Landmark gas deal with Qatar gives China unprecedented control over energy

beijingwalker · Jan 2, 2023

Landmark gas deal with Qatar gives China unprecedented control over energy

January 2, 2023 09:21 IST

As Europe is struggling to reduce its dependence on Russian gas, seeking to secure gas from the Middle East, China beat Europe to the punch and at the end of last November sealed the largest ever liquefied natural gas (LNG) deals with Qatar at the staggering amount of US$ 60 billion.

The conclusion of this accord is generally seen as a significant coup for China, which managed to beat other EU countries - like Germany - in the race to secure natural gas and reduce the effects of energy shortages because of the war in Ukraine.

QatarEnergy has signed an agreement to supply China's Sinopec LNG for 27 years- the longest such LNG agreement ever signed- and a very big agreement as regards gas volume, as it provides that Qatar will send four million tonnes of LNG every year from its new North Field East project. QatarEnergy will provide the shipping and delivery of the LNG.

Saad Sherida Al-Kaabi, who is Qatar Energy Minister and the CEO of QatarEnergy while announcing the deal, said that the pricing of the deal would be like others in the past that were linked to crude oil. Furthermore, said he was certain that the accord would further solidify the excellent bilateral relations between China and Qatar and help meet China's growing energy needs.

Continuing, he added: "I think the recent volatility has driven buyers to understand the importance of having long-term supply that is fixed and that is reasonably priced for the long term... It signifies that long-term deals are here and important for both seller and buyer."

For his part, Sinopec Chairman Ma Yongsheng described the deal as a "milestone" accord because "Qatar is the world's largest LNG supplier and China is the world's largest LNG importer". He added that in October 2021 Sinopec formally requested a share in Qatar's North Field South Project and wants to examine the possibility of concluding other deals with the Qatari company.

In the wake of the war in Ukraine, Europe found itself in the difficult position of having to replace urgently almost 40 per cent of the gas supplied by Russia through pipelines. It appears that the only way to do it is through massive LNG shipments from the Gulf, as the other possible solution, i.e. gas shipments from the US, is much more costly.

Indicative of this is the statement made earlier this year by German Economy Minister Robert Habeck who stressed that the US was seeking "astronomical prices" for gas supplies and accused it of taking advantage of Europe's energy shortages.

So far, the efforts made by Germany to get the LNG supplies it needs from Qatar, have not produced any results, because Qatar insists on concluding long-term contracts, while Germany wants much shorter contracts in light of the fact that the EU wants to phase out natural gas by 2049. Although less polluting than coal, natural gas still contributes to man-made climate change.

Another issue preventing the conclusion of a deal between Qatar and Germany, is that the Gulf state includes in the contracts it signs a clause preventing reselling to other European countries, a clause that Germany wants to be removed from its contract.

Qatar is the top LNG exporter in the World and is working hard to increase its gas production through the further development of the giant North Field, which holds more than 900 trillion standard cubic feet (TSCF) of gas in reserves. The North Field is part of the world's biggest gas field that Qatar shares with Iran, which calls its share South Pars.

North Field is at the centre of Qatar's expansion of its liquefied natural gas production by more than 60 per cent to 126 million tonnes a year by 2027. North Field is divided into the North Field East LNG and North Field South LNG. The former, located in Ras Laffan, northwest Qatar currently operates 14 LNG trains with an overall production capacity of 77 Mtpa (million tonnes per annum) and plans the construction of four LNG mega trains with a capacity of approximately 7.8 Mtpa each.

China is the first country to seal a deal for North Field East. The Chinese company's Chairman revealed it had also requested a full share of the North Field South project which is dominated by Western energy giants.

Beijing has been carefully -and without much fanfare- building up its presence in the Gulf and aims to become a significant stakeholder in one of the largest natural gas fields in the world, something that will give it unprecedented control over energy. The deal concluded with QatarEnergy fits nicely with China's strategic "Belt and Road Initiative" and simultaneously avoids bidding wars on gas prices with European countries, which are included in China's most important clients.

Justin Dargin, a Middle East energy expert, points out: "The LNG supply deal, which guarantees Chinese LNG imports until the 2050s, has moved Qatar closer to China. China has been proactively and meticulously building up its presence in the Gulf, as opposed to the somewhat haphazard and reactive way the West has been engaging with much of the world over the past decade.