Key Takeaways
- In the short-term, QatarEnergy (QE) could divert only some of its liquefied natural gas (LNG) volumes to help bridge the gap if Russian gas imports to the EU and U.K. are significantly curtailed, or to support the EU's diversification efforts.
- Most of QE's gas contracts are long term, expiring after four years or more, with divertible shipments accounting for 10%-15% of its total LNG export volumes at best. We estimate diverted Qatari LNG could cover about 13% of Russian gas imports to the EU and U.K.
- We see modest monetary benefits to QE from diverting LNG to Europe from Asia, given relatively small volumes but currently higher spot prices for gas in Europe.
- Qatar could play an important role in European governments' plans to be independent of Russian oil and gas by 2030. Qatar is embarking on an investment program to significantly increase LNG production capacity to 126 million tons per year (mtpa), from 77 mtpa, by 2027.
S&P Global Ratings believes the EU's planned diversification from Russian gas could have important implications for Qatar (AA-/Stable/A-1+) and, more specifically, state hydrocarbons producer QatarEnergy (QE; AA-/Stable/--). However, the gas major 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.
Amid the risk that Russia pre-emptively stops pumping gas through its Nord Stream 1 pipeline to Germany, this has focused minds on potential replacements. In our view, Qatar, as one of the world's largest LNG producers via QE, is an obvious candidate, and with additional production coming online could help meet REPowerEU's long-term objectives.
QE Will See Modest Upside To Its Already Strong Financial Position From Higher Oil Prices.
In our view, QE already stands to gain from recent hydrocarbon price volatility. On March 1, 2022, we raised our Brent oil price assumptions to average $85 per barrel (/bbl) in 2022, and $70/bbl in 2023, with our long-term assumption for 2024 unchanged at $55/bbl (see "S&P Global Ratings Raises Near-Term Oil And Gas Price Assumptions Following Russian Invasion Of Ukraine," published Feb. 28, 2022, on RatingsDirect). Since then, Brent has exceeded $100/bbl (last close $99.91/bbl on March 15, 2022) 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/demand imbalances.
QE 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 QE given its strong credit metrics and financial standing. Higher gas export revenue will also support Qatar's already strong external and fiscal positions (see "Qatar Ratings Affirmed At 'AA-/A-1+'; Outlook Stable," published Nov. 5, 2021).
QE Could Provide Modest Short-Term Support To Europe
Reduced reliance on Russian gas would likely increase demand for Qatar's LNG. Russia contributed 30%-40% of the EU and U.K.'s natural gas supply (about 158 billion cubic meters [bcm] in 2021, according to the International Energy Agency [IEA]). We understand that approximately 80% of QE's LNG sales are via long-term contracts, predominantly with Asian buyers. According to public statements by Qatar's minister of energy, about 10%-15% of Qatar's gas exports are divertible and could hypothetically be shipped to Europe. We estimate this at about 21 bcm (15.4 million metric tons per year[mmtpa]), assuming Qatar's current LNG capacity is 106 bcm (77 mtpa). This would account for about 13% of the EU's and U.K.'s gas supply from Russia. QE's investment program will bring significant additional gas production volumes onstream by 2027, providing further medium-term upside to European gas supply. The completion of QE's Golden Pass LNG Terminal in the U.S., which is in partnership with Exxon Mobil Corp. (AA-/Negative/A-1+), is scheduled for 2024, with total capacity of approximately 16 mmtpa. The terminal will export U.S. LNG but is another conduit through which QE could support the EU's diversification efforts, given QE's 70% stake.
QE has a leading position in the global LNG market, with more a than 20% share by capacity (including foreign partners' joint venture shares of Qatari LNG) and derives about 60%-65% of its proportionately consolidated EBITDA and assets from LNG. For now, we see modest monetary benefit to QE if it diverts LNG exports to Europe from Asia, given the the relatively small expected volumes, but there will be some upside given higher gas prices in Europe.
At the same time, there are potential limitations on Europe's ability to take delivery of Qatari LNG, at least in the short term. The main one being 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.
QE has limited exposure to Russia and Ukraine, with no direct ownership in any Russian/Ukrainian entities. The company already exports most of its LNG production to Asia (almost 80%, including India, South Korea, Japan, and China), and about 20% to Europe. QE has access to an LNG fleet with 69 vessels, which have offtake capacity in LNG receiving terminals in the U.K., Italy, Belgium, and elsewhere in Europe. More specifically, QE caters to its existing LNG markets in the U.K. and Europe through its majority owned South Hook LNG regasification terminal in the U.K. (regasification capacity of 15.6 mtpa) and minority owned offshore Adriatic LNG regasification terminal, off the coast of Italy (5.8 mtpa). In addition, it has access to LNG terminals in Belgium, France, and the Grain LNG terminal in the U.K. (starting 2025). 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 U.K. These lower flows have been partially compensated by higher LNG inflows, which reached 13 bcm in January. Interestingly, Qatar has provided relatively little additional LNG supply so far (see chart 1), which further supports our view of limited flexibility given QE's long-term LNG contracts.
EU Gas Diversification Could Bring Longer-Term Benefits For Qatar And QE
Qatar can achieve more than short-term diplomatic gains for supporting the EU during a time of economic stress. 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. QE 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 (Australia and the U.S.), Qatar's relative proximity to Europe and lower production costs may provide a competitive edge compared with other providers, in our view.
Related Research
- S&P Global Ratings Raises Near-Term Oil And Gas Price Assumptions Following Russian Invasion Of Ukraine, Feb. 28, 2022
- GCC Banking Sector Outlook: On The Recovery Path In 2022, Jan. 11, 2022
- Qatar Ratings Affirmed At 'AA-/A-1+'; Outlook Stable, Nov. 5, 2021
- GCC Low-Cost Producers May Be Better Placed Than Most Oil And Gas Majors As The Energy Transition Heats Up, Sept. 27, 2021
- Qatar Petroleum 'AA-' Rating Affirmed; Outlook Stable, June 23, 2021
This report does not constitute a rating action.
| Primary Credit Analysts: | Rawan Oueidat, CFA, Dubai + 971(0)43727196; rawan.oueidat@spglobal.com |
| Trevor Cullinan, Dubai + (971)43727113; trevor.cullinan@spglobal.com |
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