The planned diversification of the European Union (EU) from Russian gas could have important implications for Qatar and more specifically to the country’s hydrocarbons producer QatarEnergy, S&P Global Ratings said in a report released on Wednesday.
The report, however, said that Qatar is unlikely to be able to play a major short-term role as the EU looks to reduce its reliance on Russian exports.
The European Commission plan (REPowerEU), announced on March 8, aims to make the EU independent of Russian fossil fuels by 2030 through diversifying supply and replacing natural gas with renewable gas.
In our view, S&P said, “Qatar, as one of the world’s largest LNG producers via QatarEnergy, is an obvious candidate, and with additional production coming online could help meet REPowerEU’s long-term objectives.”
“In our view, QatarEnergy already stands to gain from recent hydrocarbon price volatility. On March 1, we raised our Brent oil price assumptions to average $85 per barrel in 2022, and $70 in 2023, with our long-term assumption for 2024 unchanged at $55,” S&P said.
Since then, the report said, Brent has exceeded $100 per barrel on the back of increased geopolitical tensions linked to the Russia-Ukraine military conflict and subsequent fears of sanctions on Russian oil and gas exports, as well as supply and demand imbalances.
“QatarEnergy will benefit from high average oil prices regardless of the destination for its exports, albeit with a lag, given that most long-term contracts are linked to oil price formulae. However, our stand-alone credit profile (SACP) assessment is already one notch higher (‘aa’) than our ‘AA- long-term ratings on QE and Qatar. Our SACP analysis focuses on financial policies and commitment to improving balance sheets through debt reduction, particularly for investment-grade companies such as QatarEnergy given its strong credit metrics and financial standing,” it said.
Higher gas export revenue will also support Qatar’s already strong external and fiscal positions, it said.
“Reduced reliance on Russian gas would likely increase demand for Qatar’s LNG. Russia contributed up to 40 percent of the EU and UK’s natural gas supply as per International Energy Agency. We understand that approximately 80 percent of QatarEnergy’s LNG sales are via long-term contracts, predominantly with Asian buyers. According to public statements by Qatar’s minister of energy recently, about 15 percent of Qatar’s gas exports are divertible and could hypothetically be shipped to Europe. We estimate this at about 15.4 mtpa, assuming Qatar’s current LNG capacity is 77 mtpa. This would account for about 13 percent of the EU’s and UK’s gas supply from Russia,” the report said.
The report said, “QatarEnergy’s investment programme will bring significant additional gas production volumes onstream by 2027, providing further medium-term upside to European gas supply. The completion of QatarEnergy’s Golden Pass LNG Terminal in the US, which is in partnership with Exxon Mobil is scheduled for 2024, with a total capacity of approximately 16 mtpa. The terminal will export US LNG but is another conduit through which QatarEnergy could support the EU’s diversification efforts, given QatarEnergy’s 70 percent stake.”
“QatarEnergy has a leading position in the global LNG market with more than 20 percent share by capacity including foreign partners’ joint venture shares of Qatari LNG and derives about 65 percent of its proportionately consolidated EBITDA and assets from LNG. For now, we see a modest monetary benefit to QatarEnergy if it diverts LNG exports to Europe from Asia, given the relatively small expected volumes, but there will be some upside given higher gas prices in Europe,” it said.
At the same time, the report said, “There are potential limitations on Europe’s ability to take delivery of Qatari LNG, at least in the short term. The main is the shortage of LNG regasification terminals to receive the additional capacity. There are also potential supply chain constraints given the shipping necessary to transport LNG to Europe.”
QatarEnergy has limited exposure to Russia and Ukraine, with no direct ownership in any Russian or Ukrainian entities. The company already exports most of its LNG production to Asia almost 80 percent including India, South Korea, Japan, and China, and about 20 percent to Europe. QatarEnergy has access to an LNG fleet with 69 vessels, which have offtake capacity in LNG receiving terminals in the UK, Italy, Belgium, and elsewhere in Europe.
More specifically, it said, “QatarEnergy caters to its existing LNG markets in the UK and Europe through its majority-owned South Hook LNG regasification terminal in the UK and minority-owned offshore Adriatic LNG regasification terminal off the coast of Italy. In addition, it has access to LNG terminals in Belgium, France, and the Grain LNG terminal in the UK. As a result, while there is some capacity for Europe to import LNG from Qatar, diverting large shipments from Asia could result in bottlenecks.”
According to the IEA, Russia has been reducing its piped gas supplies to the EU and UK. These lower flows have been partially compensated by higher LNG inflows in January.
The report said, “Qatar has provided relatively little additional LNG supply so far that further supports our view of limited flexibility given QatarEnergy’s long-term LNG contracts. Qatari support could enhance its reputation as a reliable strategic partner for the EU if it becomes a more structural energy supplier over the longer term. QatarEnergy could also benefit from diversifying its gas export destinations and find a market for the significant increase in its North Field gas production scheduled to come online in 2027.”
Although there are other LNG exporters that could help bridge the gap like Australia and the US, the report said, “Qatar’s relative proximity to Europe and lower production costs may provide a competitive edge compared with other providers, in our view.”