This op-ed was sent exclusively to EurActiv by Matthew Hulbert, senior fellow at the Centre for Security Studies at ETH Zurich.
"Having visited the Doha Diplomatic Club to speak at an energy conference late last year, I was struck by two things. The first was the number of football billboards promoting the 2022 World Cup bid: such bravado was clearly justified given what transpired in the smoke-filled rooms of FIFA a couple of days later.
The second was the number of billboards proclaiming Qatar's gleaming success to 'provide 77 million tonnes per year of LNG to the world'. In ball park terms this amounts to around 20% of global LNG supply.
Now admittedly, LNG is not quite as glamorous as the World Cup, but for an energy wonk, it still gets the juices flowing. Where Qatar goes from here will be an important indicator both for the future complexion of international gas markets and Europe's role within it.
LNG jewel losing its sparkle?
Qatar has long been the jewel in the LNG crown, and now occupies the top spot as the world's largest single producer of liquefied gas. But behind the glossy veneer of the gas billboards resides an awkward truth for Qatar: it would much rather not be trying to sell such prolific amounts of LNG onto global markets right now. It is basically stuck with the legacy of previous investment decisions made in the early 2000s when it decided to pitch for the top LNG spot. Ten years on, the 'magic' 77 million figure is supposedly on the verge of being reached; quite an achievement for the small Emirate to pull off, irrespective of the fundamentals to hand.
Obviously, making a virtue out of necessity is not new to producer states, and to be fair, Qatar was by no means the only producer that assumed gas was going to be the archetypal seller's market. Those willing to brave the liquefied world (Russia has bottled it to date) were destined to stand on an exalted arbitrage altar, able to play off competing consumers in the Atlantic and Pacific Basin at will.
But to say that the narrative has now changed would be an understatement: heading into 2011, we're not only stuck in a deep economic downturn blunting global demand, but the US is now 'floating' on a bed of unconventional gas production. Neither outcome is one that gas producers have relished, particularly as price pressures from the Atlantic have rebounded in the Pacific.
Qatar knows this better than anyone; the Emirate purportedly made more money in 2009-10 out of its slender 800,000b/d oil production (and associated products) than the entirety of its massive gas supplies due to softening wholesale prices.
But it's not quite panic stations yet in Qatar. A moratorium placed on any further production from 2010 onwards will help to stop some of the oversupply rot, and the Emirate still has massive gas reserves relative to a small population to fall back on. Such developments are still unnerving for the al-Thani dynasty however; Qatar is certainly open to any decent offers it can get to shift some gas.
Which must come as great news for Europe, I hear you say? What an opportunity to expand marginal supply relative to Russian dependency on the cheap... Very true; but at this stage the global gas glut has merely seen Europe lose significant ground to Asian supply contracts. As far as the Gulf is concerned, 'East is East', and nowhere more so than Qatar. This is a trend that could haunt Europe, and haunt them in the non-too distant future.
East is East...
A key reason for the shift East is not just future demand prospects, but the fact that Asian buyers are willing to give gas producers exactly what they want: linkage between oil and gas prices on long-term gas supply contracts. This stands in sharp contrast to European fundamentals that are rapidly becoming a tale of two markets (i.e. oil and gas) which has got gas producers in a spin.
This explains why the latest GECF meeting held in Doha (December 2010) was keen to roll out the same line proclaimed in Oran (April 2010); 'the oil link must be maintained wherever possible on spot price dynamics'.
Russia and Algeria are obvious litigants in this battle given their European supply bases, but Qatar has joined the ranks by stressing the need for long-term contracts on LNG deliveries as 'the best way for stability to be brought back to the market'. Maybe so, but from Qatar's perspective, this really is a case of 'hot air' – at least with relation to the Atlantic basin.
Merely preaching to European consumers to pay more than they have to will only ever have limited effect. If producers really want the oil link to be cemented then massive supply restraint would be the order of the day. This is not an option the Emirate is willing to contemplate. Or as the Minister of Energy, H. E. Abdullah, put it on the sidelines of the GECF meetings: 'no cartel'. Qatar is paddling its own canoe, not trying to 'swing' like Tarzan to save the Janes of the gas world.
And it's not exactly a hard call for Qatar to make, precisely because it's looking far beyond European markets to offload LNG. Supply still trumps price in Asia, which means oil-indexed contracts are still in vogue. Of the total 60 million tonnes of global LNG commitments made in 2009 by Qatar, two thirds purportedly went to Asia-Pacific buyers.
India stands as a long-term Qatari client - so much so that it has a security and defence pact in place with the Emirate. It expects to source 11.5 million tonnes of LNG by 2014, enhancing the 7.5 million tonnes it currently takes from the GCC state. But unsurprisingly, it has been China that has been making the most aggressive moves into the Qatari LNG. Both PetroChina and CNOOC have signed agreements designed to bring a total of 12 million tons annually to China. Sinopec is duly following suit. Beijing is unlikely to stop the Qatari charm offensive until it becomes Doha's export market of choice.
Train in motion?
The key question therefore is not whether Qatar will sell the bulk of its LNG under long-term contracts to Asia for demand security. That's a given. But whether it's smart enough to leave sufficient excess supply to perfect its arbitrage potential?
The jury is still out to some degree, but the Emirate managed to supply 15 of the 22 LNG importing countries in the first half of 2010 compared with seven countries a year earlier. Canada and Argentina were amongst some of the more exotic prospective deliveries.
'Old school' pipelines have also been put into the mix to feed regional demand. The Dolphin pipeline feeding Qatari supplies to the UAE came online from 2007, while tentative discussions have been held with Saudi Arabia, Bahrain, Jordan, Syria and Turkey with a view to future supplies.
All of which sounds impressive from an arbitrage perspective, but if you dig a little further into the numbers then it could be argued that Qatar has overstepped the mark by going 'too long, too fast' in Asia amid the gas glut panic of late. The government has claimed that all of its 77 million tonnes have already been sold under long-term contracts, which will no doubt help Qatargas to sleep a little easier at night, but it suggests that excess capacity from Qatar will be tight, or indeed, non-existent down the line.
That would be a shame for Qatar, and even more so for Europe. Canny European states should have taken a massive bet against the market to source large quantities of Qatari gas to increase elasticity of supply. This would not only act as a counterweight against Russian dependency in future, but feed liquidity on European wholesale markets. That option is no longer really on the table, not unless European states are willing to pay premium rates for LNG in the coming years. In effect, Europe has quite literally 'missed' the Qatari LNG train.
Optimists will no doubt point out that despite considerable downside risks pervading gas markets, Qatar might decide to lift its production moratorium before 2014. That's certainly possible, but any new production would probably be snaffled up by Asian consumers anyway. Thus if Europe really wants a stake in the Qatari game, it needs to follow Asia's lead and start talking politics and as much as markets to Doha. If nothing else, appealing to Qatari self-interest would be a good start.
For despite the obvious short-term appeal of sealing long-term contracts with Asia, Qatar's secular interests are still far better served by leveraging its arbitrage potential between East and West as markets tighten. Diverting marginal exports to the Atlantic Basin is the best way for Qatar to secure top prices in prime Asian markets; this means keeping capacity high and supply options open for LNG spot market dynamics. Qatar also has a vested interest in supporting Singapore to become a regional LNG trade hub to set Asian gas price indexes.
The Emirate would be perfectly placed to win, and win big from its liquefied position in Europe and Asia under a seller's market. 'Liquid players' will ultimately gain from 'liquid markets'.
Whether this all happens, or Qatar merely continues to ply its long-term GPA trade in Asia, remains to be seen. But without greater political engagement from the EU to buck the market, it's highly unlikely that Qatari LNG 'trains' will end up back in European stations. That will matter, not only for Europe, but Russia, North Africa and Central Asian producers who all stand to gain from such a development.
Conversely China will use Qatari supplies for its own leverage over Australasian, Central Asian and South East Asian supplies, firmly underpinning the global significance of the small Emirate.
Ultimately Qatari gas will be available to some degree or another, but whether Europe will be willing to pay the price needed to get it ahead of Asian consumers, or in the amounts required to create genuine elasticity of supply, remains doubtful. The champagne bottles will be opened in Moscow as a result; perhaps to celebrate hosting the 2018 World Cup, but no doubt to drink a toast to the 2022 hosts as well..."