Like its neighbours, Qatar’s economy is feeling the impact of lower energy prices. In 2014, oil and gas accounted for around 55 per cent of Qatar’s gross domestic product, 90 per cent of government revenues and 85 per cent of export revenue. Reduced revenue from the country’s oil and gas exports led to a 17.2 per cent drop in gross national income in the second quarter of 2015.
Unlike its neighbours, most of Qatar’s energy revenues come from natural gas: The country has the world’s third largest natural gas reserves and has enjoyed an almost decade-long run as the world’s largest liquefied natural gas producer since displacing Indonesia in 2006. According to the IMF, in 2013—before LNG prices began their recent fall—the value of crude oil and refined petroleum product exports was $60.2 billion while that of LNG and related exports reached almost $85 billion, comprising around 93 per cent of the total value of exports of goods.
“There will be a focus on efficiencies and any kind of spending will be a lot more judicious now”
Qatar is now grappling with an LNG industry that is burdened with excess supply due to a raft of projects that have come online around the world over the past two years, according to Boston Consulting Group analyst, Andreas Kyrilis. This has caused LNG prices to plummet over 50 per cent from approximately $18 over the last two years. “Contract prices are usually indexed to oil prices,” says Gopal Balasubramaniam, oil and gas partner, KPMG. “They enjoyed their high at approximately $18 when oil was hovering at a dizzying $140. LNG in Asia now trades at roughly $8,” says Balasubramaniam. Pressure on prices has also increased due to falling demand from China and Japan—Qatar’s biggest customer—where nuclear reactors have been restarted following a three-year shutdown as a result of the Fukushima disaster.
With supply high and demand low, Qatar has to cater to a buyer’s market by agreeing to sell LNG at spot prices or re-negotiating agreements with countries such as India and Pakistan at terms more preferable to them. “It’s an attempt to keep market share and cover production,” says Balasubramaniam. While Qatar remains ideally suited to supply customers in Asia, a report by the Ministry of Development, Planning and Statistics say its geography has presented a challenge in delivering LNG to other global customers—Chubu Electric in Japan, KOGAS in South Korea and high demand areas in Europe, all of which Australia and the US have easier access to.
Qatar’s dominance of the LNG export market could be tested by both Australia and the US over the next few years. With a $250 billion investment in seven new plants expected to come online by 2018, Australia is forecast to soon have “the world’s most modern and technologically advanced LNG industry,” according to research by Accenture. “Significant LNG developments planned in Australia and Papua New Guinea could increase LNG capacity by up to 65 million metric tonnes (90 billion cubic metres) per year,” says Boston Consulting Group Analyst Andreas Kyrilis. The high level of investment needed at a time of low prices may slow Australia’s progress, though. “Australia’s plans to build capacity cost three to four times more what Qatar paid in the 90s. A lot of projects across the world, including theirs, are also being delayed or cancelled.” Skilled labour shortages in Australia have also led to higher production costs according to a study by the Brookings Institute’s Natural Gas Task Force; delays in the launch of projects “of up to two years should be expected,” says Kyrilis; Balasubramaniam says it might take even longer.
The US is also attempting to become a significant exporter and is completing LNG terminal projects on its eastern coast. At the moment the US produces what is considered low-cost LNG, mostly for its domestic market. “Ongoing advancements in shale technologies and the opening of the new Panama Canal could also make US exports competitive,” says Kyrilis. KPMG’s Balasubramaniam says the US’s ambitions with regard to the LNG export market are not yet clear enough to make an accurate assessment of its impact. “What the US wants to do is a mystery,” he says. “Investment in downstream products to create jobs is being deliberated. But there is also speculation it might become a net exporter soon. It’s very political; they need a long-term strategy.”
Even if competition in the global LNG market increases, with low debt and lower production costs than competitors, Qatar’s LNG-producing companies such as RasGas and QatarGas should remain the government’s primary sources of revenue. There will however be greater attention paid to ensuring that as much of that income as possible is retained until prices recover, says Balasubramaniam. “In 1998, the price of oil fell to $8 a barrel before picking up. But it’s safe to say that the days of $100 oil are gone and won’t be back for a while. There will be a focus on efficiencies and any kind of spending will be a lot more judicious now.”
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