Streetwise Professor

July 6, 2017

The Qatar LNG Expansion Announcement: Vaporware Meets LNG?

Filed under: Commodities,Economics,Energy,Politics — The Professor @ 4:04 pm

Qatar sent shock waves through the LNG market by announcing plans to increase output by 30 percent. Although large energy firms (including Rex Tillerson’s old outfit) expressed interest in working with Qatar on this, color me skeptical.

I can think of two other explanations for the announcement, particularly at this time.

The first is that this may be akin to a vaporware announcement. Back in the day, it was common for software firms to announce a new product or a big update of an existing product in order to try to deter others from entering that market. If entry in fact did not occur, the product announced with such fanfare would never appear. Similar to this strategy, I think it is very plausible that Qatar is trying to deter entry or expansion by North American, Australian, and African producers by threatening to add a big slug of capacity in a few years. Perhaps the developers won’t be scared off, but their bankers may be.

The surge in LNG capacity around the world has severely undercut Qatar’s competitive position, and forced it to make contractual concessions. It also threatens to erode prices for a considerable period. Even more entry would exacerbate these problems. This gives Qatar a strong incentive to try to scare off some of that capacity, and a vaporware strategy is worth a try in order to achieve that.

The second is based on the current set-to between Qatar and the Saudis and the rest of the GCC. They are all but blockading Qatar, and have made demands that bring to mind Austria-Hungary’s demands against Serbia in July, 1914: the ultimatum is designed to be rejected to give a pretext for escalation. Qatar needs to demonstrate that it is immune to the pressure. An announcement of grandiose expansion plans is a good way to signal that it is immune to pressure and not only plans to continue business as usual, but to go further. In a part of the world where showing weakness is an invitation for the wolves to pounce, putting on a bold front is almost a necessity when the wolves are already circling.

So we’ll see where this goes. But I think there’s a good likelihood that this is a big bluff.

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  1. Wise comment,pretty much straight from the playbook.
    Your comparison with the Serbian ultimatum is a bit worrying, but I don’t think it tracks across.
    Wheels within wheels. US is now pretty much self sufficient in energy, so Trump made a phone call (or a private tweet. Is there such a thing?)
    “Hi Saudi, we don’t need you, we are swing producer now.
    But we’ll be nice for a bit, even though we know you are the source of most terrorism.”
    Saudis get panicky, buy some military hardware from US, point to some other Arabs (Qatar) and say not me guv, look at those Arabs over there.

    Good excuse to close down the only Arab news outlet that has about 5% independence.

    Another thing. Qatar relies mostly on LNG tankers, so would be (presumably, I’m no expert) more exposed / capable to the spot market, while pipeline suppliers would have longer term contracts, I’d guess. Judging from US ability to turn on a dime (OK 3 years) from import to export, this is far faster than agreeing, let alone building a gas line.

    Comment by james — July 6, 2017 @ 6:37 pm

  2. So, US now poised to become major player in LNG export market, no longer needs geopolitical Qatar pipeline through regime changed Syria to compete with Russian gas into Europe, neither does it want Iranian pipeline that Assad prefers. New plan, US ‘rebel forces’ aim to block Iran link to Lebanon, not because of weapons but because of gas, aim to reduce competition from the middle east suppliers to export gas without killing prices. US wants Egypt and Saudi to allow passage of US LNG through Suez canal and round to India but to stop Qatar LNG coming the other way, hence the little pact. As I said on your other post, Trump is out there selling US LNG to the world and it is turning the geopolitical priorities on their head. Fun to watch. Not sure what the puppet masters at the Council for Foreign Relations think mind you….

    Comment by Mark T — July 7, 2017 @ 2:05 am

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