Qatar's Al-Kaabi: Crisis Changes Outlook for Gas

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The current energy crisis has generated massive interest in LNG and its potential role in addressing supply concerns, both today and in the energy transition. This has heightened scrutiny of the plans and strategy of LNG superpower Qatar. Energy Intelligence recently spoke with Saad al-Kaabi, Qatar's Minister of State for Energy Affairs, and President and CEO of Qatar Energy, in his Doha office. An edited transcript of the interview with 2022's Energy Executive of the Year follows.

Q: With Europe and Russia escalating into an all-out energy war, we are heading into a very difficult winter for European customers. As the largest LNG producer in the world, how do you see the market developing? Is there going to be enough LNG supply to replace Russian gas?

A: It is a very difficult question to answer. A lot of countries and companies have reached out to us, and I have consistently said the same thing: Europe was always dependent on Russian gas as the major supplier from pipelines. The majority of Europe, especially the north, was not set up for LNG imports. Now, of course, the situation has changed. You see Germany going from zero LNG import terminals to four to five terminals, starting in the first quarter next year. And other European countries are trying to take a similar approach. From what you hear, the Europeans have really tried to fill up storage capacity. Storage will help for sure. But if it is a very strong winter, there could be a problem — maybe not in winter, but beyond winter in the season when you are going to have to replenish storage for the next winter. There will be some LNG coming in from the US, other places. [For Qatar,] the majority of our customers have long-term contracts. We have committed not to move anything away from Europe or divert any volume. And we have lived up to that. But in the end, this is a small volume in comparison with the huge volume that is coming from Russia that Europe depended on.

Q: Do you think Europe will be able to wean itself off Russian gas?

A: No. They are going to have come back. I am hoping that at some point there is an end to this crisis, or a mediation that would bring peace to Europe and hopefully bring some of that Russian gas back to support Europe. If you look at a situation where zero Russian gas comes to Europe for more than two winters, I think it is going to be very difficult.

Q: Shell CEO Ben van Beurden’s recently said Europe is facing “a number” of bad winters. So unless there is a political solution to bring back Russian gas, it sounds as if you agree?

A: There isn’t a quick solution. A quick fix is not available. It will take a lot of collective efforts to logistically get some volume into Europe. There is a lot of fuel switching due to the high prices, and that could help slightly alleviate that. But I think it is important that legislators and governments understand that they need to have their minds set on what they need for the long term. And it can’t be narration of: ‘We need to go green, green, green,’ without talking about the transition. I still hear some people promoting that, saying we need to invest heavily in green energy, which I completely support. But we should not forget that gas, specifically, is very important for that transition for continuity of supply and for having a fuel that can be your baseload with no intermittency for a long time. When you couple gas with CO2 sequestration, some renewable energy to power that, it is the most powerful fuel we have. It serves both purposes. Gas is fundamentally needed for decades to come.

Q: You have said that Qatar does not have supplies to replace Russian gas in the short term, but what can you do in the medium term?

A: In the five- to seven-year horizon, we have much more capability to support Europe, because volumes are going to start coming from two of our projects. One is 16 million tons per year Golden Pass LNG coming on stream from 2024. It is already earmarked for Europe. It could go to other markets too, but Europe would be the first choice. In addition, just a couple of years after that we have the huge North Field expansion. When you combine our US and Qatar projects, QatarEnergy and its partners alone will bring around 65 million tons/yr into the market.

Q: There have been calls by EU politicians to phase out the use of gas altogether as soon as 2030. Do you see Europe as a reliable market for Qatar in the future?

A: Europe is definitely going to be a very important gas market no matter what happens. If you look at what we're doing, as far as all the investment in the 32 million tons/yr North Field East (NFE) and Phase-2, the 16 million tons/yr North Field South (NFS), when it's all said and done, I would expect us to have 50% East of Suez. It could be skewed to 40/60, either way depending on supply and demand.

Q: You have had a lot of conversations with governments and policymakers over the last couple of months. Do you detect any change in their willingness to have gas be part of the energy mix in the quest for energy security?

A: Absolutely. There has been a big shift, a fundamental shift in how governments perceive gas and want to publicly speak about gas. I think a lot of it was discussed previously but it is much more public due to energy security now. I think they realized that gas was absolutely needed, but they couldn’t be as vocal as they are today in my view. You need all fossil fuels. We have to make sure we have strict environmental regulations, so that everybody in the oil and gas industry has the same standards.

Q: Contract duration seems to be a key stumbling block as regards new supply to the EU. Currently where do we stand on this?

A: I think everybody wants stability. A buyer wants stability of supply, and a seller wants a buyer that is stable and can buy for the long term. But the fundamental issue in Europe, in my view, is that governments talk about buying additional gas but they can't because most European countries do not have a vehicle to buy gas through. The majority of the purchases of LNG is through private companies. It's the private sector that buys. That's the mismatch. Is the government going to pitch in to bridge that gap for the risk of the private sector or not? I'm not sure. I think 10- to 15-year deals are probably what are most acceptable to both sides. But for us, the long-term deal, it's not just about duration, it's about price.

Q: Is there any possibility of accelerating the start-up of Golden Pass?

A: No. I think it is very difficult. If you look at contractors' situation, steel prices, shipping , logistics — everyone is challenged. I don’t think anybody is going to be able to do that.

Q: We would be very interested in hearing your views on prices. Do you see danger of long-term LNG demand destruction?

A: As far as the gas prices and what's happening in [Dutch] TTF and [UK] NBP and so on, that is actually ridiculous. It has already destroyed demand. You have seen companies shut down fertilizer plants. It really did have a big effect. Destruction of demand is the biggest enemy for our business, in my view. It will need time to correct itself.

Q: We are hearing a lot of talk about capping the price of Russian oil and gas into Europe. What are your views on this?

A: Like you, I read about the price caps. I don't think it's a good idea to try and control the market. Not because I want higher prices, I'm just saying it won't solve the problem. It will be creating something that is unprecedented and could worry investors for future investments. Because if the Europeans decide to have a price cap and I'm investing billions of dollars, what guarantees me that that price cap is not lower than my break-even [price] at some point in the future.

Q: To follow up, are you concerned that high gas prices mean you could move from coal directly to renewables and skip gas, especially in Asia?

A: I don't see that at all happening, if people are serious about the environment. You are doubling the emissions when you use coal instead of gas. So, if you are willing to double that emission, you definitely are not going to get to net zero by 2050. Coal cannot do everything. Coal cannot run CNG (compressed natural gas) buses, cannot run shipping. And even the coal that they are talking about, they need the ammonia to try and reduce the carbon as one way to make it less carbon intensive. And you need gas to do that. So, I don't buy into that argument at all.

Q: It would be interesting to hear your views on green LNG. What sort of premium do you see for it?

A: Buyers today are looking for LNG. Period. They are not looking really for green LNG, to be honest with you. But as a responsible company striving to ensure sustainability, we have used solar, the best machinery you can buy for reduction of emissions of nitrogen oxide, sulfur oxide, all the emissions. We have invested in the best technologies — more than $250 million dollars — just for the CO2 sequestration and storage and everything that we need to do to reduce the emissions. And a couple of weeks ago, QatarEnergy announced the start of construction of two new new solar power plants in the industrial area, to generate for 800 megawatts of power. This will partially supply power to the new LNG trains in Qatar to reduce the carbon footprint. In addition, all the ships that we've ordered — around 70-plus ships — are going to be run by LNG-fueled engines, using the most efficient engines available today. Basically, from an overall value chain, Qatari LNG will be the least carbon footprint LNG you can get. We think that our buyers, and our investors that have joined us in NFE, see this as the Rolls Royce of projects. We're not asking for a huge price premium. But there is an appreciation for what we can supply as far as reliability and sustainability as a package.

Q: Once the supply situation gets better post-2025, do you see green LNG becoming a bigger selling point?

A: I think it's a great selling point for us. There's no question. I mean, we have invested a lot in it. We were working on this many years before people were talking about CO2 sequestration.

Q: There seems to be a shift towards greater Qatari ownership of your assets, for example with taking full ownership of upstream oil concessions and Qatargas-1 from foreign partners. Is that what's going to happen as the other LNG projects expire? Will they automatically revert to QatarEnergy operatorship?

A: We are not saying that we don't want the partnership model — as evident by what we did in NFE. NFE partnership is similar to joint venture models that we've had in the past with some of the same partners. The new joint ventures in NFE are going to be in effect until 2055. It's not a shift in strategy. But we were prepared to [go solo for NFE]. And I was serious. I said this before.

Q: That wasn’t a bluff?

A: It wasn't a bluff. We awarded all the EPC contracts and we went ahead. It was all done.

Q: With all the design work done, the contracts awarded and enough capital to self-fund the expansion, why did you bring in any partners?

A: There are benefits of having them in. If we didn't like the offers we got, we would not have brought them in. Period. We have a great relationship with our partners. They are very much a value-add to Qatar’s gas industry and to our business. That’s why we have them. We are very proud of our partners. [But] going forward, QatarEnergy needs to present to my country that we are bringing a value proposition for having a partner take a piece of that action. If there is no value, there is no partnership, very plain and simple.

Q: But when you have partners, you can bring them with you for other things?

A: Yeah, that is definitely there. There is an element of having that partnership that is important. The relationship with these companies is important; the relationship with their countries is also of added value. You look at all that. You look at the offers they bring in. They bring a wealth of expertise. They're going to spend capital here so they're bringing in 25% of the capital in some NFE ventures, for example. That of course is a big support. Its foreign direct investment into the country. In addition to that they bring a marketing offer. Part of that is there is an offtake agreement by them. That is a win-win. You need to have a partnership that can outlast CEOs. You can't have a partnership where it's lopsided and you think you got the best of them or vice versa. It has to be balanced for both sides. It has to be, as much as possible, fair. And also the way our projects work, and how we've structured the deals, it has a lot of downside risk protection on price. These projects, even at a very low oil price, would actually make good money.

Q: For all partners?

A: Yes. An investment in Qatar is really an important downside-risk revenue maker. When the Covid pandemic hit, I know for some companies, the only real money maker was their investments in Qatar. That's because of the low-cost resources, the excellent operational efficiency and also the structure of the deal.

Q: You have said in the past that you want QatarEnergy to look more like an IOC than an NOC. Can you give us an update on your vision on what you're trying to do with the company?

A: I consider that we already made the shift from being a national company to being an international company, evident by what we are doing internationally. It is very methodical. It's been ongoing, even in the downturn of the business. We have more than 30 blocks around the world and there are wells being drilled as we speak. We are not stopping. People are saying, ‘What are they doing? Why are they going and investing internationally?' We were consistent, and we were just staying the course. It takes a lot of good work and some good luck. And we've been quite successful in our exploration, whether it's in Cyprus, or in South Africa. The biggest was Namibia, where we had two big finds with our colleagues from Total and Shell. In addition to that, we bought into the Sepia oil field in Brazil, which is a producing asset, and we were fortunate to join the project at a good time. On the petrochemicals side, we've announced in the US that we are going to build the largest polyethylene plant in the world. And we are getting close to moving ahead with that. If you are asking what QatarEnergy will look like in the future, it will be a much bigger producer. Some part of its production is going to be from outside Qatar. What percentage that is will depend on the success of the exploration drilling. But it will be a substantial income for the country and for the company. In addition to that, our announcement of the 1.2 million tons/yr blue ammonia project was a big surprise to everybody. It is something that we need for the future from a transition point of view. We went to EPC. The contractors are in place. And in a few years, we will have first production. It's coupled with carbon capture and sequestration. It has solar power for some of its requirement and it is the largest in the world.

Q: It sounds like your model is very much, you build it and then you figure out the market later. Is that fair to say you don't need to have all the buyers lined up before you invest?

A: When we are confident about the demand in the future about any product, we invest. When we talked in 2016 or 2017 of the LNG expansion, people were doubting us. Why would you do the huge expansion project NFE/NFS and go solo? Everybody, even us, thought that there will be an oversupply in 2022 and 2023. But nobody thought that it would come to what we have today.

Q: Are there still ongoing discussions for Asian clients to join NFE?

A: Yes. The discussions are still ongoing and it's really an open discussion, if you will. We don't need them. If they come that's great. There isn't a timeline.

Q: Are you still offering 5% equity in the project?

It depends. It won't be higher than 5%. But if there is a percentage that's given to somebody that's willing to buy LNG from us for 26 years, and at a price that we accept for that duration, then they would come in. That can happen one day before the production starts and it can happen today. We're in no rush. But we're talking to many Asian customers.

Q: On NFS, have the partner selection discussions begun?

A: We are almost done. I can't tell you who it is. Before I come to receive the Energy Executive of the Year on Oct. 4, we will have an announcement. I know that at least one is beyond the finish line.

Q: How much do associated liquids make up of your profits?

A: It depends on the oil price, of course. I actually don't have a number to give you now, but it's substantial. It’s 40% or 30%, it depends. We produce about 700,000 barrels per day of condensate. And condensate is at $90/bbl plus. We're producing LPG. We're going to be the largest or one of the largest producers in the world.

Q: After NFS is done, you have 108 years of production left in the North Field, according to your bond prospectus last year. What are your next steps for the North Field?

A: If you look at the evolution of Qatar and LNG and what we have done, there is something we don't talk much about by the way, which is very important. All the trains of LNG that we built in the past did not extract ethane. None of them. This project, NFE, is the first that actually extracts ethane. It tells you that we're actually ambitious on chemicals. We have a very set plan, and the plan is very meticulous. We know where we're going, and we know what we're going to do. I don't have to think about it. It is done. Every year we update our strategy or our path, just to make sure. [We might say,] okay, a little bit to the right guys, a little bit to the left, but it's really the same strategy. We haven't changed our strategy in almost anything.

Q: Even through the pandemic?

A: It has not changed at all. The only thing that actually kept getting delayed was the award of the North Field expansion to IOCs, and it was intentional. We didn't like what they offered us. Then we awarded everything (all EPC contracts) alone as QatarEnergy. We de-risked NFE and asked our friends that were in the race to enter NFE to submit a new bid that took into account the new risk profile.

Q: How many rounds of negotiations were there? How close were you to going by yourself?

A: After we awarded the EPC contracts and everything was set in stone from a cost perspective — we knew the the actual capital cost of the project — then I said, if I don't get offers within this kind of threshold, we are not going with anybody.

Q: How did the foreign partners feel about the deal that you finally gave them?

A: I think they feel they should have gotten better terms but understand that this is a de-risked project and very good portfolio protection for the low side. And it has quite a robust high side. I think they are very happy to be in the best LNG project in the world from a carbon footprint point of view..

Q: What are your plans for further North Field development beyond the North Field South project?

A: It depends on technical information. Once the technical information is in, it will either tell us yes or no. We would like to develop more. We are working on it. We haven't stopped appraising the field. Does that result in saying that we can potentially do more? Possibly. The issue to me is technical. If something materializes that shows there is potential, we would not hesitate.

Q: I note that from NFE to NFS, there's a slight drop in quality of the reservoir.

Q: True. The cost [per unit] of NFS is going to be higher than NFE. Yes, for sure. You see there is a difference. If in our international exploration program we find something one tenth as good as the quantity/quality of NFS, I'll be making headline news. Now, with NFS to NFE, I'm comparing a Rolls-Royce to a Bentley, or a Bentley to a BMW, or a BMW to a Mercedes. It is just one step below NFE, but it is still a world class asset. Now if we go to another area of the field, it could be better than NFS not worse.

Q: Is there still a lot of work to do, to know the next stage for North Field development?

A: We will know soon enough.

Q: Next year?

A: In the next couple of years.

Q: Has the mindset changed at all in Qatar about the urgency to develop resources? Should you monetize your assets quicker?

A: If there are reserves that can be developed economically with good reservoir engineering practice in mind, it will be developed. That's always been the mindset. I am a believer that you need to monetize what you can because the market conditions change and there is a competitive advantage to go ahead of others. And I think NFE proved that we were right in the decision. We don't look to compete with others. We are focused on our strategy.

Q: Let’s discuss new technologies and how the oil and gas industry can play a role in removing carbon from the energy mix. You have been skeptical on hydrogen. But you mentioned the large ammonia project, so you clearly see value in clean hydrocarbons. What is driving this investment?

A: People don't understand that the oil and gas industry understands ammonia and hydrogen very well. We have dealt with it for years. We produce or use hydrogen in a lot of our facilities. We are one of the largest urea producers in the world. You need ammonia to produce urea. Everybody is saying, ‘ammonia and hydrogen, hydrogen.' But for hydrogen, you need to go to minus 260°C to transport it in liquid form to far away markets. That is a very difficult proposition. Ammonia is transported as liquid at minus 30°C. It is doable, much easier than for hydrogen. Ammonia can be a carrier for hydrogen, which is one way of doing it. People are trying to say that or testing ammonia as fuel directly. Ammonia can be used to reduce the CO2 emissions from coal. When you're burning coal, you bring in ammonia with it and you burn the two in power plants and you reduce the CO2 emissions substantially.

Q: So why not by that same logic invest in blue hydrogen?

A: Hydrogen on that scale, we don't see how it can work without a big subsidy. If somebody's going to off-take hydrogen and pay for it, I want to see somebody do the economics for a large-scale project and make it feasible. I don't have the confidence that I have with ammonia.

Q: Are you looking at more regas capacity internationally?

A: Yes. Pakistan is being considered. We are looking at terminals all round the world. If it helps us monetize our gas, we would participate. We bought capacity into regas terminals in Zeebrugge, Montoir-de-Bretagne, the Isle of Grain. People were saying, ‘What are these guys doing?’ We were targeting the EU and also that was the closest point to Germany, and that's the biggest industrial nation in the EU. The UK is second.

Q: On your international upstream portfolio, are you looking at becoming an operator?

A: No, I think for some time we will be a partner that actually participates actively, but not the pure operator.

Q: Can you talk about any highlights of your international portfolio, for instance Namibia?

A: Namibia is a very substantial find. Both [our] fields are quite large oil fields with some gas. Now we are further appraising these fields with our partners. We are the biggest holder of reserves in Namibia as QatarEnergy because we have two blocks with TotalEnergies and Shell.

Q: How big are the Namibia reserves?

A:. I would say it's around 10 billion bbl of oil In place with upside.

Q: And how much production could that be?

A: I am not sure yet. But it's quite sizable. It is quite a large reserve.

Q: So you've actually got quite a large production in Brazil. What is your strategy there?

A: In Brazil we have many exploration blocks. We are partners in the Sepia field, which produces somewhere in the range of 180,000 b/d and it's going to go up to 400,000 b/d in the next couple of years. In Cyprus, we’ve made a good discovery and we took additional acreage. We are shooting seismic next year.

LNG Supply, LNG Demand, LNG Projects, LNG Contracts, LNG Prices, Gas Prices, Gas Supply, Gas Demand, Hydrogen, Exploration, Fiscal Terms, Corporate Strategy , ENERGY INTELLIGENCE FORUM 2022
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