U.S. LNG exports could stand to benefit from a group of Middle Eastern countries' decision to cut diplomatic ties with Qatar, potentially making supplies from the world's largest LNG exporter more expensive and leading buyers to diversify their portfolios away from a country that may be perceived as increasingly risky.
Saudi Arabia, Egypt, United Arab Emirates and Bahrain cut relations with Qatar in a coordinated move. Yemen, Libya's eastern-based government and the Maldives joined in later. Qatar in 2016 accounted for roughly 30% of global LNG trade, according to the International Gas Union.
In a statement announcing the split, Saudi Arabia's state-run news agency accused Qatar of being involved with "destabilizing" groups including the Muslim Brotherhood, the Islamic State and al-Qaida. Qatar's foreign minister replied in a statement that "such measures are unjustified and are based on baseless and unfounded allegations."
While it is not yet clear how the move will affect Qatar's ability to ship LNG, any disruption would likely lift global LNG prices, which have stayed low amid a supply glut. "In the scenario, all exporters that are exposed to liquid pricing would benefit," said Nikos Tsafos, an LNG consultant and co-founder of the research firm Enalytica. Off-takers of U.S. LNG, which is linked to Henry Hub and would be more attractive amid higher global prices, would then stand to gain, he said.
But such a disruption to Qatari LNG supply by other Gulf Arab states is "extremely unlikely," said David Goldwyn, a former U.S. Department of State special envoy and the president of Goldwyn Global Strategies. "They lack the ability to do it themselves, the U.S. wouldn't stand for it, and it's precedent that would be far more damaging to them than it would be to Qatar."
Instead, any short-term benefits to Henry Hub-priced LNG would come from Qatari gas exports becoming more expensive, he said. As the cost of moving people and equipment in and out of Qatar rises, refueling and servicing tankers becomes more complicated, and insurance rates go up to the extent that the market perceives conflict, U.S. LNG becomes more competitive, Goldwyn said.
"I think those are relatively minor but not insignificant. Anything that raises the delivered cost of LNG to customers is a marginal positive for U.S. Henry Hub-based exports," he said. "The larger factors are the cost of the gas and cost of the liquefaction, but our disadvantage is distance to market, and to the extent that transaction costs shrink that transportation disadvantage, Henry Hub could benefit."
Cheniere Energy Inc.'s Sabine Pass terminal in Louisiana is the first of several major LNG export facilities planned in the Lower 48. Cheniere spokesman Eben Burnham-Snyder said in an emailed statement that the "dispute is a timely reminder of the value of the diversity and flexibility of supply that destination-free U.S. exports bring to individual buyers — and the LNG trade in general."
While off-takers of LNG from Sabine Pass would receive cheaper gas relative to the global price, the real winners from an isolated Qatar could be U.S. projects that have yet to come to market. Aside from five other projects under construction in the U.S., three export terminals have all major regulatory permits in hand but have not received a final investment decision, including the Golden Pass project backed by Qatar Petroleum and Exxon Mobil Corp.
The challenge for developers of proposed U.S. LNG export projects has been finding buyers who will sign long-term contracts amid global oversupply. "It's a very fierce competition for market, and so as U.S. versus other LNG exporters go to Asian customers — China, Korea, Taiwan, Thailand — to say, 'Buy ours versus buy someone else's,' their pitch is they are more long-term cost-competitive and they are more long-term reliable," Goldwyn said. "No one has really questioned the reliability of Qatar LNG to any significant degree, but they've got a big question right now, and that'll impact marketability."
Qatar Petroleum on May 31 announced that it is weighing modifications to its liquefaction trains that would increase production capacity in an effort for the state-owned LNG export giant to retain its grip on the market.
"Qatar ranks first in the world in the production and export of liquefied natural gas (LNG), the first in the production and export of gas to liquid products (GTL) and the first in the production and export of Helium," Saad Sherida al-Kaabi, Qatar Petroleum's president and CEO, said in a statement. "Qatar Petroleum is determined to continue its lead position in the gas industry with its expansion plans, both inside and outside the State of Qatar."