Faced with a production moratorium on its biggest gas field, and grappling with new liquefied natural gas (LNG) rivals, Qatar, the world’s top LNG exporter, is shifting its focus to investments into petrochemicals and other gas projects at home and abroad as it looks to diversify revenue away from gas.
Is the period of breakneck growth for Qatar’s liquefied natural gas (LNG) industry officially over? According to law firms that have had a hand in major gas deals till date, the Middle Eastern nation, which has the world’s third-largest gas reserves after Russia and Iran, has entered a new phase in its energy cycle after achieving its self-set target of producing 77 million tonnes per annum of LNG. “The rapid expansion of Qatar's LNG industry is perhaps in the past,” says Stuart Cavet, Dubai-based partner at SNR Denton, who has been involved in negotiating LNG sales. “Where we are at the moment, is that we are in a definite period of consolidation. Qatar is now appraising its option for monetizing gas in the future.”
The chances of any new gas projects to be developed in Qatar will depend on the outcome of a ban on future production from its North Field gas reservoir, which provides most of the output for the country’s gas industry and is shared with Iran. It was put in place in 2005 and is unlikely to be lifted before 2014, leaving the Gulf state with fewer resources for new energy projects at home. The moratorium was imposed to conduct studies on the field, considered to be the world’s largest single nonassociated gas reservoir. Qatari officials were alarmed that rapid production from the North Field could cause damage by reducing reservoir pressure, potentially impacting future output. “There is a concern in terms of reservoir damage if they want to produce more gas, because the North Field is shared with Iran, and Iran is developing the field for their domestic market and gas re-injection into the oil fields,” says Siamak Adibi, head of the Middle East gas team for Singapore-based consultancy FACTS Global Energy. “The amount of gas that Iran plans to produce on the Iranian side in the short term is large. Indeed, if
Qatar and Iran want to extract gas quickly there could be some reservoir damages in the field.”
The moratorium is all the more important because Qatar has built all the LNG production facilities trains it had set out to do, constructed the world’s biggest LNG ships to cater to customers all over the world, and invested in three regasification terminals to secure the delivery of its cargoes. “If the moratorium is lifted, we are likely to see more petrochemical projects and there is certainly more work for lawyers there,” says Cavet. “The way most hydrocarbon economies operate is that they will develop oil or LNG first and once revenues from those industries come in, they will develop other industries. This protects against being overexposed to pricing conditions of one particular sector and helps develop secondary industries.” Besides the vagaries of LNG pricing and the moratorium on its North Field, Qatar is facing the prospect of losing its title of the world’s biggest LNG exporter, which it gained in 2006, snatching it from Indonesia, only ten years after the first Qatari LNG cargo was sold in 1996. Australia is expected to overtake Qatar as the world’s biggest LNG exporter towards the end of this decade. Australia would have the geographical advantage of being close to the high consuming markets in Asia, which is currently the focus of Qatar.
Qatar has diverted LNG cargoes away from U.S. and Europe to capture a bigger slice of the more lucrative Asian demand for LNG. Russia is also investing in LNG projects and even firms in the U.S. are talking about exporting LNG to Asia. “If the moratorium were lifted, then they would have to decide whether the global LNG market would support additional capacity development and expansion,” says John Harris, who is part of the Global Gas group at consultancy IHS CERA and leads coverage of the Asian gas markets. “If the Ichthys project in Australia takes Final Investment Decision in the coming weeks (as is expected), then Australia will have more capacity existing and under construction than Qatar has today.”
Looking overseas
That’s why Qatar in the last few years has focused more on developing other aspects of its energy industry in a bid to lower reliance on LNG as a main source of income. In partnership with international oil companies, Qatar has built two gasto-liquids (GTL) plants that convert gas directly into fuels such as diesel. Products from GTL plants are expected to be in demand because they include low-sulfur fuels that fulfill needs for limits on carbon emissions in many countries. Both Royal Dutch Shell and Total are in also talks with Qatar to construct petrochemical plants in the Gulf state. “Given Qatar's already dominant position in the LNG industry, in our view the focus is more likely to be on the expansion of other industries, such as the petrochemicals sector,” says Joanna Addison, senior associate at Herbert Smith, who has worked on Qatari contracts. Currently, she is advising Qatar Petroleum and the Qatari government on negotiations related to off-take arrangements for GTL base oil and gas oil, together with advice on the upstream development and production sharing agreement and ancillary documentation.
Qatar is also eyeing various energy projects abroad to help cement its lead in the gas industry and the energy world as a whole. This year, state-run energy firm Qatar Petroleum signed a framework deal with China National Petroleum Corp., and Royal Dutch Shell Plc to build a joint venture refining and petrochemical complex in China. “Opportunities exist more generally in supporting Qatar's outbound investment which is driven by its desire to diversify by looking at the energy industry globally,” says Addison.
Qatar’s emphasis on diversifying investments and revenue away from LNG stems from the fluctuations in demand and pricing that almost left it in a quandary in the last two years. Just as Qatar was ramping up its LNG production, some of its biggest customers such as the U.S. and Europe fell into a deep recession, while an unexpected uptick in unconventional production of shale gas in US and Canada created a gas glut. Qatar had counted on rising gas needs of the U.S. to help sell its LNG. It even invested in the Golden Pass LNG regasification terminal in the U.S., which would receive Qatari LNG cargoes.
Meanwhile, the economic slowdown in Europe and the ensuing sovereign debt crisis were another unknown factors in the Qatari equation. Qatar is an investor in two LNG regasification terminals in Europe, South Hook terminal in the UK and the Adriatic LNG terminal in Italy. It is no surprise then that Qatar is looking at projects in the East to channel investments while a decision is made on the North Field moratorium. Qatar has already expressed an interest in acquiring a stake in Russian gas producer Novatek and its Yamal LNG project in the Arctic,which will lead to cooperation between two rival gas producers. A partnership with Russia on an LNG project would set a new tone to their relationship
since Qatar has increased its share of the European gas market at the expense of Russia, which has had price and payment disputes on the gas it delivers to Europe. “There will not be a competition between their domestic projects in Qatar and other projects they may decide to be involved in,” says FACTS’ Adibi. “It is a political decision for them to keep their role as a major player in the gas market.” Any new energy projects that Qatar may take part in abroad will present a new set of opportunities for lawyers in terms of project financing, production agreements and sales deals, but also a new set of challenges.
Ever since it set up its first LNG firm Qatargas in 1984, Qatar has developed a structure of agreements to build, sell, and ship its commodity. Qatar’s two LNG companies Qatargas and RasGas followed a similar model to build the LNG trains whereby staterun oil firm Qatar Petroleum owned majority stake in each production facility, then invited international oil companies such as Exxon Mobil Corp, Total, ConocoPhillips, and Shell to take minority stakes, tapping into their expertise. “Qatar has used a particular structure for its LNG projects in Qatar that has been successful,” says SNR Denton’s Cavet. “It has a lot of latitude with whom it wants to do business in Qatar and it has a wide variety of world class partners.”
With international projects, Qatar is likely to have minority stakes and may not be able to emulate the same structure or the flexibility that allowed it to build trains with different partners. New projects will have different factors that would come into play. “It may want to use that sort of structure elsewhere, but it depends on who their partners are,” adds Cavet. “If you are working with new partners, new jurisdictions,and new business structures, it will be a learning curve. It may not be able to use the same agreements.” Asia focus The downturn in the Western markets has prompted Qatar to switch its attention to the booming Asian markets, which have seen a rise in consumption even as the developed world is grappling with recession. This year, Qatar said it would provide Japan with extra cargoes to meet the Asian country’s demand following the earthquake and tsunami in March, which led to contamination from the Fukushima nuclear plant.
Japan was Qatar’s first LNG customer in 1996. Indeed, Qatar’s first three LNG production trains were mostly dedicated to its customers in Japan. In September, the Gulf state became the biggest LNG exporter to Japan, with the 1.18 million tonnes imported from Qatar narrowly exceeding the 1.17 million tonnes imported from Malaysia. Japan’s natural disaster didn’t just help boost Qatar’s LNG sales to Asia,it gave Qatar its chance to prove LNG trumps nuclear power as a clean and safe energy source. The Japanese nuclear disaster has initiated a worldwide rethink of reliance on nuclear energy and prompted countries such as Germany to decide to phase out its nuclear plants by 2022. Analysts expect more countries to abandon nuclear projects in favor of other clean energy sources, such as LNG, guaranteeing demand and higher LNG prices, which is a bonus to Qatar. Rising consumption of gas in China, India and other Asian countries will also help Qatar secure sales for its LNG.
“Demand in Europe may be affected by whatever happens to the European economy in the next few years and the need for the U.S. to import LNG appears less than expected even only 12 months ago because of the development of shale gas and other reserves in North America,” says Neil Brimson, managing partner of Herbert Smith’s Dubai office. “At the same time, demand from Asian economies seems likely to continue increasing fairly dramatically.” Rethinking contracts The changes to the LNG market in terms of pricing and demand is expected to create work for law firms, which will have to re-negotiate prices and quantities in sales contracts. “When Qatar started producing LNG, the market was very much in favour of suppliers. Since then the market has varied between being demand driven and supply driven,” says Herbert Smith’s Addison. “Price reviews in these long-term contracts to reflect
the change are very important to both sides and there is definitely a role to play for external legal counsel.” Qatar signed long-term deals with its customers, a move that allowed it to secure financing to build its trains and guarantee customers when the projects were finished. The Gulf state continues to sign long-term contracts, including a heads of agreement signed in July with Malaysia’s national oil and gas company Petronas to deliver 1.5 million tonnes per annum over a period of at least 20 years, starting 2013. “One of the reasons you tend to have contracts that are 20-25 years in length is that you need contracts that will guarantee a revenue stream that will pay project financing,” says Cavet. “Once project financing is paid off, you are in a position where you don’t need to have long-term contracts. You may still want to have some long-term contracts amongst your portfolio because you
know you have long-term operational costs to cover and it gives you a more balanced book of business.”
Although most of Qatar’s LNG contracts are long-term, spanning usually 20 years or more, the Gulf state is also entering short-term and mid-term contracts to maximise profits, particularly by selling more cargoes to Asia. Gas prices sold in the U.S., Europe differ from prices in Asia, where there is usually a premium. Qatargas said in April it would supply an extra four million tonnes a year to top LNG importer Japan over the next 12 months to meet its needs and Qatari officials have pledged to meet any extra demand from Japan. “Once a company has established a template for spot or short-term sales, it is likely to try to maintain that form so that cargoes can be sold quickly. That is not to say buyer and seller may not want to negotiate some of the terms and that lawyers will not have a role to play,” adds Cavet. “But in the general scheme of things, it tends to be longer term arrangements that require more lawyering to deal with the greater number of variables that can occur or need to be addressed.”
Qatar also could get more short-term to mid-term contracts in case the country goes ahead with debottlenecking its existing plants, a process that maximises the profitability by running plants to unit limits, adding additional cargoes. “We would see the debottlenecking of existing plants adding 8 to 12 million tonnes per annum to the market,” says FACTS’ Adibi. “However, I am not really optimistic they will do the de-bottlenecking in the next few years.” Qatar’s integrated LNG chain, which includes production from trains, shipping through its carriers and delivery at its LNG terminals, has given it flexibility in meeting its customers’ requirements and would prove helpful if it decides to bottleneck its existing plants. “A client that has interests in multiple stages along the gas chain, then as a lawyer you have an opportunity to do more work because your client is doing more,” says Cavet. “Debottlenecking will make available further quantities of LNG. Project financing will not have been based on these cargoes and subject to arrangements with lenders. It is possible these cargoes could be sold on a much more flexible basis than the long-term sales arrangements that do, in fact, underpin the financing arrangements.”
