale gas development. But with the start of LNG exports from Canada’s Pacific coast now all but inevitable, that situation could soon become reality.

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Canada’s National Energy Board has granted export licenses to two LNG export developments proposed for the country’s Pacific coast: a partnership of US independents Apache and Chevron have a 20-year license, awarded in October 2011, to export up to 10 million mt/year of LNG; while Royal Dutch Shell and three Asian partners–South Korea’s Kogas, Japan’s Mitsubishi and PetroChina–in February won a 25-year license to export 670 million mt/year of the fuel.

The greenfield Canadian export projects will not imminently unleash large volues of low-priced North American gas onto the Asian market, massively changing its price structure overnight, as some buyers apparently had hoped. The Canadian developments, neither of which is yet backed by a final investment decision, will be pricey, requiring large amounts of supporting infrastructure including pipelines over major mountain ranges, as well as significant investment in upstream gas development.

Chevron, which in February finalized a deal to acquire a 50% stake in Apache’s Kitimat LNG project from Canadian independents Encana and EOG, has warned that the projects won’t get built on the basis of gas supply contracts indexed to US Henry Hub gas prices rather than oil prices. The struggle to moderate Asian gas importers’ expectations has been blamed for delaying the final investment decision on Kitimat, which was expected in 2012.

That gives Qatar some breathing space, though it too favors oil-price indexation for its long-term gas supply contracts, provided it doesn’t undercut its own market. It already has economy-of-scale advantages over existing LNG exporters and can realistically expect to hold its own in competition with emerging Australasian LNG exports and potential East African developments.

The wild card is how long it will take the US to follow Canada’s lead on LNG exports, which even if initially from its Atlantic or Gulf coasts could still reach Asian markets via the Panama Canal, now in the midst of a major upgrade that is scheduled for completion in 2014. Here, wily Doha is showing signs of positioning itself to take advantage from the US side of the international gas trading opportunities that such a development could open up.

In other words, Qatar may be hedging its bets.

Wood Mackenzie notes that the international investment arm of Qatar Petroleum (QP), in partnership with ExxonMobil, owns the Golden Pass LNG regasification terminal on the US Gulf Coast. The partners are considering redeveloping the facility as a gas liquefaction and export terminal.

Such a development would allow Qatar to continue expanding its presence in the international LNG export space, even as it marks time in the Persian Gulf.

“A Golden Pass liquefaction project could offer advantages over some other proposed US LNG projects, including lower development costs and less financing challenges,” says Noel Tomnay, Wood Mackenzie’s head of global gas research.

The consultancy further notes that a global partnership between QP and ExxonMobil is already well established: the US oil major is a partner in some of Qatar’s biggest gas projects. It estimates that ExxonMobil’s gas and LNG position in Qatar represents 19% of its upstream value.

If the Golden Pass export proposal wins Washington’s approval, which is by no means assured, then initial exports would of course go to Europe, not Asia.

In the medium term, that could work quite well for QP, which has underutilized regasification capacity in the UK as well as excess LNG shipping capacity. Tomnay estimates that Golden Pass liquefaction could have a sunk-cost economic advantage of $1-1.50/million British thermal units over other proposed US LNG export projects for European supply.

“The bolstering of Europe’s, and specifically UK’s, energy security of supply through the facilitation of LNG exports from the US, combined with Qatari energy investment in North America, would strengthen Qatar’s geopolitical hand,” he adds.

With Europe’s financial and economic crisis dragging on, however, Doha’s end game must be protecting its position as the dominant LNG supplier to Asia. Whether or not the Golden Pass export project specifically receives Washington’s blessing, Qatar will find a way to establish a supply presence on both sides of the Asia-Pacific market.

In recent comment on Canada’s proposed Pacific coast LNG export projects, Adam Waterous, global head of investment banking at Canada’s Scotiabank, suggested that Canada had an opportunity to become “the new Qatar,” the world LNG leader with the highest GDP in the world.

Not if Doha has any say in the matter.

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