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Fast changing dynamics of global LNG market

Qatar witnesses a prosperous start to 2021, first scoring a major political goal by restoring diplomatic relations with Saudi Arabia and ending its almost 4-year long embargo. Following a political breakthrough come an unexpected revenue bonanza, which saw Doha happily riding the waves of spiking Liquefied Natural Gas (LNG) prices in Asia. The combination of both developments – Qatar casting away its pariah state and probably playing a more nuanced role as it finds itself between Saudi Arabia, Iran and the still-skeptical UAE, as well as its low-cost LNG production becoming a staple diet of North East Asian LNG demand has elevated the Middle Eastern state into worldwide limelight. All this, however, also means that in the manifold connections Qatar has been trying to build with Europe may start to slowness.

The January 2021 LNG spike in Asia was a combination of three key factors – low temperatures, low spot cargo availability and persisting COVID-19 ramifications. All three were vastly intertwined; low temperatures by themselves need not cause a market distortion if there is ample LNG production on the market. This wasn’t the case mid-January as long-term Brent-pegged, LNG deliveries were as usual. However spot cargoes were very few and those who missed out on them risked missing out altogether. Qatar’s competitors, due to their geographic location and previously concluded commercial commitments, could not reorient such volumes towards Asia.

The fact that Asia needed LNG urgently was further supported by the fact that January 2021 LNG arrivals have reached an all-time high of 28 million tons LNG. A whopping 23 percent of this came from Qatar and only 6 percent and 5 percent, respectively, from the United States and the Russian Federation. The oil-linked nature of Qatar’s LNG exports has for once turned out to be beneficial for the buyers at large, being naturally capped to the price of the global benchmark they could only increase as high as crude did. Luckily for Asian buyers nominating term volumes from Qatar lately, crude was largely stagnant amidst surging Asian LNG prices. For Qatargas this was an impressive tour de force after all the travails with Ras Laffan liquefaction trains necessitating unplanned maintenance.

Simultaneously to Qatar deluging the Asian market with its LNG cargoes, its supplies to Europe have plummeted by an unprecedented measure. After a gradual ramp-up of exported volumes, Qatar’s monthly LNG exports have averaged up to 1.95 million LNG tons per month in 2019 and for most of 2020. Qatar’s interest in having a safe outlet in Europe was genuine and seemed to usher further growth. In 2020, Qatargas has signed two important infrastructure deals with UK’s Isle of Grain LNG and France’s Montoir-de-Bretagne LNG terminals, in both cases booking their capacities for a period of 35 and 25 years, respectively.

Add to this Qatar’s 2019 storage and liquefaction agreement with Belgium’s Zeebrugge LNG terminal and one can see a fairly thorough plan on increasing LNG volumes going into Europe and staving off potential rivals. Fast-forward to January 2021 and Qatari LNG supplies to Europe, despite the Old Continent having a rather usual winter season, plummet 0.54 million tons LNG. The January 2021 result is not a one-off result, December 2020 exports to Europe are only marginally higher at 0.65 million tons LNG, throughout the winter of 2020/2021 Qatari supplies to Europe have fallen to a third of their former loads. Concurrently to Qatar fortifying its hold with some Atlantic Basin terminals, its spot deliveries to European buyers have suffered dreadfully, especially in H2CY20.

Interestingly, the highest Qatari LNG exports to Europe have ever gotten was in April 2020 when a total of 2.79 million tons LNG was loaded at Ras Laffan. It was roughly at that time when it had to decide which markets would it prefer to safeguard and, for obvious reasons, it chose to fight for those that yielded the highest profits. This meant exporting less to spot-heavy economies like Spain and focus on Belgium, Italy and the United Kingdom, gradually complemented by France. Reorienting its market reach on Atlantic consumers turned out to be a prudent assumption for Qatar – most of Russia’s oil-linked long-term pipeline contracts have started to reflect Brent plummeting in the spring months of 2020 exactly at a time when the Asian price upswing started.

Such a tangible market shift would surely incline Qatar’s LNG peers and rivals to seek a similar strategy and try their luck with Northeast Asia. Upon closer perusal, it becomes evident that Qatar is quite unique in the extent of its Asian pivot. Russia’s Yamal LNG exports towards China usually climb up in the summer months when the Northern Sea Route is navigable, on the score of which its December-January exports have more than halved compared to the peak season of July-September. LNG exports from the United States do not face such encumbrances and thus could see a similar upswing as the Qatari ones – and they did, though the monthly peak in terms of departures was reached in November 2020, two months before the price surge. January 2021 LNG loadings en route to Asia dropped back.

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