Qatar Faces Challenges in LNG Supply Agreements

By Andrew Mills, Marwa Rashad, Emily Chow and Yuka Obayashi

(Reuters) – Qatar is struggling to negotiate new liquefied natural gas (LNG) supply deals with Japan and South Korea amid increasing competition from the U.S. and other suppliers offering more flexible contract terms, challenging Qatar’s long-standing market dominance.

Once the leading LNG supplier to Japan and South Korea, Qatar now faces stiff competition as buyers are increasingly favoring U.S., United Arab Emirates, and Oman supplies. These suppliers provide shorter-term contracts and do not impose destination restrictions, which allows buyers to resell cargoes if necessary.

Negotiations have stalled as Qatar insists on maintaining destination clauses. A senior trading source stated, “The Qataris try to achieve a lot in how they sell their LNG, in terms of retaining control over the market.” Meanwhile, the UAE's ADNOC and Oman are reportedly more focused on achieving competitive pricing.

As Qatar's dominant position weakens, especially after losing the title of top global LNG supplier to the U.S. in 2023, the country aims to secure new agreements with both Japan and South Korea—countries that rank as the second and third largest LNG importers, respectively.

Currently, Qatar's major supply contract with Korea Gas Corp (KOGAS) will expire this year, with another deal set to lapse in 2026.

Furthermore, Japan's LNG demand has been on the decline, attributed to nuclear restarts, renewable energy integration, and a sluggish economy. The country's imports have decreased from 83 million metric tons in 2018 to 66 million metric tons in 2023, and Qatar's market share in Japan has fallen from 12% in 2018 to 4% in 2023. Conversely, the U.S. share has increased to 8% from 3% during the same period.

In South Korea, Qatar's market share also decreased, dropping from 32% in 2018 to 19% in 2023. Competitors like Australia and Malaysia have gained market share during this time.

Negotiation Stalemate

QatarEnergy is attempting to secure new contracts as fresh supplies are expected from its North Field expansion, which will enhance production by 85%. Although the CEO envisions a robust future for LNG in Asia, the absence of significant new contracts raises concerns.

Qatar has recently engaged in several long-term agreements with Chinese buyers and has expanded its clientele to include Taiwan and Kuwait. Yet, analysts suggest that a substantial portion of Qatar's LNG output remains unsold.

One hurdle includes QatarEnergy’s requirement for long-term commitments of at least 1 million metric tons per annum for 10-15 years—terms that are increasingly incompatible with Japan’s latest energy prospects.

To counter the difficult market dynamics, Qatar has become more accommodating, proposing smaller cargo lots with flexible pricing structures. For contracts initiate in 2028, the proposal includes a price equivalent to around 13% of the price of a barrel of oil per million British thermal units (mmBtu).

Japan's Tokyo Gas has expressed willingness to explore LNG purchases from Qatar, contingent on favorable contract terms and market conditions.

Market Dynamics Shift

Amid mounting competition, Qatar is more inclined towards long-term contracts to ensure stable revenues. Meanwhile, participants from U.S., ADNOC, and Oman typically offer more buyer-friendly arrangements.

As the energy landscape shifts post-Russian invasion of Ukraine, U.S. exporters have filled much of Europe’s LNG supply needs, enabling their rise as the world's largest LNG exporter in 2023. If Qatar cannot attract more creditworthy buyers, it might have to pivot toward the spot market to enhance its sales strategy.

Anne-Sophie Corbeau from Columbia University posits that Qatar could potentially increase its spot market share from the current 39% to 60% by altering its contract approach. The pivotal question remains: will they make those changes?