Qatar well placed to handle increased global LNG supply: QNB

Doha

Qatar, which is the “lowest cost” liquefied natural gas producer in the world, has been well placed to handle the expected increase in global LNG supply, QNB said, which it says will increase significantly to 297mn tonnes per year in 2017 from 245mtpy in 2014.

Three major projects have recently been completed; over 100mtpy of LNG projects are currently under construction; and 600mtpy of projects are under consideration.

“However, the viability of many of these projects is being threatened by a number of factors, not least the recent collapse in crude oil (liquefied natural gas prices for long-term contracts are usually indexed to crude oil benchmarks) and LNG spot,” QNB said in a report yesterday.

“Qatar is well placed to compete with the expected increase in supply,” QNB said. It is the lowest cost LNG producer globally; already accounts for 31% of the global market (74mtpy in 2014); and sells most of its gas through long-term contracts, ensuring stability of supply.

The three major global projects that have recently been completed have faced some difficulties.

The 8.5mtpy Queensland Curtis LNG project in Australia was completed in 2015 after considerable delays.

A 4.7mtpy Algerian facility completed in 2014 is only producing at 50% of capacity due to a lack of feedstock.

A new 6.9mtpy facility in Papua New Guinea was completed in 2014 and a new 2mtpy facility started production in Indonesia in 2015.

There are currently 16 major LNG projects already under construction, which should add around 12mtpy in 2016 and 33mtpy in 2017.

Australia and the US are adding the largest amount of capacity. Australia made large discoveries of natural gas in the 2000s and invested heavily in LNG—$180bn of LNG projects are currently under construction with total capacity of 60mtpy. The US is currently building 50mtpy following its shale gas revolution, which has transformed the US from a hefty importer of natural gas to a soon-to-be exporter. As a result, a number of plants that were designed as LNG importing terminals are being converted to export facilities.

Some additional LNG capacity is also expected from Malaysia (4.8mtpy in 2015-16) and Russia (16.5mtpy in 2017-19).

“The plug is unlikely to be pulled on projects that are under construction,” QNB opined.

They already have long-term commitments from buyers for the sale of LNG and their breakeven oil price is estimated at around $50/barrel, just about manageable at present.

“However, we expect there to be some slippage in the completion date of these projects due to their complexity, rising costs as well as permitting and regulatory issues,” QNB said.

In addition to “under construction” projects, there are numerous projects being considered, including around 600mtpy of proposed projects, around 260mtpy of which are in the initial engineering and design phase.

However, according to QNB, very few of this massive volume of projects are likely to be considered viable for a number of reasons in the current environment.

First, the breakeven oil prices on these projects are estimated at around $70-80/barrel, well above current market levels.

Second, China is expected to be the main source of future demand growth for LNG and concerns about its economy slowing down may undermine the global LNG demand outlook.

Third, construction costs more than doubled in 2007-13 compared with 2000-06, with higher labour costs being a particular issue in the US oil and gas sector. Fourth, the large amount of new capacity that is already under construction seems to point to a likely oversupplied market until at least 2020, discouraging the approval of projects that are currently under consideration.

Fifth, buyers are reluctant to enter into long-term contracts in the current market environment as spot LNG prices are low and falling. Without long-term gas sales contracts in place, large-scale LNG projects are highly unlikely to be able to put the financing in place, making it hard to get these projects off the ground.

Some companies have already cancelled projects. For example, Royal Dutch Shell cancelled its $20bn Arrow project in Australia at the beginning of 2015 and Woodside has pushed back a decision on its Browse floating LNG project in Australia from 2014 to 2016 at least.

“In this environment, we expect few new LNG projects to be initiated in the short-term. LNG projects have a construction period of 4-6 years. Therefore, a delay in initiating new projects over the next year or two, should lead to tighter LNG markets in the early 2020s,” QNB said.

LNG capacity, the bank said, was expected to increase sharply up to around 2020 leading to a glut in supply, depressing prices.

“Qatar is in a strong position versus new producers thanks to its competitive pricing power and the long-term contracts it already has in place.

In the longer-term (say, by the early 2020s), the current pause in the initiation of new LNG projects could to lead to a tightening of the market as demand catches up,” QNB added.