Qatar is moving to reclaim its place as the world’s biggest LNG exporter, potentially jeopardising WA exports.
Plans to expand Western Australia’s liquefied natural gas industry could be facing a fresh challenge.
Qatar, the world’s leading low-cost LNG exporter, has moved to offer cheap gas to long-term customers ahead of committing to its own production expansion.
For local companies such as Woodside Petroleum and Santos, the prospect of competing with Qatar for new sales contracts is daunting because the Middle East country is sitting on the world’s biggest deposit of easy-to-extract gas.
Until last year, Qatar was the world’s biggest exporter of LNG, ceding that title to Australia after the development of a series of new LNG projects in WA as well as Queensland and the Northern Territory.
According to industry reports, the government of Qatar has decided it’s time to reclaim the title of world’s biggest LNG producer, unveiling a plan to build four new production facilities (trains) with a combined capacity of 50 million tonnes a year of LNG, which is more than double the size of Australia’s biggest project, the North West Shelf.
To ensure the expansion is profitable, Qatar is offering discounted long-term contracts at prices well below those required to ensure the profitability of new projects planned in Australia.
First reports of the Qatar expansion and price reductions were carried last month by The Australian Financial Review, which quoted leading London-based energy consultant, Fereidun Fesharaki, saying the time was right for Qatar to change its LNG pricing policy, given its planned expansion.
Dr Fesharaki said the new pricing policy was probably here to stay and should help it win long-term sales contracts before the end of the year (and more next year).
In a note to clients, he said other LNG producers such as Shell, Total and BP, would be “unable to compete with Qatar and certainly not for greenfield (new) projects”.
For Woodside Petroleum, which is edging closer to making a final investment decision on a series of LNG expansion projects, including Pluto 2, Scarborough and Browse, the prospect of a more competitive Qatar is a significant challenge in a market already buffeted by reduced demand in the wake of the COVID-19 economic slowdown and new entrants in the LNG market, such as the US.
Santos is another LNG producer planning an expansion project, with the development of the Barossa gasfield off the Northern Territory.
It, too, may have to rethink its plans if the long-term LNG price is forced down by Qatar’s price cutting.
LNG is sold in two ways.
• Limited quantities are sold through short-term (spot market) deals, generally to shift surplus production at a highly variable price.
• Long-term contracts (preferred), which enable producers to organise their financing while providing customers with an assured volume of gas at a known price.
Qatar opted to sit on the sidelines during Australia’s big expansion phase over the past decade, because the LNG price would have been crushed if it had tried to develop additional capacity at the same time.
It now appears that Qatar has decided it’s time to reassert its role as traditional LNG leader and price setter, getting in ahead of the next wave of Australian projects with a pricing lure that will be hard for customers to resist and even harder for higher-cost rivals to match.
In the gas market, short-term LNG prices are reported to have recovered to around $US4.50 per million British thermal units after plunging to less than $US2/mbtu as the COVID-19 pandemic started to accelerate in March.
Long-term LNG prices, which are indexed against the price of oil, are reported to have been cut by Qatar from $US9/mbtu to around $US6/mbtu to ensure it wins sufficient volume to underwrite the expansion of its LNG industry.
For Australian gas producers, the Qatari price challenge could mean a switch in focus from the highly competitive export market to selling more gas to domestic customers, something the Australian government has been advocating.
That may be easy for Queensland gas producers with their access to pipelines, but presents a hurdle for WA’s gas industry and its relatively small domestic market.
This further highlights the need to find a way for WA to sell gas to customers in eastern states, either by shipping or via a proposed but controversial transcontinental pipeline.
With the international traded gas market being filled by Qatar and other new entrants in the LNG industry, there is highly likely to be a fresh discussion around the pipeline proposal, which will need government funding in some form, or at least a government finance guarantee.
Lithium lags
LNG is not the only WA resource facing the challenge of rising production and the prospect of long-term low prices.
Once a star of the local mining sector, lithium attracted a large number of entrants keen to become part of the business supplying raw materials to the makers of batteries for electric cars (EVs).
The attraction, up to two years ago, was the price of lithium, which at one stage fetched more than $US20,000 a tonne when sold as lithium carbonate.
Today, thanks to overproduction and slow EV sales, lithium carbonate sells for around $US5,500/t, but the real problem is that the price is now seen as staying low for years.
Investment bank Morgan Stanley’s most recent commodity price forecasts were released on the same day that Elon Musk, founder and chairman of the world’s leading EV company, Tesla, held its forecasting event called Battery Day.
While Mr Musk was hugely optimistic, as ever, about EV sales, he repeated a demand for more battery metals, especially nickel and lithium.
Significantly, he also revealed plans for Tesla to develop its own lithium project in the US, which is precisely what WA’s lithium industry did not want to hear.
Morgan Stanley’s view is that lithium prices will continue to slip lower over the next two years, with a modest increase to around $US6,000/t from 2023.
But the bank also warned that lithium’s upside potential was capped by the large volume of latent hard-rock capacity, and continued brine expansion in South America.
Rather than WA enjoying a lithium boom, the outlook is for long-term tough times, which must have management of prospective entrants into the business, such as Wesfarmers, questioning the wisdom of getting involved with a business that has lost its growth appeal.
Blowback
Rio Tinto’s reputation has been bruised by the demolition of the Juukan Gorge Aboriginal sacred site, but until now it has been difficult to cost the issue.
Investment bank Goldman Sachs reckons it has an answer to the cost question, estimating that resolving the sacred sites question will add $US1 per tonne to the cost of producing iron ore in the Pilbara, while annual exports for each of the major producers will be cut by 5mt.
