By Pratap John/Chief Business Reporter
As the “world’s lowest-cost producer” of liquefied natural gas, Qatar can “better withstand” lower prices than many of the new supply points coming online, a new report has shown.
“LNG from markets such as Australia and Mozambique is much more expensive to produce. The key for Qatar in the long run is to ensure it maintains market share by adapting rapidly to changing market dynamics,” said Standard Chartered bank in its latest report ‘Global focus’.
Standard Chartered said it saw “little near-term impact” on Qatar’s fiscal receipts from LNG sales. In the long run, however, Qatar’s ‘sweet spot’ for pricing LNG is likely to tighten further, it said highlighting the challenges faced by the country’s liquefied natural gas sector.
“Qatar’s LNG sector faces pressure on prices for Asian buyers as a result of the slump in oil prices,” Standard Chartered points out.
LNG prices in Asia are currently below $10 per mn British thermal units (mBtu) as new supply from the US and Australia comes online.
“Asia accounts for almost 80% of Qatar’s LNG exports; while demand is likely to rise further, supported by lower prices, Qatar’s ability to maintain its pricing advantage will be challenged as these markets benefit from new supply sources and lower prices,” the report said.
Liquefied natural gas prices are generally oil-indexed; falling crude prices therefore affect the price at which Qatar is able to sign new LNG contracts. Australian LNG prices, in particular, “pose challenges”.
Qatar has signed long-term contracts with Asian buyers over the past three years, locking in prices at attractive crude-indexed levels. For example, the contract signed between RasGas and India’s Petronet is a 25-year deal based on the five-year moving average of Japanese crude cocktail (JCC).
The drop in crude has lowered the price of the new contracts Qatar is signing with key Asian buyers. In February, Qatar and Pakistan signed a $21bn long-term contract for 500mn cubic feet per day at almost $7/mBtu, as the contract is indexed around (or at a small discount to) current crude Brent prices. “Falling energy prices have forced Qatar to shelve its second large petrochemical project in six months. The Al Karana project, being developed by Qatar Petroleum and Royal Dutch Shell, was deemed too costly ($6.4bn) following the drop in crude prices. This came after Qatar Petrochemicals Company cancelled a similar petrochemical scheme, Al Sajeel (estimated cost: $7.4bn). “Reduced financial feasibility on the back of falling energy prices was likely a key reason, reflecting the cyclical nature of the hydrocarbon sector,” the report said.
Standard Chartered forecasts Qatar’s GDP growth at 5.4% in 2015.
“We expect this to be supported by strong non-hydrocarbon-sector growth, while the LNG sector and hydrocarbon-related spending are likely to be affected by challenging energy-market dynamics. Qatar’s non-hydrocarbon-sector spending has picked up since 2013; we expect the pace to be maintained in 2015 as policymakers focus on delivering projects in the run-up to the FIFA 2022 World Cup and on longer-term projects related to Qatar Vision 2030,” the report said.
It said Qatar awarded numerous infrastructure projects in 2014 in preparation for FIFA 2022 and to address long-term infrastructure needs arising from rapid population growth; the bank expects further spending in 2015.
The government forecasts that the population will rise to 3.8mn by 2030 from around 2mn currently. Under Qatar’s national development strategy, an estimated $183bn of investment is planned between 2011 and 2016. “We estimate that almost USD 27bn worth of projects were awarded in 2014 for key infrastructure projects. We expect project spending to reach $34bn in 2015,” Standard Chartered said.
Qatar inflation to rise to 4.2% by end-2015
Qatar’s inflation that reached 3.4% in January was expected to climb to 4.2% by end-2015, Standard Chartered said citing “rising population” as a key driver.
Official statistics show that Qatar’s population reached 2.33mn in February 2015, up 109,000 since January 2015.
Workers for projects related to Qatar’s national development plan and the FIFA World Cup are driving the population increase. This is putting pressure on infrastructure, particularly housing.
Rents in some areas of Qatar have risen by as much as 40% and basic infrastructure capacity is being stretched. Housing costs make up 32% of the inflation basket, and this is likely to be a key inflation driver in 2015.
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