The world’s top exporter of liquefied natural gas is dramatically increasing production and undercutting competitors’ prices in a bid to drive them out of the market.
Qatar is slashing prices and pushing ahead with a $29 billion project to increase its exports of the fuel by more than 50%, hampering prospects for new plants elsewhere. It has also set up a marketing team to compete in the fledgling spot market and to push into Asia more aggressively, according to people familiar with the matter.
The strategy is a shift for Qatar, which has barely increased production in the past five years and has traditionally prioritized price over market share. Increased competition, especially from the United States and Australia, has forced the Persian Gulf state to be more nimble and attract buyers from Asia, a hot spot for gas demand.
The global transition to renewables adds to the country’s sense of urgency. Although until recently LNG was touted as a bridge between coal and oil and solar and wind power, it is falling out of favor with some governments, which are stepping up efforts to curb climate change.
“Qatar’s expansion plan is so big that the need for other supply options is being questioned,” says Julien Hoarau, director of EnergyScan, the analytics unit of France’s Engie SA. “It’s still number one, but the U.S. has never been that close, so Qatar had to move if it wanted to maintain its leading position.”
The U.S. came close to surpassing Qatar’s monthly exports for the first time in April, while Australia has been on par with the Middle Eastern nation for the past year, according to ship-tracking data. As Gulf Coast projects develop, the U.S. is forecast to briefly become the world’s top supplier by 2024, before Qatar regains that status later in the decade.
Several factors play in Qatar’s favor. China, one of the fastest-growing LNG markets, has been reluctant to import more from the U.S. or Australia due to trade and geopolitical tensions.
But Qatar’s main advantage is that it has the lowest production costs in the world thanks to an abundance of easy-to-extract gas, most of it contained in the giant North Field that stretches all the way to Iran.
Bonuses are coming
Qatar’s state-owned energy company, which could soon sell up to $10 billion in bonds to finance the gas expansion, said the project will be viable even with oil at $20 a barrel, 70% below current levels. LNG contracts are usually tied to oil.
That allows Qatar Petroleum to lock in prices below what other exporters can manage, traders say. In recent months, the company has sold LNG at around 10% of the price of Brent crude, including to China and Pakistan, whereas previously it set the level at 15%.
“No one can compete with Qatar’s costs,” says Jonathan Stern, a research fellow at the Oxford Institute for Energy Studies. “They can do what they want and everyone will have to respond as they can. And, especially when the market is in surplus and prices are low, that will impact on the benefits of competition.”
QP executives have traveled around Asia in recent months to close export deals. Their efforts led in March to a 10-year contract with Beijing-based Sinopec, signed at 10%-10.19% of Brent.
Qatar’s Ministry of Energy and QP did not respond to requests for comment.
A few years ago, LNG demand was forecast to rise sharply in the coming decades. The gas emits less carbon dioxide than most other fossil fuels when burned, while renewable energy projects were still too expensive to power electricity grids, factories and large-scale transportation.
But solar and wind technology is improving faster than expected, helped in part by massive government green spending programs triggered by the coronavirus pandemic.
We are not afraid
Although Qatar is trying to make the most of its assets, there are obstacles to its achieving total dominance. Many buyers want a diverse group of suppliers. Russia’s Yamal LNG project and the planned Arctic LNG 2 plant, led by Novatek PJSC, are among those that will remain competitive as Qatar ramps up exports, according to analysts at Citigroup Inc.
The largest U.S. LNG exporter, Cheniere Energy Inc, said it is not affected by Qatar’s moves. Some importers are attracted to U.S. companies that offer more flexible delivery terms and prices that aren’t tied to oil, which has soared nearly 30% this year.
“We are not afraid,” Cheniere’s chief commercial officer, Anatol Feygin, told investors this month. “We are part of a kind of diversification of the supply and contracting structure along with Qatar Petroleum and our friends at Novatek.”
However, U.S. projects are among the most likely to suffer. At least 10, five of them in Texas and four in Louisiana, will probably not get enough financing to complete.
Commodity costs are part of the problem. U.S. companies have to buy gas at about $2.50 per million British thermal units, well above Qatar’s wellhead prices of $0.30 or less.
New U.S. suppliers need spot LNG prices of at least $7.80 per million BTUs in Asia and $6.80 in Europe, according to David Thomas, an independent consultant and former head of LNG at Vitol, the world’s largest independent oil trader. By way of comparison, Asian rates have averaged $6.80 over the past five years. The economics of Australian and African producers are similar, according to Thomas.
The lack of new supplies from other countries will benefit Qatar, said Energy Minister Saad Al-Kaabi, who is also CEO of QP.
“The Qatari strategy seems to be to maintain its global market share and also to maximize sales, before the gas market starts to shrink,” said OIES’s Stern. “It’s a competitive and strategic race. They recognize that demand for LNG will eventually decline as the world moves forward in the energy transition.”