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Qatar Moves to Defend Market Share

World’s largest LNG producer takes bold steps towards regaining market dominance currently at risk from Australia and the United States

New Reserves at North Dome Gas Field

Following appraisal work at the North Dome Gas/Condensate Field, Qatar confirmed the results will support raising the country’s nominal production capacity from the current 77 million tonnes per annum (mtpa) to well above 100mtpa. The chief executive of state energy giant Qatar Petroleum, Saad al-Kaabi, said in a news conference in Doha on Monday that North Dome – which is part of a wider gas play shared with Iran (which calls its part South Pars) – now contains confirmed gas reserves exceeding 1,700 trillion cubic feet.

High quality, stable reserve base

Given the relatively shallow waters of the Persian Gulf, the play’s high reservoir quality and the mature infrastructure already in place, Qatar Petroleum is supremely confident to be able to start with the selection process of the main contractor to build two additional LNG mega-trains with a combined capacity of 16mtpa.

Robust expansion strategy contrasting conservative debottlenecking plan of early 2017

Qatar is thereby clearly pursuing a strategy of robust capacity expansion, contrasting the much more conservative debottlenecking project to squeeze an additional 10mpta out of existing facilities originally mulled in early 2017 (a drilling moratorium at North Dome was still in place at the time). Beyond yesterday’s initial pledge, which would swiftly raise capacity to 93mtpa by around 2024, the total additional capacity to be installed at Ras Laffan is planned to rise to 110mtpa by around 2025 and potentially 126mtpa by 2027.

Qatar established market dominance since the early 2000s

Although Qatar managed to dominate the global LNG market in the early 2000s, later consolidated by additional demand created by the Fukushima nuclear disaster and a pre-2014 global commodities boom, that enabled it to lock buyers into long-term and inflexible supply contracts (e.g. cargo diversions were not permitted), its market influence has since suffered some erosion.

However, market influence has suffered some erosion

In North America, new flexible supply entered the market with Sabine Pass in 2015 whilst in the lucrative North Asia region new Australian capacity added considerable competition, too. Concurrently, high-growth markets closer to home – namely Pakistan, India and Bangladesh – proved extremely price conscious and demanded more flexible terms and lower prices, a cue also adopted by some European buyers after legacy contracts expired.

Expansion aimed at applying pressure on competitors and curb expansions elsewhere

Qatar’s capacity expansion is likely to apply considerable pressure on competing LNG producers post-2025. Fortunately, its production costs are reputed to be among the lowest in the world, so that it can aim to reassert its market dominance that way. We expect Australia’s production to reach equivalence with Qatar’s from next year (Ras Laffan produces slightly above nameplate capacity) until the first two new trains reached their stride in 2024.

At the same time, US investors are likely to become more hesitant to continue with their own plans to expand capacity if they risk protracted oversupply as their feedstock is to considerable extent sourced from volatile shale gas production. As such, the move to expand capacity is primarily a move to defend – and potentially expand – market share. We also highlight that some of the initial capacity installed at Ras Laffan will have surpassed the 25-year mark by the time the new trains are currently scheduled to be commissioned, so that some capacity could end up being replaced by the new facilities instead of added to, depending on market conditions.

Qatar Petroleum set to be selective on investment structure, exploring all options

An interesting factor will be the investment structure for the new capacity. Oil majors already heavily invested in Ras Laffan – chief among them ExxonMobil, Shell and Total – are keen to see the expansion take place. Indeed, it was these investors who pushed for debottlenecking in 2017. In a Platt’s interview last month, al-Kaabi would not be drawn on how Qatar Petroleum intends to structure investment, affirming that any partnerships would be contingent on the value they would provide to Qatar Petroleum, including “an offtake [arrangement]”. In our view this is particularly noteworthy because it implies the potential of Qatar Petroleum beginning to sell LNG based on a similar tolling model seen in the US to reduce its exposure to risks in a market more crowded than in 1996 when Ras Laffan’s first train was commissioned.