When it comes to LNG, Qatar is all in, expanding its liquefaction capacity by over 40%, investing in more than 100 LNG carriers and adding CCS technology, too
1997 proved to be a watershed year for Qatar when its first LNG cargo arrived in Japan for Chubu Electric Power Co, under a 25-year sales and purchase agreement (SPA). The deal, along with another SPA with seven other Japanese utility and gas companies signed in 1994, laid the foundation for the Middle East country’s LNG pre-eminence on the global stage.
Now, some 25 years later, the next evolution in Qatar’s LNG development is in full swing. In March, Qatar Petroleum (QP) announced it would not renew the decades-old Qatar Gas Liquefied Natural Gas Company Limited (QC1) joint venture with Total, ExxonMobil, Marubeni and Mitsui. The QC1 JV was responsible for developing Qatar’s first LNG project – the source of that first cargo to Chubu Electric. An estimated capex of US$5Bn was spent for the initial development covering the LNG plant, Ras Laffan port, offshore facilities and seven 135,000-m3, Moss-type LNG carriers – Al Zubarah, Al Kohr, Al Rayyan, Al Wajbah, Al Wakrah, Broog and Doha.
Under the structure of the JV, QP controlled a 65% stake, with affiliates of Total and ExxonMobil each holding a 10% interest and Mitsui and Marubeni each with a 7.5% ownership.
As of 1 January 2022, the state-owned oil and gas company will take full ownership of QC1, which controls facilities with a production capacity of approximately 10 mta of LNG.
Commenting on the consolidation of ownership, Qatar Minister of State for Energy Affairs and QP president and CEO Saad Al-Kaabi said: “This event marks the start of the next chapter in QG1’s history, which we hope and believe will be even more successful than the last chapter, and we look forward to serving our customers for the next three decades from this world-class asset.”
The top LNG exporters
In 2020, Qatar exported 77.13M tonnes of LNG, down 0.9% year-on-year and fractionally less than Australia’s 77.77M tonnes, which claimed the global top spot for the first time, according to GIIGNL Annual Report 2021. Other LNG exporters in 2020 in the Middle East were Oman, with 9.76M tonnes, and UAE, with 5.71M tonnes.
Year-on-year, Australia registered a healthy uptick of 3.2%, despite the demand destruction caused by Covid-19 and outages at Prelude FLNG. Among the world’s top five LNG exporters, only the third-place US, with LNG exports of 44.76M tonnes, scored a double-digit growth gain – a whopping 32.6% y-o-y rise. Russia exported 29.6M tonnes and Malaysia 23.85M tonnes of LNG to round out the world’s top five exporters.
FID on expansion
Qatar’s LNG production is fed by the giant North Field, which has recoverable reserves of more than 900 trillion standard cubic feet (tscf), or approximately 10% of the world’s known gas reserves. In February, QP took FID on the US$28.75Bn expansion of the North Field East (NFE) project to raise the Persian Gulf country’s LNG production capacity from 77 mta to 110 mta.
The decision to proceed with the investment was announced at a signing ceremony held to celebrate the execution of the project’s key onshore engineering, procurement and construction (EPC) contract. The main scope of the EPC contract is the construction of four mega-LNG trains with a capacity of 8M tonnes each, with associated facilities for gas treatment, natural gas liquids recovery, as well as helium extraction and refining within Ras Laffan Industrial City.
“Ships carrying LNG cargoes from these projects will have lower full-cycle carbon emissions”
While LNG is a fossil fuel, Qatar clearly has its eyes on the global clean energy transition. In announcing the FID, Minister Al-Kaabi noted a significant part of investment in the expansion project that will advance decarbonisation. “One of the most important environmental elements of the NFE project is its CO2 capture and sequestration (CCS) system, that will be integrated with our wider CCS scheme in Ras Laffan, which – once fully operational – will be the largest of its kind in terms of capacity in the LNG industry, and will be one of the largest ever developed anywhere in the world,” he added.
Drewry Maritime Financial Research (DMFR) assistant manager Santosh Gupta said the CCS scheme offers “a potential of added environmental, social and corporate governance (ESG) benefits to LNG charters.” Mr Gupta added: “Ships carrying LNG cargoes from these projects will have lower full-cycle carbon emissions.”
The NFE project marks the first phase of Qatar’s LNG expansion plans and in addition to LNG, the project will produce condensate, LPG, ethane, sulphur and helium. Production is set to begin in Q4 2025.
A second phase of the project – North Field South (NFS) – is expected to further boost the LNG production capacity of the country, from 110 mta to 126 mta. NFS will feature two new LNG trains, with a capacity of 8 mta each, and is expected to begin production in 2027.
Historic LNG newbuild programme
So how do you back the largest LNG expansion project in recent memory? The only way you can – with an historic, US$19Bn, 100+ LNG carrier newbuild programme. In March, QP issued a tender package aimed at selecting world-class shipowners for the long-term time charter of LNG carriers to satisfy the future requirements of QP and its subsidiaries.
Besides the NFE project, the tender package managed by QP for Qatargas covers the requirements for the LNG volumes that will be produced from the US$10Bn Golden Pass LNG export project at Sabine Pass, Texas. Affiliates of QP and ExxonMobil own Golden Pass LNG, which will begin exporting LNG in 2024. QP has a 70% interest and ExxonMobil the remaining 30% stake in the 16-mta project.
Furthermore, the tender includes options to replace time charters for a number of Qatar’s LNG carriers that will expire in the next few years.
Shipbuilding slots for the enormous shipbuilding programme were secured in 2020 by QP with South Korea’s Daewoo Shipbuilding & Marine Engineering (DSME), Hyundai Heavy Industries (HHI) and Samsung Heavy Industries (SHI), along with China’s Hudong-Zhonghua Shipbuilding – representing about 60 to 70% of the global LNG shipbuilding capacity. Once shipowners are selected through the tender process, they will be assigned one of these reserved newbuilding slots, with ship deliveries expected between 2024 and 2026.
Reportedly, QP has offered shipowners four options for the firm charter hire period: 10, 12, 15 or 20 years – with ‘options’ to extend the period up to 25 years. The newbuild LNG carriers are expected to have two-stroke, fuel-efficient dual-fuel prime movers, either MAN Energy Solutions’ high-pressure, Diesel-cycle ME-GI or WinGD’s low-pressure, Otto-cycle X-DF engines. MAN Energy Solutions has its own Otto-cycle engine, due out next year, that could be in the running, too.
Attractive long-term charters
In his analysis of the tender, Mr Gupta – DMFR assistant manager – examined shipowners’ potential returns on investment in these ships against their cost of capital, highlighting charter lengths as a vital determining factor.
“We believe charter duration is the key difference between the new tenders and Nakilat’s ongoing time charter contracts on existing LNG ships,” said Mr Gupta. “While the charter contract on Nakilat’s existing LNG vessels is for a period of firm 25 years with two extension options – five years followed by another five years – the firm period for the new tender contracts is a maximum of 20 years, with an option to extend for another five years.”
“Shipowners are looking at a bigger share of the earnings from LNG ships this time”
Drewry believes this highlights the declining useful life of LNG vessels, due to technical advancements and environmental regulations. “We expect long-term charter rates to be around US$75,000 per day for the new LNG ships, which is well below the implied long-term charter rates of US$90,000 per day on Nakilat’s existing wholly owned LNG vessels,” said Mr Gupta. “We believe lower long-term charter rates can be attributed to the comparatively smaller size of these vessels (compared to Q-Flex and Q-Max LNG ships) and the decline in long-term LNG charter rates in the last 10 years,” he added.
Despite these lower freight rates, Mr Gupta believes the 20-year time charter is the most attractive of the options offered in the tender.
Additionally, he expects shipowners with existing relationships with Qatargas will be the “primary beneficiaries of this tender, assuming they bid.” One of those is Nakilat, which has a long-standing business relationship with Qatargas and QP, through its JV-controlled fleet of 45 vessels.
“We expect some of these joint ventures to participate in the bidding,” said Mr Gupta. “In addition to these entities, there could be some new bidders as well, both independent and in joint venture. We believe shipowners are looking at a bigger share of the earnings from LNG ships this time compared with the previous time. Most of Qatar’s existing Q-Max and Q-Flex LNG ships were delivered between 2007 and 2010 and were built at Korean shipyards.”
Besides Nakilat, Mr Gupta highlighted Teekay LNG as another potential bidder. “During its recent analyst calls, the company had indicated that it would be interested in Qatar’s LNG tender. The company has not ordered any LNG ship in the last three years and has been focusing on deleveraging its balance sheet. It believes it has a competitive advantage over other players, given that it does not have any new order outstanding at present. In contrast, competitors have high borrowings related to ongoing deliveries,” he said.
Since a number of LNG carriers could be built in China, Chinese shipowners are expected to participate in the tender, according to Drewry. Additionally, China has emerged as a leading importer of LNG and buyer of Qatar LNG. In 2020, China imported 10.72M tonnes of LNG from Qatar, almost 16% of its LNG demand during the year. Overall, China imported 68.91M tonnes of LNG, accounting for 19.3% global share – second only to Japan’s 74.43M tonnes.
Some of those LNG newbuilds could be fitted with LNT A-Box cargo-containment technology from LNT Marine. The company is part of a joint industry project with QP, ABS, Shanghai Waigaoqiao Shipbuilding – a subsidiary of China State Shipbuilding – and others to develop new medium and large LNG ships designs. Other signatories to the agreement are Qatargas and affiliates of ConocoPhillips, ExxonMobil, Shell and Total.
“We believe this is another step towards QP’s strengthening relationship with Chinese shipyards,” concluded Mr Gupta.