The role of LNG in a changing energy world
The Brookings Doha Center (BDC) hosted a panel discussion on April 21, 2016, about the ongoing transformations in the LNG market. The panelists were Amos J. Hochstein, special envoy and coordinator for international energy affairs at the U.S. Department of State; and H.E. Abdullah bin Hamad al-Attiyah, chairman of Abdullah bin Hamad al-Attiyah International Foundation for Energy & Sustainable Development. Sultan Barakat, senior foreign policy fellow and director of research at the BDC, moderated the event, which was attended by members of Qatar’s diplomatic, academic, and media community.
Barakat commenced the session by noting that the energy markets are witnessing exciting, almost transformational times. The increasing availability and decreasing price of LNG is key to that transformation: allowing countries to diversify energy sources, meet demand spikes, and transition from outdated fuel sources to modern renewables. Within this framework, LNG emerges as an important transition fuel that will facilitate a shift towards cleaner energy. However, some hesitancy still exists when it comes to the consumption of natural gas, as we see places like China considering a return to coal.
Hochstein agreed with Barakat adding that these times are in fact revolutionary for all aspects of the energy market mainly due to the emergence of unconventional and offshore explorations, the rise in renewable energies, technological advancements and new efficiency levels, in addition to a renewed political commitment to climate change.
He then described the evolution of the natural gas industry. Only a few decades ago, gas could only be transported via restricting pipelines set up between a consumer and producer, which Hochstein likened to a “catholic marriage”. This old transport system was later supplemented, in an effort pioneered by Qatar, with liquefied natural gas (LNG) adding flexibility to the gas market and allowing the commodity to be traded more independently. Still, unlike oil, LNG could not be simply transported by tanker and be immediately ready for consumption, it required the consumer to re-gasify it. In other words, multibillion dollar investments into infrastructure were necessary simply to use natural gas after it was purchased. To address this hurdle, another innovation emerged, the floating storage and regasification unit (FSRU), a transportable LNG conversion unit which allowed a consumer to forgo the hefty investment in regasification, rendering LNG more accessible, faster, and cheaper.
Given these transformations, new producers have been eager to enter the LNG market; Australia and the United States will rival Qatar’s production levels by the end of the decade, and other producers such as Mozambique, Tanzania, Egypt, Israel, and Cyprus will soon follow. When President Obama was sworn into office, the United States was the largest importer of LNG in the world. Remarkably, the United States exported its first LNG cargo a few weeks ago. In fact, U.S. import regasification terminals are now being converted to export-oriented liquefaction ones.
Hochstein argued that, as a result to these developments, gas prices are becoming less tied to oil. Given the surge in production, it is likely that gas prices will remain low even if oil prices rebound. This would be equalized by an upsurge in demand, which is likely to occur given continued low prices and renewed commitment to environmental protection. Hochstein encouraged governments and companies to use gas as a transition fuel, assisting a shift from fossil fuels to clean energy. In fact, Hochstein sees that government policy should proactively encourage and regulate such a transition in order to meet climate change goals.
Sultan then directed a question to al-Attiyah, asking how those developments are likely to affect Qatar. Al-Attiyah, who has been working in Qatar’s energy sector since the 70s, began by describing the emergence of LNG in Qatar. When he was appointed minister of energy in 1992, LNG production was nonexistent; at that time, gas discoveries were bad news to companies looking for oil. Given transportation difficulties and the distance between Qatar and major gas consumers, conventional wisdom at the time considered gas a failed enterprise. Yet, when Qatar finally decided to go ahead and invest in LNG, it saw incredible success. Qatar now exports to Asia, Europe, and the Middle East.
Interestingly, Qatar started investing in gas when oil was sold at around $10 per barrel, a time when gas was also at its lowest price. The investment was lucrative despite the low prices because oil and gas markets work in cycles of boom and bust, and the price soon recovered. Today, Qatar plans on adopting a similar policy, investing in the maintenance and development of its LNG capacities despite the low prices. More importantly, the current prices are an opportunity to increase efficiency and make production more cost effective, a commitment that will expand profit margins once prices rebound.
In fact, al-Attiyah added, the low rates will encourage consumers to develop the infrastructure necessary to consume more gas. This will increase demand for the commodity in the long run. It is also important to note that Qatar is at a particular advantage at the moment; the country has already developed all its infrastructure and facilities, making its production costs lower than those of any new coming competitors. If anything, the low prices will deter some competitors from entering the market and force others to abandon new projects, thus maintaining Qatar’s position as the lead gas exporter.
Another advantage that al-Attiyah highlighted is Qatar’s flexibility, given the fact that it operates the largest LNG fleet in the world. It also has long, well-established relationships with its consumers. For instance, Japan has been Qatar’s consumer for almost 20 years. When the tsunami overtook Japan’s pacific coast in 2011 forcing it to shut down its nuclear power plants, Qatar immediately converted hundreds of cargos to aid its customer in its emergency. Al-Attiyah assured that all Qatar’s customers can expect similar customer service and accommodation. Qatar is one of the few countries that manage the full production chain: upstream, downstream, and transportation, which allows it to be highly flexible and reliable. To sum up, if anything, the current low prices present an important opportunity for Qatar to attract new consumers, get rid of upcoming producers, and increase its efficiency.
After a Q&A session that asked about the potential development of a gas cartel, technological advancements in renewable energy, diversification plans in Qatar, and gas supply to the Ukraine, Barakat concluded by thanking the guests and saying that the event has been rather constructive and encouraging, emphasizing mutual benefits and highlighting the potential advantages of the current situation.
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Economic diversification in the Middle East is a real challenge, because the oil and gas industry is so productive, and it throws off so much income that it becomes difficult for other industries to compete with that.