Lower LNG costs to help Qatar stay profitable: BMI

Asia would remain the 'dominant importer' of Qatari LNG over the decade, the consultancy says

Qatar is the leading producer of LNG globally, exporting 103bcm in 2015.
Qatar is the leading producer of LNG globally, exporting 103bcm in 2015.

Qatar is one of the lowest cost producers of LNG in the world, which allows the country to remain profitable in the current pricing environment, an industry analyst has said.

Peter Lee, Asia Oil & Gas analyst at BMI Research said Qatar is the leading producer of LNG globally, exporting 103bn cubic metres (bcm) in 2015, equivalent to 82.7% of the country’s total natural gas exports.

Asia, Lee said, would remain the ‘dominant importer’ of Qatari LNG over the decade. However, in a buyer’s market Qatar will have to show increased flexibility in its contract negotiations to maintain its position in the region, Lee told the Gulf Times on Friday.

“Asia has historically been the largest offtaker of Qatari LNG. However, in 2015, the volume of exports to Europe started to increase again, at the same time as Qatar reduced its exports to Asia,” Lee said.

This move to Europe was, in BMI’s view, a response to weak demand in core North East Asia markets notably Japan and South Korea.

“We believe that Qatari LNG exports to Europe will remain elevated historically in the coming two to three years. In particular, the outlook for demand in Japan looks sluggish, as nuclear capacity comes back online and due to a dampened macroeconomic outlook,” Lee said.

The ability of Europe to absorb these excess volumes will be increasingly tested, due to weak demand growth in the European power sector, coupled with increased competition from new exporters, primarily the US.

Post-2016, he said, Qatar does not have any new contracts coming into force and with 30.1bcm of contracts rolling off in the next ten years, and will have to start negotiating new contracts to secure long-term offtake.

Despite the demand weakness in South Korea and Japan, BMI expects Asia to remain the dominant consumer of LNG, driven by strong growth in emerging markets such as China and India. As such, it will remain a key target for Qatar.

According to BMI’s Japan Korea Marker (JKM) forecast, the Asian LNG price benchmark will collapse in 2016 and 2017, as global oversupply drives down prices.

“We expect price weakness to remain weak for the coming five years, despite a modest recovery in 2019 and 2020. Price weakness creates a buyer’s market, eroding the negotiating power of Qatar. Reduced bargaining power will lead to terms that favour the Asian consumer, in particular through more flexible contract terms,” Lee said.

“Major changes we expect to occur include a relaxation of destination clauses, a shift to cargo-by-cargo contract models and more generous price re-opener clauses. In addition, a larger share of the contracts will be short and medium term rather than historically preferred long-term contracts,” he added.

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