Qatar’s Huge New Long-Term LNG Contracts Are Crucial for Both China and the West

Although the U.S. and China are indirectly involved in the ongoing Russia-Ukraine and Israel-Hamas wars, the conflict between the world's two leading Western and Eastern powers has not itself turned hot - yet. There are many senior officials on both sides who believe it is only a matter of time before it does, with the consensus being that it will follow the conventional war template seen in the current Ukraine conflict in the first phase at least. As recently as March, Admiral John Aquilino, head of the U.S.'s Indo-Pacific Command, said he believes that China's military will be prepared to invade the contested territory of Taiwan by 2027. Given this, liquefied natural gas (LNG) looks set to remain the world's emergency energy source, as it became after Russia invaded Ukraine, as analysed in full in my new book on the new global oil market order. It is readily available in the spot markets and can be moved quickly to anywhere required, unlike gas or oil sent through pipelines. Unlike pipelined energy as well, the movement of LNG does not require the build-out of vast acreage of pipelines across varying terrains and the associated heavy infrastructure that supports it. Against this backdrop, the competition between the U.S. and its allies and China and its partners for upcoming long-term LNG contracts from Qatar will be intense.

Even without any new major conflict in the next few years, global demand for LNG is projected to increase by more than 50 percent by 2040, according to oil and gas major Shell. Before the U.S. became the world's biggest exporter of LNG at the end of last year, Qatar had long held that position, only occasionally relinquishing the top spot to Australia. The Emirate's importance is set to be boosted further as the outlook for the U.S.'s LNG exports remains uncertain, with a pause on approvals of permits for new LNG projects still in place. Together with this, an indefinite pause also remains on U.S. exports of LNG to non-free trade agreement countries. Many of these are in Asia, and any lengthy continuation of this LNG exports pause would be devastating, forcing them to continue their use of coal for power generation or increasing reliance on the Middle East and Russia for supplies, according to recent comments from the Asia Natural Gas & Energy Association. Although Europe is presently well provided with LNG, the balance in its supply chain remains a complex and delicate one, even without any further escalation in conflict from Russia on its eastern flank or from increased competition in demand from Asia. Related: Oil Price Plunge Hits BP and Shell Shares

As it stands now, Qatar will account for at least 40 percent of all new LNG supplies across the globe by 2029, according to recent comments from its government. These projections are in line with independent industry figures, with the huge increase in production set to come from the ongoing expansion of its North Field projects. This 6,000 square kilometre field is one part of two sites that constitute the world's biggest gas field. The other 3,700 square kilometre section is Iran's South Pars gas field, which accounts for around 40 percent of the Islamic Republic's total estimated 33.8 trillion cubic metres (tcm) of gas reserves and about 75 percent of its gas production. Qatar's North Field expansion program will see six major new developments in the North Field East (NFE) and North Field South (NFS) to 2029. Four new 'trains' (production facilities) - each with 8 million metric tonnes per annum (mtpa) - will be built on the NFE site, and two (with the same production capacity) in the NFS site, totalling 48 million mtpa of new LNG production. At the end of February, QatarEnergy announced another set of projects - focused on its North Field West (NFW) - that will increase its LNG output from the current 77 million mtpa to 142 million mtpa before the end of this decade. This compares to the 404 million mtpa of LNG traded globally in 2023 and to industry estimates that this figure will reach around 625-685 million mtpa in 2040. It is with an eye on these NFW sites that Qatar very recently announced that it will very shortly sign more long-term LNG supply deals to add to the 25 million tonnes of sales secured last year.

However, there is no guarantee that the Emirate will award the contracts to the West. It has long been forced to play a delicate diplomatic balancing act between the two great Middle Eastern powers (Saudi Arabia and Iran) and their principal superpower sponsors (the U.S., up until relatively recently, and China, respectively), positioned as it is directly between the two big regional players. In the lead up to Russia's invasion of Ukraine, China was engaged in a flurry of activity to expand its sources and methods of gas supply, as also analysed in full in my new book on the new global oil market order.  This began in March 2021, with the signing of a 10-year purchase and sales agreement by the China Petroleum & Chemical Corp (Sinopec) and Qatar Petroleum (QP) for 2 million mtpa of LNG. December 2021 saw another major long-term contract for Qatar to supply China with LNG, on that occasion a deal between QatarEnergy and Guangdong Energy Group Natural Gas Co for 1 million mtpa of LNG, starting in 2024 and ending in 2034, although it could be extended. Quite aside from ensuring a diversity of gas supply - and very quick supplies if necessary - these deals (and later ones) with China subtly shifted Qatar at that point into the China-Russia-Iran sphere of influence, as far as the U.S. was concerned. This was especially concerning for Washington as this meant an alliance between the world's top LNG exporter at the time (Qatar) and one of the world's top holders of gas reserves (Iran), both of which were founding members of the 11-member Gas Exporting Countries Forum (GECF), together with Russia. The deals also further inextricably linked this huge combined global gas resource with the world's biggest buyer of energy products over the past two decades or more - China.

Consequently, the end of March 2022 saw the first in a series of strategically crucial meetings for Washington and its allies with senior representatives from Qatar aimed at securing vital LNG supplies urgently for the West and also at moving the Emirate more decisively into the U.S.'s sphere of influence. Following one such meeting in March - between Qatar's Emir, Sheikh Tamim bin Hamad Al Thani, and German economy minister, Robert Habeck - President Joe Biden reiterated his view expressed in January of Qatar as a "major non-NATO ally". Several more business and political 'carrots and sticks' were laid out by the U.S. to Germany and Qatar designed to ensure that the 2022 invasion of Ukraine by Russia did not end up as consequence-free as its 2014 invasion of the country, as also detailed in my new book. May 2022 saw Qatar sign a declaration of intent on energy cooperation with Germany aimed at becoming its key supplier of LNG. These plans would run in parallel with, but were likely to be finished significantly sooner than, the plans for Qatar to also make available to Germany sizeable supplies of LNG from the Golden Pass terminal on the Gulf Coast of Texas. QatarEnergy holds a 70 percent stake in the project, with the U.S.'s ExxonMobil holding the remainder. Following on from these developments, December 2022 saw two sales and purchase agreements signed between QatarEnergy and the U.S.'s ConocoPhillips to export LNG to Germany for at least 15 years from 2026.

The fact that these LNG supplies to Germany involved a major U.S. company working with Qatar's major energy firm told the energy market - and China and Russia - three key things. First, from the perspective of energy buyers in Europe, Washington was not going to allow them to return to a situation in which the continent - and its effective leader, Germany - was bankrolling much of the Russian state through huge imports of its gas and oil. Instead, they could rely on the U.S. and its network to provide whatever was needed. Second, Washington was also not going to stand by while China hoovered up all available energy supplies at the expense of both the U.S. and its allies. And third, that the new global oil market order had reached a tipping point, so it was time to pick a side. Despite this, however, given its precarious geographical and geopolitical position, nothing can be taken for granted on Qatar's new LNG awards. November last year saw it strike another 27-year supply deal with China's Sinopec for 3 million mtpa.

By Simon Watkins for Oilprice.com

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