Last week, Qatar Petroleum announced it planned to increase production dramatically from its huge North Field in the Persian Gulf.
The increase calls for the country's gas production to climb 30% by 2024, and that's going to have a huge impact.
Qatar is currently the global leading exporter of liquefied natural gas (LNG), a result of existing production from the North Field. It is also the first gas exporter in the world to put all of its gas into LNG, ending all exports via pipeline.
LNG is natural gas cooled to about -260°F to a liquid state, transported by specially designed tankers, then regasified at a receiving terminal someplace else in the world and injected into existing delivery pipeline networks. It allows a significant expansion in gas exports.
And the LNG market worldwide is accelerating rapidly. However, so is the expected supply over the next decade.
The Qatari increase, should the country follow through, could create an LNG glut internationally, thereby reducing the price, including for U.S. LNG exporters.
It also puts a fuse on an already very charged situation...
Qatar Is Being Blockaded by Its Neighbors
Qatar is currently at loggerheads with Saudi Arabia, Bahrain, the United Arab Emirates (UAE), and Egypt.
The four countries are demanding that Doha (Qatar's capital) break ties with Iran, end funding terrorism (a charge Qatar has vehemently denied), close the Al-Jazeera news service, and over a dozen other demands.
The Saudis have closed Qatar's primary overland line for trade, and all four of the nations have closed their respective air spaces for flights from Qatar, including all those by national carrier (and my personal favorite service in the region) Qatar Airways.
The strategic Strait of Hormuz, located where the Persian Gulf meets the Arabian Sea, remains open. This allows Qatar's LNG to move to market, along with much of the crude oil volume from Saudi Arabia and other Gulf nations further north.
The Strait has the UAE on one side of its narrow opening and Iran on the other. This guarantees it remains as a flashpoint.
But the Saudis and their allies are not likely to move to obstruct traffic in the face of the Iranian Revolutionary Guard Navy.
Quite apart from politics, Qatar relies on Iran for three other important LNG reasons.
First, the countries jointly develop the huge North and South Pars offshore gas fields, among the largest in the world.
Second, should pressure emerge at Hormuz, Qatar may need to rely on contract swaps allowing it to export LNG from Iranian ports south of the Strait in order to have any exports at all.
Third, as Iran develops its own gas and LNG projects, Doha becomes a more desirable location for joint access to capital.
Take, for example, this week's $4.8 billion project with French major Total SA (NYSE ADR: TOT) and Chinese CNPC, which I was just on TV explaining (click here for the full video).
Qatar, despite the current crisis, has the highest per capita wealth in the world and is a fast-rising challenger to the UAE's Dubai as the regional location to strike deals.
As Riyadh engineers a tightening of the sanctions, Doha will move closer to Tehran.
But that's not the only impact of Qatar Petroleum's announcement...
Once Again, U.S. Energy Companies Are Under Attack
The other impact of note recalls the OPEC November 2014 decision to defend market position and the subsequent collapse in oil prices. Then, one of the targets was U.S. shale oil production.
Looks like déjà vu all over again, because Qatar may throw a wrench into U.S. plans to move into the world LNG market.
Exporting LNG has been an expectation for some time. It would allow for a continuing increase in shale and tight gas production, with the additional volume moving into the export flow.
That flow had been intended for both Europe and Asia, the latter made possible thanks to the recently completed widening and deepening of the Panama Canal, which allowed exports from the Gulf Coast.
In both cases, the local markets provide higher prices than in the United States, although transportation costs temper this advantage.
Cheniere Energy Inc. (with the appropriate trading ticker symbol of LNG) currently has the sole operational LNG export terminal in the "lower 48" U.S. states.
But four others are under construction, and as many as 20 in total may end up being approved. Assuming, of course, that the export market justifies the expense.
Now, Cheniere has five major multibillion-dollar long-term sales agreements with some of the largest LNG importers in both Europe and Asia.
And those agreements also have some very intriguing clauses to provide pricing protection for bringing LNG to market.
You see, Cheniere and other American exporters are relying upon the establishment of guaranteed local spot markets to make their LNG volume and availability more attractive.
At present, the exports are not cost-effective against pipelined gas, although the expansion of an LNG network would open significant new markets...
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Whatever Qatar Does, U.S. LNG Will Be a Strong Competitor
Yet competition in Asia from huge projects on Papua New Guinea, five major LNG export developments in Australia, and expanded Sakhalin production from Russia, along with major networks already in place for MENA (Middle East North Africa) deliveries to Europe, are lowering expectations.
For its part, Qatar is dominant in both the European and Asian markets, with the largest fleet of tankers in the world, established infrastructure, and multiyear contracts.
Its decision to expand its LNG trade by some 30% is certain to put some downward pressure on prices.
U.S. companies note that Beijing has recently allowed its domestic importers to strike private deals with American exporters. However, some observers believe the Chinese may simply use the new option to leverage lower prices from Qatar.
Another element should be remembered as we watch whether Qatar delivers on the increasing gas production decision.
As the widening of the global LNG market unfolds, a rage of arbitrage and swaps will emerge quite unlike anything ever witnessed in the energy sector.
As I will explain when we reach this point, there will be a strong position for U.S. LNG...
Regardless of what Qatar (or any other gas-producing nation) ends up doing.
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About the Author
Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.