Qatar Financial Centre (QFC) recently presented the first in a series of Thought Leadership webinars to keep its business community informed in these uncertain times.
Refinitiv’s Global Head of LNG Research, Anne-Katrin Brevik, shared her insights on the economic impact of COVID-19 and the implications for the global and local markets with Henk J. Hoogendoorn, Managing Director, Financial Sector Office, QFC.
LNG outlook for rest of the year is uncertain, but Qatar remains a reliable business partner
The outlook for Qatar’s LNG exports this year has unique challenges amidst a global oversupply and significant disruptions caused by the coronavirus (COVID-19) for LNG consumers, Chinese firms as well as South Korean and Japanese industries.
Globally, the outlook for LNG for the rest of the year is highly uncertain, although Refinitiv still sees continued demand growth. LNG’s spot price has fallen of late thanks to increased competition, higher supply and a simultaneous drop in demand.
According to the most recent data available, Qatar has more than 80% of its LNG export capacity tied up in long-term contracts, mostly with South Korea and Japan. As both countries have been comparatively less affected by COVID-19 than China, long-term prices have remained somewhat stable but the decrease in volumes is notable. Export volumes dropped by 4% in February to South Korea and Japan and March is likely to follow that trend.
Amidst these challenges, Qatar remains well-positioned as a reliable business partner and low-cost supplier of LNG to the world. Production at its Ras Laffan facility continues unabated with no impact from COVID-19. Plans to build additional capacity, through the North Field expansion, are proceeding and will see Qatar build market global share in the coming decade.
The most significant impact on Qatar will likely come through weak oil prices, feeding through to oil-indexed long-term LNG contracts over the remainder of the year. The outlook for fundamentals in 2020 foresees the LNG supply glut to swell further, while COVID-19 represents the largest risk to demand. Tempering the outlook on fundamentals, US producers may have large shut-ins of LNG exports should prices turn negative or producers’ credit lines are significantly curtailed.
Pricing dynamics - what to expect
Asia’s LNG spot price has witnessed a break in the correlation between long-term contract and oil prices over the past one-and-a-half years. Historically, when Asian market fundamentals are very tight, the spot price moves more toward oil-price parity rather than the long-term contract price. Where the market is very loose, spot prices tend to fall and gravitate towards the European hub price. Looking forward, if the market tightens over a period of five to seven years for example, we can expect to see a closer correlation to oil prices.
Risk in relying on LNG market forecasts
For 2020, the global LNG supply glut is likely to swell further with COVID-19 representing the biggest downside risk to the demand forecast. Current forecasts show that as the supply overhang slows down, it will shrink and taper off starting 2021, and from 2023 the market is expected to be in balance.
This narrowing of fundamentals is being accelerated with multiple new projects as dozens in the US and several in other countries are being postponed if not canceled altogether. Globally, we are seeing a plethora of final investment decisions (FIDs) on LNG projects being held up, with buyers uncertain about future demand and running into immediate financial difficulties.
Implications of declaring force majeure
Long-term LNG contracts have a variety of force majeure clauses, which themselves are protected by principles of confidentiality. Recently, we have seen two cases, involving Chinese LNG importer CNOOC declaring a force majeure, as well as by Indian importers. In declaring force majeure, importers typically state the precise reason that falls within their individual clause. While these declarations can be contested, they are often accompanied by very strict legal procedures to minimise uncertainty. However, making this declaration is a major event in and of itself, which is highly unlikely to happen with concomitant spot purchases should they value their commercial relationships.
Qatar’s drive to find new customers
Traditional clients have had operations disrupted, which is leading Qatar to explore new markets and attain new customers. There are potential new importers in South Asia, like Vietnam and the Philippines. However, in terms of diverting previously spoken-for LNG cargoes to new spot markets, there appears to be limited immediate potential. Challenges exist in exporting to Africa and even South America. Argentina has been ramping up LNG production at the Vaca Muerta shale play, allowing them to reduce LNG imports and even export propane gas to Chile. There are potential customers in Brazil, but they are simultaneously ramping up domestic production. Meanwhile, Caribbean markets also have limited upside potential, given their proximity to the US and with it inexpensive competition.
Qatar stands the best chance to work with its future customers to develop their capacity to use more of the fuel over time. Some of the Asian tigers can stand to develop gas infrastructure further so they can ramp up use of clean-burning LNG.
Europe could also be an interesting growth area for Qatari LNG exports. Germany is projected to have two new import terminals ready within the foreseeable future. Although the EU has declared aspirations to be carbon neutral by 2050, politicians will likely have limited interest in gas as a bridging fuel in a climate neutral Europe. Local production trends may favor Qatari exports, with the Netherlands’ Groningen production falling and a halt foreseen by 2023. Simultaneously, gas may see a resurgence with Germany closing numerous coal-fired- and nuclear power plants, while Belgium and France will also see closures in the near term. Exacerbating this trend, several Central European countries are likely to increasingly favor LNG imports over reliance on fickle Russian supplies.
Building Qatar’s long-term advantage
Qatar stands to build an advantage over the medium term, should it proceed with its own expansion project while global projects see cancelations. Qatar is planning to increase production in the North Field, which is comparatively a low-cost operation that will see it increase overall production enlarge by nearly two-thirds.
Qataris has endeavored to build excellent relationships with its customers. It takes a long-term view, which dissuades US producers and others to enter discussions with their clients. By showcasing understanding of their clients’ precarious situation, Qatar is signaling its willingness to work together over the long-haul.
Promisingly, Qatar continues to strive ahead with building up its own LNG capacity, work together with existing customers on their current requirements, and maximize its reach to new potential customers. Looking beyond 2020, Qatar stands to benefit in erecting additional LNG trains at good prices and gaining more global market share with its stellar commercial reputation.