Qatar doubles down on LNG amid energy market volatility

The oil and gas sector has been the dominant driver of Qatar’s economy. Over the years, although that sector has remained the major focus of Qatari investments, the emphasis has increasingly shifted towards the expansion of the country’s gas production and liquid natural gas (LNG) export capacity.

Qatar’s North Field and its vast recoverable reserves of offshore gas have served as the engine of the country’s rapid economic transformation. Revenues from gas exports, which last year amounted to $132 billion, have turned Qatar into one of the world’s richest countries, with a GDP per capita of more than $84,000 at current prices; fueled the growth of the country’s sovereign wealth fund (SWF), which has ballooned to an estimated $450 billion; supported the growth of the private sector; and enhanced Doha’s ability to pursue its foreign policy goals.

While the construction boom ahead of the 2022 FIFA World Cup powered the Qatari economy in recent years, income generated by the expansion of the country’s LNG production and export capacity is likely to drive the economy for many years to come — both despite and partly because of the market turmoil caused by the fallout from Russia’s invasion of Ukraine in February 2022.

Qatar’s strategic wagers and payouts

The development of Qatar’s gas industry was a turning point in the country’s history. Revenues from LNG exports have ensured its financial wealth and political independence. Massive investments in gas production and export capacity by the state-owned energy company, originally known as Qatar General Petroleum Co. (QGPC) before rebranding as Qatar Petroleum (QP) and more recently as QatarEnergy (QE), in cooperation with international oil companies (IOCs), have paid off handsomely, enabling the country to become an energy, investment, and media powerhouse as well as a diplomatic power-broker.

Qatar’s rise to prominence as a global gas supplier is a function of the country’s natural resource endowments, most notably its gas reserves in the massive offshore North Field, the world’s largest non-associated gas field, which Qatar shares with Iran. But it is also the product of foresight, ambition, determination, and the flexibility required to respond adroitly to changing market conditions.

Declining oil revenues prompted a switch in the early 1980s in Qatar’s energy export portfolio to gas. At that time, officials in Doha crafted a three-phase plan to develop the North Field gas reservoir and monetize this asset by processing, marketing, and exporting LNG. To implement the plan, they set up a joint venture known as Qatar Liquefied Natural Gas Co. Ltd. (Qatargas) in 1984 between the Qatar General Petroleum Co. (now QE), BP, and Total (now TotalEnergies).

However, several factors conspired to forestall this effort starting in the mid-1980s, namely the escalation of the Iran-Iraq War, which in its latter stages spread to neutral shipping in the Persian Gulf; sagging energy demand in Japan, which had been expected to be the primary destination for Qatari LNG; and tensions between Qatar and some of its key Gulf Cooperation Council neighbors, which stymied the development of a cross-border regional pipeline grid. Importantly, however, these unexpected obstacles did not derail Qatar’s plan to transition to a natural gas-based economy.

Nor did the fact that Qatar was a relatively late entrant to the gas industry that lacked the financial and technical expertise to efficiently develop the North Field and initiate LNG production on its own. Doha officials, who recognized the need for and sought out foreign partners, found Exxon Mobil (Mobil at the time) to be an especially good fit, given its ample financial resources, extensive experience with LNG, and access to and ability to deploy the technologies needed to launch the country’s first LNG plant.

Qatar’s rise to prominence in the global gas market has also stemmed from its ability to adjust to changing market conditions. During the 1990s, for example, Qatar responded to cost reductions across the LNG supply chain and the widespread use of combined-cycle gas turbines in power generation by reorienting its gas resources away from domestic power generation towards the global export market. Similarly, in April 2017, facing tepid international demand and an intensifying battle for market share, Qatar lifted its moratorium (2005-2017) on further developing the North Field in an effort to fend off competition from rival producers such as Australia and the U.S. that had ramped up production.

When, two years later, a global LNG glut caused the spot price in Asia, where Qatar sells most of its gas, to tumble to its lowest point in a decade, Qatar remained committed to forging ahead with expansion. Subsequent global market turmoil caused by the COVID-19 pandemic led QP to postpone the start of production from its new gas facilities until 2025 but did not result in a decision to scale back the North Field project. On the contrary, QP pressed ahead with domestic and foreign expansion. The final investment decision (FID) to proceed with the North Field East expansion was made in February 2021 — with Qatar once again placing a wager that it would be able to cope with market shocks. Phase one of the North Field expansion project is expected to increase capacity by 43% from 77 million tons per annum (mtpa) to 110 mtpa by 2025. Phase two will further increase the production capacity from 110 mtpa to 126 mtpa, a total increase of 64% by 2027.

The same admixture of calculated Qatari risk-taking and determination is evident today. In spite of longer-term questions over the role of gas in the energy transition, Qatar remains undeterred. A strong believer in long-term gas demand, Qatar is betting that it can outcompete other prospective suppliers through scale, low production costs, the ability to renegotiate legacy contracts, deep relationships with established buyers, ownership of a fully integrated LNG supply chain, and co-production of condensates and liquefied petroleum gas (LPG). Meanwhile, QE remains busy hedging risks and buying out the competition through investing in LNG projects abroad.

The war in Ukraine and the global LNG market

Russia’s invasion of Ukraine in February 2022 upended LNG markets. As Russia cut pipeline gas shipments to their European Union (EU) customers, European buyers purchased record volumes of LNG to compensate for the interruption of supplies. Higher European demand in turn caused global LNG spot prices to spike and diverted gas away from Asian importers.

The sharp surge in LNG imports into Europe was balanced by a steep decline in the rest of the world, particularly in Asia. Japan, South Korea, China, and India — the world’s largest LNG importers — all slashed purchases last year. Meanwhile, for Southeast Asia, which prior to the pandemic McKinsey projected to be a hot spot for global demand growth, LNG proved to be either unaffordable or simply unavailable.

But the recent rapid easing of prices — spurred by a mild winter and efforts by governments globally to curb energy consumption — has rekindled interest across Asia, among established and potential new LNG buyers alike, to import the fuel. India, Bangladesh, and Thailand are procuring shipments on the spot market again. Vietnam and the Philippines are ramping up preparations to begin importing LNG, as is Hong Kong, which is scheduled to receive its debut shipment in May.

Yet, although buyers across the world appear generally confident about the role of LNG during the energy transition, supplier reliability has become a top priority. Buyers are increasingly concerned about the security of supply and potential geopolitical disruptions. The refocusing of the LNG market on supply security has prompted a return to long-term contracts.

Qatar responds to the energy crunch

The war in Ukraine, by tightening the LNG supply-demand balance and increasing uncertainty over supply, has highlighted Qatar’s leading role in the LNG market and boosted its clout. It has also supplied the impetus and the opportunity for Qatar to strengthen and further diversify its gas export portfolio, enhance its partnerships with IOCs, and bolster its “green” credentials.

Pursuing long-term contracts East and West

When the crisis began, Energy Minister Saad al-Kaabi declared that Qatar would stand in “solidarity with Europe” and not divert gas supplies from the continent even for financial gain. Over the past year, Qatar has fulfilled its pledge. While the U.S. supplied more than half of Europe’s LNG imports, Qatar redirected significant flexible volumes to the European market. Qatar’s importance to Europe’s energy security is likely to grow thanks to the North Field expansion projects, which are due to come on-stream in 2026 and 2027. 

However, Qatar’s ongoing expansion strategy, together with the expiry of legacy contracts (mostly in Northeast Asia), means that by the end of the decade over 60% of Qatar’s export portfolio will be uncontracted. It is therefore not surprising that Qatar has sought to use its leverage to lock-in customers, pressing them to sign long-term contracts. Indeed, since the outbreak of the war in Ukraine, Qatar has been engaged in an intense marketing campaign to secure long-term supply contracts, focused both on new European buyers and existing Asian partners.

Russia’s weaponization of energy supplies prompted European states to enter discussions with Qatar regarding long-term supply, though negotiations have been difficult due to differences over contract duration, destination restrictions, and pricing indexes. Nevertheless, there have been important breakthroughs. Last November, QE signed a 15-year deal to supply Germany, the largest gas market in Europe, with 2 million tons of LNG annually, with deliveries to start from 2026. The gas will be sold by Qatar to ConocoPhillips, which will then deliver it to the LNG terminal in Brunsbüttel. The deal with Germany is promising evidence that QE is fulfilling its long-standing strategic aim of strengthening its market position in Europe.

Yet, it is Asia, and not Europe, that traditionally has been Qatar’s biggest regional market. For decades Qatar’s LNG export strategy has largely focused on the Asian premium markets, which have accepted its demands for long-term contracts with oil-indexed pricing. As of early 2023, Asia accounts for over 70% of Qatar’s LNG exports. Within the Asian regional market, Qatar’s LNG exports are highly diversified, though South Korea, India, China, and Japan are the biggest buyers.

Prior to, and especially since the Russian invasion of Ukraine, Qatar has moved aggressively to strengthen its grip on the Asian LNG market. Qatar’s Asian buyers are feeling the pain of higher prices and grappling with how to respond to market uncertainty. Though shielded from supply shortages and soaring prices by its reliance on long-term contracts, Japan, the world’s biggest LNG importer, has nonetheless been reevaluating how to enhance its energy security. Long-term contractual expiries, impending nuclear reactor restarts, carbon neutrality commitments, and stiff competition for LNG from Europe are all weighing on Japan’s contract strategies.

Late last year, JERA (a joint venture between Tokyo Electric Power Co. Holdings and Chubu Electric Power), which accounts for about 40% of Japan’s annual LNG imports, declined to extend its contract with Qatar. More recently, however, Japanese buyers, including JERA, have reversed course, switching focus from spot and short-term trade to longer-term contracts, while prioritizing supply flexibility. Casting a wide net, they have signed multi-year agreements to buy LNG from Oman and the U.S. and are reconsidering securing more supplies from Qatar.

South Korea — the world’s third-largest LNG consumer, behind only its neighbors, China and Japan — is also looking to lock in supplies as a buffer against volatility. Like Japan, South Korea has had to contend with the disruption of the normal functioning of the LNG spot market. In July 2021, the Korean Gas Corporation (KOGAS) signed a 20-year LNG supply agreement with Qatar, starting in 2025, though at prices that are 34% lower than previous purchase contracts. Like KOGAS, India’s top gas importer Petronet LNG, which has until the end of this year to renew its deal with Qatar Gas beyond 2028, is seeking lower prices, mirroring contracts signed with Bangladesh, China, and Pakistan. With long-term LNG procurement competition intensifying, questions of pricing and affordability are front and center.

Last November, just a few days before its deal with Germany, QE signed a 27-year sales and purchase agreement with China’s Sinopec — a deal for twice the volume and for nearly twice the duration of that with Germany. QE is reportedly also close to finalizing a 30-year LNG supply deal with China National Petroleum Corp (CNPC). These agreements are an indication of the central role that China is likely to play in Qatar’s LNG export strategy.

Building multiple partnerships of value

Qatar’s partnerships with IOCs were essential to the early development of its gas industry. Although QP (now QE) proceeded alone with the development of the North Field expansion project, lately it has looked to partner with Western oil majors to share the financial risk of the development and help sell the additional volumes of LNG it will produce. Last July, QE announced joint-venture agreements with five of the world’s biggest IOCs — Shell, ExxonMobil, ConocoPhilips, TotalEnergies, and Eni — to develop the vast North Field East. TotalEnergies was the first of multiple international partners to recently have been awarded equity in the second expansion phase of Qatar’s North Field, known as North Field South.

Qatar, which embarked on an overseas expansion drive in 2017 aimed at diversifying risk and income away from its vast domestic gas resources, has continued to leverage its strong ties with international majors in developing upstream projects. QE has worked with ExxonMobil to build an LNG export terminal in Louisiana that will come on-line by 2024; to produce gas in a field off the coast of Egypt; and to explore for gas in Cyprus as well as Canada’s Orphan Basin. In another venture with ExxonMobil, QE is to take and trade 70% of production of the Golden Pass LNG export project in Texas, due to start up next year. In addition, QE recently began talks with TotalEnergies about exploration cooperation in Lebanon and Iraq. Meanwhile, Qatar is exploring other potentially valuable types of partnerships, especially those that bolster its market access or downstream integration in key demand centers — but also joint efforts to map and help reduce greenhouse gas emissions from its LNG production and transportation.

“Greening” the LNG supply chain

For Qatar, which has bet long on LNG, natural gas is a “green” transitional fuel. Accordingly, Doha has sought to position itself both as a leading supplier of an in-demand commodity and as a capable and committed supporter of the march towards carbon neutrality. Facing the dual challenge of providing energy and reducing emissions, QE has been engaged in efforts since 2012 to reduce routine gas flaring.

Eighteen months ago, Doha launched the Qatar National Environment and Climate Change Strategy, an ambitious climate change action plan that envisions a 25% reduction in the carbon intensity of its LNG plants and upstream operations by 2030. The North Field expansion reportedly will include a carbon capture and storage (CCS) facility that will be part of a CO₂ capture and storage cluster in Ras Laffan. QE is scaling up its energy transition investments, a sign that it is prepared to take the commercial risk to safeguard demand as the world strives to reach net-zero emissions and to support the country’s future sustainability.

Five takeaways

Qatar’s strategic decision to focus on the gas industry was the defining moment in the country’s emergence as a major force in global energy markets. Since then, its gas development initiatives and trading activities have not only succeeded in adapting to market changes but have played a significant part in helping to shape them. This has continued to be the case in the run-up to the Russian invasion of Ukraine and amid the market turmoil it has induced.

First, the return to a sellers’ market with growing LNG supply tension since 2021 has led to changes in contracting patterns. Long-term contracts are back in fashion. The recent price fluctuations have shown the value of long-term contracts, which now seem to offer more stability for buyers and more predictable revenue for sellers such as Qatar. Of the world’s 245 existing long-term (10 years or more in length) LNG contracts, 92 expire this decade, just as vast amounts of new LNG capacity is also scheduled to be commissioned, requiring long-term contracts of its own. The Institute for Energy Economics and Financial Analysis (IEEFA) expects 64 million metric tons of annual liquefaction capacity to be added by 2026, the most in the history of the global LNG industry.

Second, there has been a realignment of global LNG trade flows in which Qatar has played a pivotal role. Qatar, having long been a major exporter of LNG to Asian countries, is poised to become a critical energy source for Europe, which is looking to lock in long-term supply deals for LNG. This could result in Qatar’s North Field East project being more balanced, with roughly half of its output flowing to Europe. However, European buyers remain somewhat ambivalent — aware they need gas now though uncertain about their needs beyond 2025 because of the pace of the energy transition and the growing recognition that current high gas prices could significantly reduce demand in the long term.

Third, the current energy crisis provides an important opportunity for Qatar to reassert its dominance as the world’s top LNG provider. Prioritizing gas demand security, Qatar has sought to leverage its North Field production expansion both to strengthen its negotiating position with new buyers and to replace existing supply agreements that are up for renewal before mid-decade as it enters into talks with its Asian and European partners over long-term LNG contracts.

Fourth, the highly volatile market conditions since the Russian invasion of Ukraine, together with the expectation of strong long-term European demand, have created circumstances where China — a major importer of and customer for Qatari LNG — has also become a seller and where Qatar’s Gulf Arab neighbors have moved to increase their own natural gas exports. Qatar’s recent long-term LNG deals with China may well have contributed to Chinese energy enterprises acquiring more control over the global market at a time when competition for cargoes is booming. Chinese buyers have lately been reselling many of the cargoes to the highest bidders in Europe and Asia while state-owned energy majors including PetroChina and Sinopec have set up trading desks from London to Singapore. Meanwhile, seeing opportunities for long-term gas supply contracts with European buyers, Saudi Arabia, the UAE, and Oman have joined Qatar in expanding upstream gas development and LNG export project plans. 

Fifth, the current energy crisis has enabled Qatar to enhance its commercial ties and security relations with the West, and specifically with the United States. On the eve of the Russian invasion, President Joe Biden declared Qatar a “major non-NATO ally” and hosted Sheikh Tamim bin Hamad Al Thani, Qatar’s emir, at the White House. Doha’s “gas diplomacy” during the crisis — signaling support for European countries in their search for energy supplies and committing to help ensure the stability of supplies going forward — has won Qatar credit in Washington and other Western capitals. QE’s partnerships with Western, including American, oil majors are deepening through joint ventures like the latter’s participation in the North Field expansion project. In the longer term, the expansion of Qatari and U.S. export capacity could cause competition for market share between the two to intensify.

Qatar's economic ascent, emergence as an energy innovator, and ability to project "soft power" regionally and globally is largely attributable to the development of its LNG industry. But the persistent uncertainty that characterizes global energy markets and geopolitics provides no guarantee that Qatar will be able to build on its past success.

Dr. John Calabrese teaches US foreign policy at American University in Washington, DC. He is the book review editor of The Middle East Journal and previously served as director of MEI's Middle East-Asia Project (MAP), and as general series editor of MEI Viewpoints. He is the author of China's Changing Relations with the Middle East and Revolutionary Horizons: Iran's Regional Foreign Policy.

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