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Simon Watkins

Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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Why Qatar Is Better Off Without OPEC


One of the many disasters for Saudi Arabia that has come after the accession of Crown Prince Mohammad bin Salman (MbS) as its effective leader was the ostracism of neighboring Qatar, to such a degree that the tiny but influential emirate left OPEC in December last year after 57 years as a core member. Not only did this compound MbS’s growing reputation as being politically and economically reckless but it also pushed the gas-rich Qatar out of the increasingly small U.S.-coalition in the Middle East straight into the welcoming arms of Iran and its friends. As a result, plans have been re-energized by Russia for a newly powerful ‘Gas OPEC’ – formed of the Gulf Exporting Countries Forum members, with Russia, Iran, and Qatar centre-stage – and have led to Qatar working alongside Iran on optimizing the two states’ gas fields.

The main gas resource of each – by a vast amount – is the shared 9,700 kilometer (km) non-associated natural gas basin, of which 3,700 km forms Iran’s South Pars field, with the remaining 6,000 km being Qatar’s North Field. Although the overlap across the border between Qatar’s eastern-most offshore phases of North Field and Iran’s western-most offshore phases of South Pars does not cover the entirety of the gas reservoir – the world’s largest natural gas field, holding an estimated 51 trillion cubic metres (Tcf) of gas and 7.9 billion cubic metres (bcm) of gas condensates – it is nonetheless significant. Until Qatar withdrew from OPEC last year, Iran had been developing its South Pars area at full tilt, whilst for much of that time, Qatar had a moratorium in place on development of the North Field. The year after Iran was able to really expedite the pace of development on South Pars by dint of new foreign partners following the implementation of the Joint Comprehensive Plan of Action (JCPOA) on 18 January 2016, the moratorium was lifted but, according to Qatar at the time, Iran’s no-holds-barred development of its South Pars site was damaging the recovery rate in Qatar’s own North Field overlap area. Related: Trump Vows To Protect Syrian Oil Fields From ISIS

In June of last year, though, once the U.S. had announced its withdrawal from the JCPOA and the re-imposition of sanctions, senior figures from Iran’s Petroleum Ministry and Qatar’s Energy Ministry began a series of meetings at which a plan for co-operation between the two states was eventually agreed at the end of last November, a senior source who works closely with Iran’s Petroleum Ministry told OilPrice.com last week. “It covered two main areas: first, Iran agreed to stop the aggressive recovery tactics that it had been using along the border areas [demarcating South Pars and North Field] and second Qatar agreed to sit down with the Russians to discuss future co-ordination of gas export destinations for Iranian and Qatari and Russian gas flows, marketing and pricing,” he said. “At that time, Russia had pledged to give Iran US$50 billion per year in exchange for having control over its key oil and adjunct gas sites and it also offered assistance to Qatar if and when it needed it as a result of the Saudi-led actions against it,” he added.

Consequently, the way is clear for Qatar – the world’s top exporter of liquefied natural gas (LNG) - to fully engage on a full expansion of its North Field resource without fear of what Iran is up to. In broad terms, Qatar – through its Qatar Petroleum (QP) corporate proxy – is targeting an increase over the next five years in its LNG production to around 110 million tonnes per annum (mtpa) from the current 77 mtpa, principally by building four new mega-train production facilities of just over eight mtpa each. With invitations to bid for the whole or parts of this project having been sent out in August, a number of international firms have now been shortlisted but QP is still reserving the right to go it alone, depending on the relative attractiveness of the offers received. Although the specific details of the offers have not yet been made public, OilPrice.com understands from various Gulf legal sources with very close knowledge of the ongoing process that preference is being given to companies that fulfill three key criteria. The first of these is that they need to commit to 10 year-plus contracts to buy dramatically increased amounts of LNG from Qatar, with the initial contracts being of the ‘take or pay’ model (the buyer under a long-term contract pays for the contracted amount whether or not he ships and uses it or not). This is not only because the emirate will have to sell the extra 33 mtpa that will be produced by the end of 2024, according to the plans, but also because another 33 mtpa or so will be available on top of that due to the expiration of some existing contracts in the next five years. Related: Iran’s $280 Billion Sanction Skirting Scheme

The second criterion is that there will be a premium on pricing of at least 10 percent over the mean average spot price for LNG over the previous 12 months in the specific region to which the companies send the LNG shipments. Given this – and the long-running Asian LNG premium over trading hub prices - Qatar understandably wants to increase its share in the Asian market because it expects the ongoing broad-based growth there to continue to prompt increasing orders for LNG. Indeed, there are a slew of new LNG-related projects planned across the region and, according to International Energy Agency figures, southeast Asian countries, in particular, will increasingly drive LNG demand in the coming 10 years or so, with the region set to become a major net gas importer by 2040, at around 10 bcm of gas. Qatar also sees Asia (especially China, alongside Russia) as a vital resource for off-the-cuff financing, technology, and associated products buying power.

The final criterion is that there will be specific commitments to building out other areas of Qatar’s economy, including its oil and petrochemical sectors. Aside from the interest already shown by the usual Chinese and Russian players, OilPrice.com understands from sources close to proceedings that other companies that have already offered QP stakes in their own assets to secure a stake in the project include France’s Total, the U.S.’s Exxon Mobil, Anglo-Dutch Shell, and Italy’s Eni. This broader range of companies reflects the recent geographically hedging out of risk by Qatar in light of the soft tone of LNG pricing in recent times. Specifically, in this context, QP finalized an agreement for unloading services at Belgium’s Zeebrugge LNG Terminal, securing its full capacity through 2044, and is looking to do the same in the U.S. following the relative success of its US$10 billion Golden Pass LNG export terminal in Texas.

By Simon Watkins for Oilprice.com

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