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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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$60 Billion LNG Mega Deal Marks Chinese Influence In Middle East

  • Qatar has gradually moved closer to China and is continuing to do so.
  • The latest US$60 billion+ deal LNG supply deal between Qatar and China takes relations between the two countries to new heights.
  • By securing a greater foothold in Qatar’s North Field East, China will gain an unparalleled hold over the biggest gas reservoir anywhere in the world.
Qatar LNG

In a world now where several major economies may need huge quantities of gas delivered very quickly and with very little notice, Qatar, as the top liquefied natural gas (LNG) exporter occupies the same sort of ‘swing producer’ position in the global gas market that Saudi Arabia used to hold in the oil market. Given what is at stake for major industrialised nations in the West and in the East, there is little wonder that Qatar has been generally careful to tread a diplomatic path between the effective leaders of these two spheres of influence: the U.S., and China. In recent months, though, exacerbated by the energy supply exigencies resulting from Russia’s invasion of Ukraine, it appears that Qatar has gradually moved closer to China and is continuing to do so. The latest mammoth LNG supply deal between the two countries adds further weight to this view. The US$60 billion+ deal involves state-owned petroleum company, QatarEnergy, supplying the China Petroleum & Chemical Corporation (Sinopec) with 4 million metric tonnes per annum (mtpa) of (LNG) every year for 27 years, starting in 2026. It is China’s longest LNG supply contract and one of its largest in terms of volume. It is also the first supply deal to be announced for the Emirate’s North Field East project, according to Saad Sherida al-Kaabi, president and chief executive officer of QatarEnergy, and the Emirate’s Energy Minister. “We are very happy about this deal with Sinopec because we have had a long-term relationship in the past and this takes our relationship to new heights, as we have a sales and purchase agreement that will last into the 2050s,” he underlined. 

Related: UAE To Cut Oil Supply To Asia By 5% In December

The deal follows a string of similar deals in recent months that started in earnest – and with a degree of foresight that seems more than coincidental – several weeks before the Russian invasion of Ukraine that began on 24 February 2022. The skyrocketing gas prices that ensued across the globe had been miraculously not just foreseen by China, Russia’s closest ally, but also insulated against by Beijing through LNG deals with Qatar and others. March 2021 saw a 10-year purchase and sales agreement between Sinopec and Qatar Petroleum for 2 million mtpa of LNG, as reported on and analysed at the time by OilPrice.com. December 2021 saw another deal between China and Qatar, also covered in depth by OilPrice.com, this time between QatarEnergy and Guangdong Energy Group Natural Gas Co for the supply of 1 million mtpa of LNG starting in 2024 and ending in 2034, although it can be extended. 

It seems unlikely that Qatar would be naïve enough to see such deals at such a crucial time in world history purely in business terms. Situated between Saudi Arabia on one side and Iran on the other, the Emirate has previously been very careful not to side too overtly with either the U.S. and its allies (including up until recently, Saudi Arabia) on the one hand, or China and its allies (including Iran) on the other. However, the leadership of the Emirate seems to be in denial that the more a country becomes involved with China, the more likely it is to end up in ‘Hotel California’-type deals – ‘You can check out any time you like/But you can never leave’ - through funding associated with its multi-generational power-grab project, ‘One Belt, One Road’. Perhaps, like everyone caught up in such deals, the leadership of the Emirate does not believe the same thing will happen to them.

This style of deal has been used by China across the globe to enable Beijing to secure key strategic tracts of land or sea in lieu of debts owed or investments made - including most notably, Iran’s major airports and naval ports under the 25-year deal with China, Sri Lanka’s Hambantota Port, and Djibouti’s Doraleh Port, among others. It is apposite to note that this latest LNG deal between Qatar and China has also been flagged by senior Qataris and Chinese as being a key component for an ‘integrated partnership in the North Field East [project]’. Sinopec itself has indicated that it could be involved in negotiations for a stake in this massive field. Several local news sources have also stated that China’s national oil majors were in advanced talks with Qatar to invest in North Field East.

If one was playing ‘China’s Middle Eastern oil and gas resources’ bingo then one’s card would be filling up fast. But China’s strategy is not as haphazard as a game of chance, as it is focused on building up strategic assets along the old land and maritime ‘Silk Road’ routes that form the basis for today’s ‘One Belt, One Road’ (OBOR). The reason, incidentally, why there has been a shift in some of the media away from using the term ‘One Belt, One Road’ to utilising the term ‘Belt and Road Initiative’ (BRI) is that China prefers it that way, as do its exceptionally generous advertisers, as Beijing regards ‘One Belt, One Road’ as sounding too imperialistic and colonialist. Nonetheless, China’s project is for ‘One Belt’ and ‘One Road’ and it is Beijing’s ‘Belt’ and Beijing’s ‘Road’ that China is referring to here.

By securing a greater foothold in Qatar’s North Field East, China will gain an unparalleled hold over the biggest gas reservoir anywhere in the world, given its existing control over Iran’s South Pars field because the two fields are the two halves of one great gas reservoir. The whole gas field is 9,700 square kilometres, holding an estimated 1,800 trillion cubic feet (51 trillion cubic metres) of non-associated natural gas and at least 50 billion barrels of natural gas condensates. Qatar’s 6,000 square kilometre section – the ‘North Field’ – is the cornerstone to its world-leading LNG exporter status. Iran’s 3,700 square kilometre section – ‘South Pars’ – already accounts for around 40 percent of Iran’s total gas reserves – mostly located in the southern Fars, Bushehr, and Hormozgan regions – and about 75 percent of its gas production.

Lest there be any misunderstanding about the true intention of all these manoeuvres by China, January this year saw foreign ministers from Saudi Arabia, Kuwait, Oman, and Bahrain, and the secretary-general of the Gulf Cooperation Council (GCC), arrive in Beijing for a five-day visit to push ahead on negotiations over the China-GCC Free Trade Agreement (FTA). At these meetings, the principal topics of conversation were to finally seal the China-GCC FTA and a “deeper strategic cooperation in a region where U.S. dominance is showing signs of retreat,” according to local news reports.  October then saw the Shanghai Cooperation Organization (SCO) summit at which China sought to further cement its influence with several of the world’s leading players in the oil and gas sector. 

These included not just the stalwart full SCO members of Russia, Kazakhstan, and India (which was handed the presidency of the organisation for the coming year) but also new full member, Iran, whose new status in the group was announced at the end of the summit. Additionally, and crucial to China’s long-term plans for the SCO that run alongside its multi-generational OBOR power-grab project, memoranda of understanding were signed granting Saudi Arabia, Qatar, and Egypt, among others, the status of SCO dialogue partners. An agreement was also reached on admitting, among others, Bahrain, the UAE, and Kuwait as upcoming SCO dialogue partners. 

Before these latest developments between Qatar and China, hopes had been high in Europe that it could call upon the government in Doha to help it deal with possible gas supply shortfalls in the wake of sanctions on energy supplies from Russia. High-level delegations from Germany and France had been involved in several parallel negotiations to make deals that would secure gas supplies throughout the upcoming winter and beyond. However, in the middle of October, al-Kaabi – in the wake of the deals already signed by that time with China, and seemingly with an eye on the deals to come from Beijing - stated clearly that Qatar will not divert gas that is already under contract with Asian buyers to Europe this winter.

By Simon Watkins for Oilprice.com

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  • Mamdouh Salameh on November 29 2022 said:
    The Qatari leadership is, in my opinion, one of the most astute business groups in the world and also one of the politically savviest in the world. It has been navigating its geopolitical and business cruise with the skill of a great skipper. The latest 27-year mega deal Qatar signed with China to supply it with 4.0 million tons of LNG annually (mt/y) starting in 2026 is no exception.

    Moreover, no one should be surprised by the deal. After all major economies need large volumes of gas to keep their economies functioning and China is the world’s largest economy based on purchasing power parity (PPP).

    The global gas and LNG market is getting tighter by the day. The competition for LNG is set to intensify over the next three years due to an underinvestment in supply. Long-term LNG contracts that start before 2026 are reported to be already sold out, which is worrying for LNG buyers because these types of contracts offer stable pricing and reliable supply for many years. The report notes that there is little new supply coming online before 2026 even from major exporters like the U.S. and Qatar. Meanwhile, Europe is desperately trying to replace Russian pipeline gas with LNG, further exacerbating the global shortage of fuel.

    Another indicator of a tight gas market is that 10-year LNG contracts are currently priced at 75% above 2021’s rates according to a report by the Oil & Gas Journal.

    Because of shortages, there is a huge competition for whatever LNG is in the market and a real possibility of LNG prices shooting up further.

    The China deal with Qatar is indicative of the competition for the remaining LNG in the market before additional new capacity comes online from 2026 onwards.

    That is why the proposed EU gas cap is doomed to fail miserably. In fact, it may never ever take off and will be consigned to the waste basket.

    Dr Mamdouh G Salameh
    International Oil Economist
    Global Energy Expert

Leave a comment

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