Journal Essay

Qatar's LNG: Impact of the Changing East-Asian Market

Steven Wright

Spring 2017, Volume XXIV, Number 1

Dr. Wright is an associate professor of international relations and Gulf studies in the Gulf Studies Program at the College of Arts and Sciences, Qatar University.

Qatar is a unique example of a small-state actor that has achieved rapid economic development domestically and nurtured a foreign policy with an international reach. The key driver behind its success is the country's extraordinary reserves of natural gas. Qatar's North Field, for instance, shared jointly with Iran, is the largest non-associated natural-gas field in the world, and the strategic decision to exploit it during the 1980s has enabled Qatar to emerge as the leading exporter of Liquefied Natural Gas (LNG).1 The profits have provided the capacity for the nation's economic growth and huge investment in its gas industry, including a global fleet of LNG tankers that can supply gas to every corner of the world. While Qatar has experienced a golden age of expansion in global consumption of natural gas, transformative changes are occurring in the market. In the absence of significant competition, market dynamics have prompted global investment in natural-gas exploitation — accelerated by unforeseen advances in the exploitation of shale through fracking for both oil and gas, in addition to coal-seam methane.2 The challenge from this changing environment will, I argue, result in a necessary recalibration of Qatar's energy policy and supply linkages. The changing market dynamics underpin and largely determine Qatar's wider trading, foreign-policy and investment relationships through what can be understood as an example of complex interdependence.3

COMPETITION OVERSUPPPLY

The global LNG market has witnessed seismic changes in demand variables, new growth areas of LNG supply, and the manner in which LNG is traded and priced.4 In the space of a decade, the United States has gone from being projected to become the world's largest LNG importer — ahead of Japan — to emerging as a major producer of shale gas and an actual exporter of LNG. It is destined to be the third-largest exporter, with clear implications for the Middle East.5 Yet, while the last decade has been particularly telling for the global LNG industry, the next five years alone should be categorized as "revolutionary" in redefining geopolitical areas of natural-gas supply, and overall global trade patterns, in a commodity that has the second-largest trade volume globally: around $150 billion per annum. Indeed, the IEA has projected that the total global export capacity of LNG will rise by 45 percent between 2015 and 2021, and the fundamentals to be those of an oversupplied market,6 leading to depressed prices. This has several implications for the geopolitics of Qatar's energy relations.

In terms of the future, while Qatar is by far currently the largest exporter of LNG globally — in 2015, exporting three times what its nearest competitor achieved — Australia has emerged as a rising area of importance in the energy industry, due to its massive deposits of coal-seam gas, coupled with a strategic decision to use this for export purposes. Projections of LNG export capacity indicate that, by 2017, Qatar will be "eclipsed by Australia, which in turn is expected to be overtaken by the U.S. in the early 2020s. More than 150 billion cubic meters of new liquefaction capacity is currently under construction, with half of it located in the U.S. and a third in Australia."7 Since Qatar implemented a moratorium on further exploration and development in its giant North Field, its export capacity has plateaued, yet it can still claim to be the world's largest exporter, with around a third of the global LNG market share, though this is expected to change in 2017. From a supply perspective, the next decade is going to be marked by a heightened level of competition in LNG, on the back of higher crude-oil prices.8

Regarding China, while growth and demand expectations did not decline in 2015, they fell considerably short of the gravity well that was supposed to spur continual market expansion and absorb excess capacity. Hubris regarding the Chinese economy carries considerable implications in terms of how the market will cope with an oversupply of natural gas. The indications for the next five years point to the glut of natural gas increasing further.9 In terms of demand, over the last five years, projections for future natural-gas consumption had centered largely on growth in China and ASEAN, in addition to the Indian subcontinent to a lesser degree. Nonetheless, these expectations have proved largely unwarranted, as the growth in demand has started to decline, especially in key markets such as Japan and South Korea.10 Indeed, prior to the 2012 Fukushima nuclear-reactor meltdown and the subsequent suspension of the Japanese nuclear-power sector, the global gas market was already showing signs of a glut, so the Japanese move from nuclear- to gas-based power production gave the market sustenance.11

However, in the case of Japan, it is because of the slow and incremental startup of its nuclear reactors that it is now able to reduce its need for LNG.12 One factor that will challenge this trend towards a gas glut stems from climate-change negotiations and the recent UN Paris Accord on climate change. As part of a country's efforts to reduce carbon emissions, cleaner fuels such as natural gas can be expected to form a greater part of the energy mix, in addition to renewable and alternative energy. Moreover, with Beijing's commitment to moving away from coal-based power production by 2020, it will be telling to observe how its own energy strategy might evolve. It could prove to be a silver lining against the indicators of a significant gas glut.

It is becoming increasingly clear that changes over the next five years will lead to a buyer's market.13 In May 2016, Japan, the leading global LNG consumer with a market share upwards of one-third, developed a new energy strategy seeking to capitalize on these trends.14 The key aspects of the strategy are being coordinated not only at the G-7 level, but also among ASEAN partner states and with major LNG consumers in Asia. This level of coordination is significant, nudging the consumption of LNG procurement toward more flexible supply agreements and building the foundations for a move towards an increased level of spot trading in the LNG market, in addition to flexibility in how LNG supply agreements are handled.15 It is common for supply agreements to be rigid and have a "destination clause" prohibiting the purchaser from reselling the gas to a different market. This is also in addition to an end-to-end supply contract restricting the ability of the purchaser to take advantage of liquefaction facilities and competitive supply agreements.

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