Easwaran Kanason

Co - founder of NrgEdge
Last Updated: May 16, 2020
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Business Trends

Qatar, in size, is only 0.5% the land/ocean mass of Saudi Arabia. Yet, despite its size, it punches well above its weight in the international arena, just like its neighbour. Most of this is down to one thing: liquefied natural gas. Qatar is the world’s leading LNG producer and exporter in the world, and that vast wealth has fuelled the dramatic transformation of its economy since 1996 when the first shipment of Qatari LNG set sail for Japan.

But uneasy lies the crown. There are usurpers to the throne. Australia, after over a decade of overstuffed budgets and overextended deadlines, is hot on Qatar’s heels. In some months of 2019, Australian LNG production and exports actually exceeded Qatar’s. And coming up both Australia and Qatar’s back rapidly is the US. The shale revolution not only transformed US oil industry; it did the same for the US natural gas industry as well. The abundance of onshore natural gas liquids has fuelled an LNG export boom in the US, with some two dozen projects in various states of completion and development. In 2019, the US accounted for more than half of new liquefaction capacity added worldwide. In the same year, the US leapfrogged Malaysia as the third largest LNG exporter in the world, and by 2025, its LNG production capacity could reach almost 15 bcf/d – eclipsing both Qatar and Australia.

The competition may be heating up, but that will not diminish Qatar’s importance. With its recent moves to tap into the vast natural gas resources in its offshore North Field and securing infrastructure though new deals for LNG ships, Qatar is prepared to defend its market share, which props up its riches. It is, after all, the Saudi Arabia of the gas world.

However, the similarities end there. While Saudi Arabia is the largest swing oil producer and the de facto leader of the OPEC and OPEC+ oil clubs, no such co-operation platform exists for natural gas/LNG. There have been attempts in the past to create one, but they have all failed. Which means that while market control and supply deals will always be an option in the oil world, the natural gas/LNG world is a cut throat business. Producers compete by offering long-term contracts for 10 or more years, locking buyers into a fixed sales cycle. Qatar was a great benefactor of this, sealing ultra-long deals with key buyers in Japan and South Korea over the 90s and 2000s, tying the price of LNG to crude oil…. a mechanism that sent its revenues into the stratosphere when crude prices breached the US$100/b level in 2011.

That advantage is disappearing from Qatar, as the riches its reaped attracted a whole new generation of LNG producers – from Mozambique to Mexico. These additional supplies shifted the LNG world from a seller’s market to a buyer’s one. When Shell completed its Prelude project (though it was massively delayed) and Inpex finished its Ichthys site, Australia became a true rival to Qatar, with the US waiting in the wings. The abundance of new suppliers has had loyal old clients pressing for more flexibility in LNG contracts, with Japan leading the fray by demanding renegotiation of contractual terms as the world’s largest buyer. The entrance of US LNG exporters has also changed the nature of the game, shifting LNG buying from ultra-long contracts to shorter-term ones in the 2-5 year range, as well as offering a more liquid spot market.

That would be have been fine, as global LNG demand was growing rapidly, fuelled by China and India. A rising tide lifts all. But then the Covid-19 pandemic occurred. And just as it has done for oil, the pandemic shifted the LNG market from oversupply to supply glut. With very little visibility on the timeframe for improvement, global natural gas/LNG prices have more than halved. Qatar is especially vulnerable to this development, since many of its ultra-long contracts are near expiry. If this was OPEC, it could convince its fellow exporters to curb output to support prices. But there is no OGEC. And Qatar,  the vulnerable LNG king,  has only two options: voluntarily curb its output to prevent the glut from getting greate or initiate a battle for market share by lowering prices. Sound familiar? That’s exactly what Saudi Arabia and Russia did in March, destroying confidence in the crude market and briefly sending WTI prices into negative territory. There is a legitimate worry that this could happen in LNG as well.

Caught between and rock and a hard place, Qatar’s next move will determine the immediate future of LNG. It already has some of the world’s cheapest LNG production, but even it will not be immune from low prices if it decides to push for market share. Sure, initiating a price war could wipe up the US’ developing LNG export industry, but just as we saw with shale oil in 2014 and even today, the US shale patch will always bounce back through flexible entrepreneurship. It will likely have to throttle output. But that risks rivals overtaking it sooner than expected, and its vast North Field Expansion project is already underway, increasing its LNG capacity by 45% by 2025. At stake is not just Qatar’s grip on the throne, but the entire global LNG complex. Hot gas brings hot rewards, but is intensely flammable as well.

Statistics: World’s Largest LNG Producers (2019)

  • Qatar
  • Australia
  • USA
  • Malaysia
  • Nigeria

Market Outlook:

  • Crude price trading range: Brent – US$30-33/b, WTI – US$26-28/b
  • Saudi Arabia to slash production by an additional 1 mmb/d after talks with US
  • IEA report suggest the ‘beginning of a fragile recovery’
  • Reports from the US suggest shale producers are restarting rigs, as prices near US$30/b


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Saudi Aramco Moves Into Russia’s Backyard

International expansions for Saudi Aramco – the largest oil company in the world – are not uncommon. But up to this point, those expansions have followed a certain logic: to create entrenched demand for Saudi crude in the world’s largest consuming markets. But Saudi champion’s latest expansion move defies, or perhaps, changes that logic, as Aramco returns to Europe. And not just any part of Europe, but Eastern Europe – an area of the world dominated by Russia – as Saudi Aramco acquires downstream assets from Poland’s PKN Orlen and signs quite a significant crude supply deal. How is this important? Let us examine.

First, the deal itself and its history. As part of the current Polish government’s plan to strengthen its national ‘crown jewels’ in line with its more nationalistic stance, state energy firm PKN Orlen announced plans to purchase its fellow Polish rival (and also state-owned) Grupa Lotos. The outright purchase fell afoul of EU anti-competition rules, which meant that PKN Orlen had to divest some Lotos assets in order to win approval of the deal. Some of the Lotos assets – including 417 fuel stations – are being sold to Hungary’s MOL, which will also sign a long-term fuel supply agreement with PKN Orlen for the newly-acquired sites, while PKN Orlen will gain fuel retail assets in Hungary and Slovakia as part of the deal. But, more interestingly, PKN Orlen has chosen to sell a 30% stake in the Lotos Gdansk refinery in Poland (with a crude processing capacity of 210,000 bd) to Saudi Aramco, alongside a stake in a fuel logistic subsidiary and jet fuel joint venture supply arrangement between Lotos and BP. In return, PKN Orlen will also sign a long-term contract to purchase between 200,000-337,000 b/d of crude from Aramco, which is an addition to the current contract for 100,000 b/d of Saudi crude that already exists. At a maximum, that figure will cover more than half of Poland’s crude oil requirements, but PKN Orlen has also said that it plans to direct some of that new supply to several of its other refineries elsewhere in Lithuania and the Czech Republic.

For Saudi Aramco, this is very interesting. While Aramco has always been a presence in Europe as a major crude supplier, its expansion plans over the past decade have been focused elsewhere. In the US, where it acquired full ownership of the Motiva joint venture from Shell in 2017. In doing so, it acquired control of Port Arthur, the largest refinery in North America, and has been on a petrochemicals-focused expansion since. In Asia, where Aramco has been busy creating significant nodes for its crude – in China, in India and in Malaysia (to serve the Southeast Asia and facilitate trade). And at home, where the focus has on expanding refining and petrochemical capacity, and strengthen its natural gas position. So this expansion in Europe – a mature market with a low ceiling for growth, even in Eastern Europe, is interesting. Why Poland, and not East or southern Africa? The answer seems fairly obvious: Russia.

The current era of relatively peaceful cooperation between Saudi Arabia and Russia in the oil sphere is recent. Very recent. It was not too long ago that Saudi Arabia and Russia were locked in a crude price war, which had devastating consequences, and ultimately led to the détente through OPEC+ that presaged an unprecedented supply control deal. That was through necessity, as the world faced the far ranging impact of the Covid-19 pandemic. But remove that lens of cooperation, and Saudi Arabia and Russia are actual rivals. With the current supply easing strategy through OPEC+ gradually coming to an end, this could remove the need for the that club (by say 2H 2022). And with Russia not being part of OPEC itself – where Saudi Arabia is the kingpin – cooperation is no longer necessary once the world returns to normality.

So the Polish deal is canny. In a statement, Aramco stated that ‘the investments will widen (our) presence in the European downstream sector and further expand (our) crude imports into Poland, which aligns with PKN Orlen’s strategy of diversifying its energy supplies’. Which hints at the other geopolitical aspect in play. Europe’s major reliance on Russia for its crude and natural gas has been a minefield – see the recent price chaos in the European natural gas markets – and countries that were formally under the Soviet sphere of influence have been trying to wean themselves off reliance from a politically unpredictable neighbour. Poland’s current disillusion with EU membership (at least from the ruling party) are well-documented, but its entanglement with Russia is existential. The Cold War is not more than 30 years gone.

For Saudi Aramco, the move aligns with its desire to optimise export sales from its Red Sea-facing terminals Yanbu, Jeddah, Shuqaiq and Rabigh, which have closer access to Europe through the Suez Canal. It is for the same reason that Aramco’s trading subsidiary ATC recently signed a deal with German refiner/trader Klesch Group for a 3-year supply of 110,000 b/d crude. It would seem that Saudi Arabia is anticipating an eventual end to the OPEC+ era of cooperative and a return to rivalry. And in a rivalry, that means having to make power moves. The PKN Orlen deal is a power move, since it brings Aramco squarely in Russia’s backyard, directly displacing Russian market share. Not just in Poland, but in other markets as well. And with a geopolitical situation that is fragile – see the recent tensions about Russian military build-up at the Ukrainian borders – that plays into Aramco’s hands. European sales make up only a fraction of the daily flotilla of Saudi crude to enters international markets, but even though European consumption is in structural decline, there are still volumes required.

How will Russia react? Politically, it is on the backfoot, but its entrenched positions in Europe allows it to hold plenty of sway. European reservations about the Putin administration and climate change goals do not detract from commercial reality that Europe needs energy now. The debate of the Nord Stream 2 pipeline is proof of that. Russian crude freed up from being directed to Eastern Europe means a surplus to sell elsewhere. Which means that Russia will be looking at deals with other countries and refiners, possibly in markets with Aramco is dominant. That level of tension won’t be seen for a while – these deals takes months and years to complete – but we can certainly expect that agitation to be reflected in upcoming OPEC+ discussions. The club recently endorsed another expected 400,000 b/d of supply easing for January. Reading the tea leaves – of which the PKN Orlen is one – makes it sound like there will not be much more cooperation beyond April, once the supply deal is anticipated to end.

End of Article

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Market Outlook:

-       Crude price trading range: Brent – US$86-88/b, WTI – US$84-86/b

-       Crude oil benchmarks globally continue their gain streak for a fifth week, as the market bounces back from the lows seen in early December as the threat of the Omicron virus variant fades and signs point to tightening balances on strong consumption

-       This could set the stage for US$100/b oil by midyear – as predicted by several key analysts – as consumption rebounds ahead of summer travel and OPEC+ remains locked into its gradual consumption easing schedule 


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