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Alex Kimani

Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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Natural Gas Offers Lifeline For Distressed Gulf Oil Giants

Their budgets just don't add up anymore. Oil-rich Arab nations are in the throes of a deep economic crisis and facing gaping holes in their finances. Saudi Arabia needs the price of Brent crude to rise to $76 dollars a barrel while UAE needs it to hit $69, Bahrain $96, and Oman $87 to balance their books. Save for tiny Qatar, no Arab oil producer can balance its books at the current price of $40/barrel. GCC nations are now facing huge fiscal deficits, with Kuwait's deficit of ~40% of GDP the highest in the world.

To make matters worse, once free-flowing credit lines have started to shut down for some. A good case in point is Oman, which is struggling to borrow after credit-rating agencies listed its debt as junk. Jordan had to plead to receive a $2.5bn aid package from the Gulf, only half of what it got eight years ago. Meanwhile, no one from the Gulf appears willing to bail out cash-strapped Egypt or Lebanon.

In short, the countries are being forced to take pretty drastic steps.

Saudi Arabia has tripled its sales tax, raised petrol prices, and suspended a cost-of-living allowance for state workers. Still, its budget deficit could exceed $110bn this year (16% of GDP). The Algerian government has said it will slice spending in half while Iraq's new prime minister has vowed to take an ax to government salaries. 

Yet, not all GCC states are facing the same level of pain. Specifically, nations rich in natural gas are faring much better thanks to improving commodity prices. Indeed, Qatar, the largest exporter of LNG in the world, needs only $39/barrel to balance its books. 

Natural gas prices have surged from their June low of $1.48/MMBtu to trade at $2.60/MMBtu due to increasing demand and falling inventories. Related: Oil Markets Brace For Tough End Of Year

Source: Business Insider

Fighting for market share

Jousting for market share at a time of massive supply/demand imbalances was the key reason why oil markets recently entered uncharted waters after dipping into negative territory. Leading natural gas producers have, however, been treading on the same path despite natural gas recently sinking to multi-year lows due to a major supply overhang. 

Indeed, back in May, Qatar remained adamant that it will not curb its LNG exports as it battled for market share against the likes of Australia, the United States, Russia, and Norway. Related: Can Kuwait’s New Ruler Reform The Country?

Qatar began sending its LNG exports to northwestern Europe in February after the coronavirus pandemic engulfed its main Asian markets and crippled demand. However, it was not long before Europe itself started feeling the heat of the health crisis with demand sharply plummeting in April. The Persian Gulf state even borrowed a leaf from its oil brethren by storing its excess LNG cargoes--with the country's NOC, Qatar Petroleum, storing LNG inventories at Belgium's Zeebrugge import terminal where it has booked all the import capacity till 2044.

Never mind the fact that storing LNG is much more expensive—and therefore a much shorter-term solution—than storing crude oil due to the former's "boil-off" rate, which can lead to daily losses in the range of 0.07% to 0.15%.

Qatar's low production costs, especially at its Ras Laffan plant, allow it to be the "most efficient" LNG producer and leaves it better placed than other producers in a battle for market share. Qatar exited OPEC in January 2019 as it sought to play a more prominent role on the global scene. Though a member of Gas Exporting Countries Forum (GECF), the organization lacks the decisiveness of OPEC, usually preferring to take a hands-off approach.

But Qatar has not stopped there. The country has recently announced that it will go ahead with its massive liquefied natural gas (LNG) capacity expansion. In effect, Qatar is betting that it can beat other LNG producers through low production costs and co-production of condensates and liquefied petroleum gas (LPG). 

But Qatar will soon have to contend with fierce competition from closer to home as Saudi Arabia and the UAE join the fray. Last year, Saudi Arabia launched the biggest shale gas development outside of the United States with Saudi Aramco unveiling plans to pump $110 billion over the next couple of years to develop the Jafurah gas field, which is estimated to hold 200 trillion cubic feet of gas.

Meanwhile, the UAE plans to become self-sufficient in gas supply by 2030 by developing the giant Jebel Ali reservoir, the world's largest discovery of its kind in 15 years.

By Alex Kimani for Oilprice.com

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  • Mamdouh Salameh on October 06 2020 said:
    Qatar is the only bright spot in a region sagging under the weight of the destructive damage that the COVID-19 pandemic has inflicted on its economies. Furthermore, it will be the only Gulf country that will not book a budget deficit in 2020. Compare this with Saudi Arabia who will end 2020 with a budget deficit estimated at $116 bn.

    Brilliant business acumen and great strategic thinking have enabled Qatar to shift the focus of its future wealth and prosperity from oil to LNG. By concentrating its efforts on developing its huge proven reserves, the world’s third largest after Russia and Iran, it was able to create a fully-owned integrated company with its own LNG plants and an LNG fleet already paid for. That is why Qatar has been for years the world’s top producer and exporter of LNG and the cheapest and most efficient producer as well. And to consolidate its top rank, it is going ahead with expanding its LNG production capacity from 77 million tonnes (mt) currently to 123 mt in three years. In effect, Qatar is betting that it can beat other LNG producers through low production costs and co-production of condensates and liquefied petroleum gas (LPG).

    When it comes to crude oil, Qatar is a relatively small producer producing up to 1 million barrels a day (mbd). However, its budget breakeven oil price is $39 a barrel compared for instance with $80 or even higher for Saudi Arabia.

    Neither Saudi Arabia nor the UAE can compete with Qatari LNG because whatever gas reserves they both have can’t match Qatar’s and furthermore they will be needed domestically for the diversification of their economies. Moreover, Qatar’s LNG will eventually play a pivotal role in the diversification of both the Saudi and the UAE economies because of proximity once relations between them are back to normal.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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