Qatar is a heavyweight in the international market for liquefied natural gas (LNG), accounting for about a third of global sales in recent years. The revenues it has earned from those gas sales have bankrolled the development of the country and given it a new-found level of confidence, but its position of market dominance now looks to be coming to an end.
Low energy prices mean that revenues are sliding and a glut of new LNG facilities are coming online around the world, putting further downward pressure on prices.
The problems start with the fall in oil prices over the past year. Most LNG sales have historically been done on the basis of long-term contracts of up to 25 years in length, which protects producers from short-term swings in demand. However, while it means that the volume of sales is secure, the prices are not. The contracts are generally indexed to the oil price, so any revenues coming from gas sales are taking the same hit as those from oil. There is a time-lag built into the system so the effect of the oil price decline only really started to feed through in April or May this year, but it is apparent now.
Not all of the LNG produced by Qatar is tied to long-term contracts. An estimated 10-25 per cent of it is sold via short-term contracts, with the proportion varying from project to project. In addition, there are also other by-products of the LNG process, such as condensates and liquefied petroleum gas (LPG), which rise and fall more directly in line with oil prices.
There is some protection for Qatar, as its long-term contracts are thought to include a minimum price for the gas. Even so, Qatar will be nursing a substantial cut in its revenues this year.
The country’s two LNG producers, RasGas and QatarGas, earned around $55.4bn in revenues from LNG sales last year according to Saudi bank Samba. If the predictions of some market analysts are correct, this year the figure could be around $16bn lower.
“RasGas’ sales of LNG, condensate and LPG are either directly or indirectly linked to oil prices, so the revenue stream is materially affected by lower oil prices,” says Jelena Babayeva,lead analyst for RasGas at Fitch Ratings. “However, as far as we know most of the LNG contracts also have a certain floor level embedded. This will prevent a decline in LNG revenues equivalent to the fall in oil prices. So if oil prices have fallen by 50 per cent the reduction in LNG revenues is less, probably at least 30 per cent.”
The longer term picture looks no more inviting, given the increasing level of competition coming to the market. “What we’re going to see is a lot more supply becoming available at a time when demand looks fairly weak,” says Andy Flower, an independent energy consultant.
That weakness in demand is particularly noticeable in Asia, which is leading to a reduction in the previously large premium paid by buyers in that region compared to the US and Europe. In 2014, the gas price in the US averaged around $4 per million British thermal units (btu), while in Europe it was $10 and in Asia it was $18. However, this year prices in Asia had fallen to less than $10 per million btu and they are not expected to recover anytime soon.
As it stands, Qatar supplies around 31 per cent of the LNG imported by countries in the Asia Pacific region, according to data from oil major BP, and an even greater share of the LNG going into Europe and Eurasian countries.
It is bound to be harder for it to maintain that sort of market share in the future, given the greater competition.
“There is a lot of supply coming into the market and most of it is from Australia and the US,” adds Flower. “The thing about the US LNG is it’s pretty flexible. The people building the liquefaction plants in the US don’t care where the LNG goes, so it can be moved around the world with few restrictions and that’s going to create a new dynamic in the market.”
There is still some time before Qatar will have to face up to such pressures. The first Qatari LNG trains came on stream in the mid to late 1990s, but most have only started production since the mid-2000s. It now has a total of 14 trains, with QatarGas and RasGas operating seven each. In total they have a production capacity of some 77.5 million t/y of LNG, with 41.2 million of that coming from the QatarGas trains. The timeline of development means that most of the Qatari long-term contracts are not due to come up for renewal for another five or ten years at least.
Three contracts for a total of 7 million t/y are due to expire in 2021, but most of the contracts will not run out until the mid-2030s. Once that happens, Qatar will have to renegotiate its contracts. By then the costs of developing the plants should have been paid off, which will give Qatar the flexibility to sign shorter-term supply deals. Doha could then find itself in a similar position to Saudi Arabia in the oil market, where Riyadh is accepting low oil prices in an effort to maintain its market share.
In the meantime, the financial position of the companies involved remains solid. RasGas is due to make the next repayment on its loans in 2019. In the past it has made such repayments from its operating cash-flow and it is expected to do the same in 2019.
Even with lower prices, it still appears to be in a healthy situation, given its low cost of production. According to Babayeva, RasGas probably needs oil to be trading at $35 a barrel or less.
“In our very conservative ratings scenario, if we assume that this RasGas repayment in 2019 will be fully repaid from operational cash flows and not refinanced, then they need to achieve a price of $35 a barrel in that year,” she says. “However, if they decide to refinance rather than repay it then the breakeven price they will need will be significantly lower. I believe it will probably be around $20 or even lower.”
Shipping company Nakilat, which transports the LNG produced by QatarGas and RasGas, also has debts to repay. It raised some $6.7bn in debt to buy 25 tankers between 2006 and 2009, some of which was refinanced in 2013. A substantial proportion of it falls due in 2025. As with the two LNG producers, it is assumed that the government would step in to help if there was any need.
Nonetheless, the lower revenues from LNG will have an impact on the wider economy and the government’s fiscal position. The days of easy money are now coming to an end.
“Qatar has benefitted from extremely favourable market conditions in the recent past. They were certainly much better than what they anticipated when the LNG projects were sanctioned,” says Federico Gronda, head of the energy project finance team at Fitch. “The market is now very different.”