Qatar’s Looming Decisions in LNG Expansion

Qatar is moving forward with a massive liquefied natural gas (LNG) capacity expansion in spite of the current glut in the market and longer-term questions over the role of gas in the energy transition. Qatar is betting that it can dissuade other prospective LNG suppliers and outcompete them through scale, low production costs, and co-production of condensates and liquefied petroleum gas (LPG). In launching this expansion, Qatar faces a number of looming questions—and its choices have implications for the entire LNG industry.

Breakneck Expansion or Moderate Pace

Already the world’s largest LNG exporter, Qatar declared a moratorium on new developments at its North Field in 2005 in an effort to ensure the long-term health of the field. By the time Qatar ended the moratorium in 2017, the LNG world had changed. Qatar still held a commanding position, but growing volumes from Australia, the United States, and other suppliers chipped away at its market share and contributed to a global LNG glut. These market developments convinced Qatar to reenter the fray. In 2017, Qatar declared plans to build four new LNG trains, and last November, Qatar Petroleum (QP) chief executive Saad al-Kaabi announced that a significant gas reserve addition would support a six-train expansion to ultimately raise capacity from 77 million tons per year (mmtpa) to 126 mmtpa.

QP seems undeterred by the longer-term challenges for gas. The market already appears well-supplied for at least the next few years, and in 2019, companies took final investment decisions (FID) on more than 70 mmtpa of LNG, far exceeding the previous annual record. But QP is a strong believer in long-term gas demand. It is confident in its low production costs and established relationships with major buyers, and sees advantages in moving ahead with the mega-expansion while other major projects have been deferred and better terms can be negotiated from service companies. Last, QP could perceive some advantages in lower gas prices, which bolster the fuel’s competitiveness against coal and renewables. 

Qatar has advanced some elements of the expansion, but Covid-19 and the impact on economic activity and LNG demand forced it to delay the North Field expansion plans by a year. It is now planning a phase 1 expansion encompassing four trains with capacity of 32 mmtpa, focusing on the North Field East area. QP aims to bring the four 7.8 mmtpa trains online by 2025 and raise its overall liquefaction capacity to 110 mmtpa. The company expects to award engineering, procurement, and construction contracts by the end of 2020. Earlier this year, QP placed the largest-ever order for new LNG vessels, and commercial bids for equity partnerships in the four new trains were due by September 15.

If Qatar awards the contracts and sanctions the four trains by the first quarter of 2021, its new volumes will be large enough to have a major impact on the market around 2025. A phase 2 buildout centering on the North Field South area would create an additional 16 mmtpa in capacity over roughly the next two years.

Sign Long-Term Contracts or Sell into the Short-Term Market

An expansion of this size presents challenges. QP will have to market some 32 mmtpa in new volumes by 2025, in addition to around 20 mmtpa in contracts expiring in that time period. QP also holds a 70 percent equity stake in Golden Pass LNG in the United States, a 15.6 mmtpa development with a first train expected on stream in 2024. Qatar could ultimately decide that managing a flood of new volumes in the 2025–2027 period will be too challenging and opt to defer its phase 2 expansion.

QP has no desire to shift away from oil indexation, and typically it has driven a hard bargain on prices in long-term LNG contracts, especially in East Asia, while showing more flexibility with buyers in South Asia. QP generally employs a segmented approach to LNG marketing, pursuing a certain price target for long-term contracts but content to either sell volumes into the spot market or hold them when spot prices are unfavorable.

But in a well-supplied market, it is difficult to win on both volumes and price, and there are signs that QP is softening its approach. Last year it reportedly offered Korea Gas Corporation (KOGAS) a long-term contract with a slope (indexation of the gas price to the oil price) of 10.8 percent, although that deal was never finalized. QP offered an even lower, 10.2 percent slope in a recent 10-year, 1 mmtpa supply deal with Sinopec. This suggests that at least in the short term, QP will make concessions on prices to lock up long-term contracts. Its approach may change over the medium term if the market becomes tighter again. But for now, Qatar’s low production costs (and the fact that its existing trains have been amortized) allow it to offer terms that few, if any, competing suppliers can match.

Creating Gas Markets

With an LNG glut, sellers are working harder to help create new markets. Numerous companies are seeking to open new LNG markets and bolster demand, and new marketing joint ventures have proliferated. But boosting LNG demand in Asia, for example, is not an easy task. Creating demand in a new market often entails costly investment in storage, regasification terminals, pipelines, or even the power sector. In many countries, gas is struggling to compete with coal, barriers to midstream access prevent direct sales to end-users, and regulated gas prices inhibit price discovery.

When access to markets was a major concern in the early 2000s, QP co-invested with partners to build LNG import capacity in Italy, the United Kingdom, and the United States. It then switched to acting only as a supplier, booking capacity at existing European import terminals. It has recently expanded those bookings (at the Zeebrugge terminal in Belgium and the Montoir-de-Bretagne terminal in France). Europe is the destination of last resort for LNG, and these positions ensure access to that market. In that light, they can be seen as a defense mechanism rather than a forward position to build new markets.

The appetite for investments further downstream has oscillated. In 2014, QP International took a minority position in a gas-fired power plant in Greece, but that move was a one-off. In 2019, QP formed a partnership with Shell to develop infrastructure for LNG bunkering, one of the premier prospects for expanding natural gas use. In all these respects, QP tracks closely with the strategy of most large producers—making targeted investments to develop markets when need be but largely shying away from a big thrust to get close to the end user. In the end, the best way for QP to create new markets is probably to make gas affordable.

Making Gas as Low-Carbon as Possible

Gas suppliers are trying to reduce the greenhouse gas intensity of their operations and help customers reduce or offset their emissions from using gas. We still lack adequate data to compare fully the greenhouse gas intensity of different gas suppliers, but there are reasons to think that Qatar would fare well in most comparisons. Its gas comes from a single large field, and most facilities are relatively new and large in scale. In a world that places a premium on how much energy is consumed during the extraction and transportation process, Qatar is likely to do well. But it has shown an ambition to do more.

In October 2019, QP without warning announced it had opened a carbon capture and storage (CCS) facility. Neither the International Energy Agency nor the CCS Institute show it as operational, which suggests that “launching” or “inaugurating” might simply suggest a start on construction. But QP signaled an ambition to capture up to 5 million tons of CO2 per year, which is roughly equal to the company’s reported emissions in 2018 (4.8 million tons of CO2). Other companies have started to promote the idea of carbon-neutral LNG deliveries, achieved largely through offsets. There is no reported activity from Qatar on that front, but the announcement on CCS shows a clear commitment to making gas as attractive as possible to customers. Here too, Qatar might lead, in an effort to defend and bolster the credentials of gas in the energy transition.

Choosing Partners

Qatar’s buildout is one of the world’s most compelling investment opportunities for oil and gas companies, but it will not be easy to gain a foothold. The state company has backed away from earlier assertions that it could finance the expansion and market the LNG volumes on its own. Last year, QP short-listed six firms as potential lead equity partners in the new trains: Chevron, ConocoPhillips, Eni, ExxonMobil, Shell, and Total. But QP is operating from a position of strength and is likely to drive a hard bargain.

Qatar will likely take several factors into account. Al-Kaabi has stated that partners must present unique commercial and strategic value to Qatar. The major contenders have spent several years building up partnerships with QP in exploration and production assets around the world (see table) in the hopes that such moves would pay dividends in Qatar. Eni and Total have been especially keen to add partnerships with QP since 2017. Chevron has also won substantial goodwill in Qatar, after its Chevron Phillips Chemical arm signed an agreement with QP to build one of the world’s largest ethane crackers in Qatar, as well as an $8 billion petrochemicals complex in the United States.

Other types of partnerships are also of value to Qatar, especially those that bolster its market access or downstream integration in key demand centers. National oil companies (NOCs) and utilities have more to offer in this regard than the Western majors. Even if several of the majors are chosen as lead partners in the new trains (in which QP plans to keep at least 70 percent equity), there should be room to create smaller stakes for state companies in Asia. Indian state firms, the Chinese NOCs, Japanese trading houses, and KOGAS are contenders, and all could help Qatar achieve some of its strategic and commercial goals.

Leveraging Gas Resources and Bolstering Influence

Geopolitics will surely play a role in Qatar’s plans. Saudi Arabia, the United Arab Emirates, Bahrain, and Egypt cut diplomatic ties with Qatar in April 2017 and imposed an economic embargo that remains in place. The North Field expansion signaled Qatar’s confidence that it had the economic resources to cope with the blockade, and new LNG trains would also allow Qatar to bolster its international alliances.

It was no accident that QP’s first major overseas investment in a liquefaction project was Golden Pass LNG in Texas, alongside longtime partner ExxonMobil. Partnering with a U.S. supermajor advanced Qatar’s commercial interests, but also strengthened ties with Washington at a sensitive time. It would be surprising if Qatar did not select at least one U.S. major in its LNG expansion—either ExxonMobil or Chevron.

Qatar’s geopolitical concerns extend well past the need to shore up its relationship with the United States. Asian countries will account for an ever-growing share of gas and LNG demand in the decades to come. In an increasingly competitive LNG market, Qatar has an interest in solidifying ties with importing states in South Asia and East Asia. Since 2015, Abu Dhabi has used the renewals at its most important onshore and offshore oil concessions to bring in a greater diversity of partners and far more Asian companies—balancing its technical, commercial, and geopolitical objectives. Qatar could follow suit.

Ben Cahill and Nikos Tsafos are senior fellows in the Energy Security and Climate Change Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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Ben Cahill
Senior Fellow, Energy Security and Climate Change Program

Nikos Tsafos