LNG Contract Renegotiations: Impacts on Japan, India, Pakistan, Qatar

This report examines the renegotiation of Liquefied Natural Gas (LNG) contracts in Japan, India, Pakistan, and Qatar, highlighting the evolving dynamics of the global LNG market. Qatar, a major LNG supplier, has historically relied on long-term, oil-indexed contracts. However, declining spot prices and increased supply diversity have prompted importing countries like India and Japan to seek more favorable terms. India successfully renegotiated its contract with Qatar, achieving significant cost savings. Pakistan, while initially agreeing to a long-term deal at a higher price, is now also seeking renegotiation. Japan is pushing for greater flexibility in its contracts, including the ability to resell excess supplies. Despite the short-term impacts of renegotiation, Qatar, with its low production costs, can benefit in the long run by maintaining market share and promoting gas-based projects globally. Desklib offers a variety of resources, including past papers and solved assignments, to aid students in understanding complex economic issues like LNG contract renegotiations.

1
Renegotiating LNG contracts in Japan, India, Pakistan and Qatar
Renegotiating LNG contracts in Japan, India,
Pakistan and Qatar

2
Renegotiating LNG contracts in Japan, India, Pakistan and Qatar
Introduction
Natural gas has immense potential of increasing its share in the primary energy sector as nations
increasingly gear towards cleaner energy options which are affordable as well. Liquefied natural
gas (LNG) is one of the cleanest and most energy efficient of all known fossil fuels. Recent data
from the World Energy Council shows “proven natural gas reserves were estimated to be 187.1
trillion cubic metres (tcm) in 2014, a 19.5% increase over 2004 levels. A majority of these
proved reserves are in the Middle East and Russia, with 80 tcm and 32.6 tcm of proved natural
gas reserves respectively. Natural gas production reached 3538.6 bcm in 2015, a 2.2% increase
over 2014 production levels. The largest producers of natural gas globally are the United States
(767.3bcm), Russia (573.3 bcm), Iran, Qatar and Canada” (World Energy Council, 2016).
Overview of the LNG Industry in Qatar
Qatar is one of the major global supplier of natural gas owing to the large disparity between their
production and consumption levels. Qatar has the third largest proved natural gas reserves
majorly in the North Field region of the country which has the largest concentration of non-
associated natural gas in the world. In the year 2014, the production level of LNG in Qatar was
four times higher than their consumption level (World Energy Council, 2016). This made Qatar
one of the largest LNG exporter through pipeline trade in 2014, second only to Russia.
Needless to say, that the oil and gas industry constitutes the backbone of the economy of Qatar.
The North Gas Field of the country, which was discovered in 1971, lies offshore to the north-east
of Qatar peninsula under the depths of 15 to 70 meters with an area of about 6000 square
kilometers. The reserves contain 14.3% of the world’s proven conventional gas resources
(Ibrahim and Harrigan, 2012). Surprisingly, the true potential of the reserve was not realised or

3
Renegotiating LNG contracts in Japan, India, Pakistan and Qatar
harnessed until the mid-1980s. The reason could be attributed to the common global perception
that oil was a much more valuable resource than natural gas. Other factors like uncertainty over
viability of the gas field, limited financial resources coupled with lack of interest by companies
to explore the reserve also led to the gas reserve lying dormant for more than a decade.
Around the 1984, situations turned favorable and the gas reserve was increasingly being tapped
to cater to their domestic market. By the year 1997, Qatar had started exporting shipments to
distant markets as far as Japan. The industry is managed by the state-owned Qatar Petroleum and
is amongst the foremost institutions of Qatar in the oil and gas sector. Over the years, Qatar has
succeeded in developing a global value chain along with a mark of reliability and flexibility in
partnerships. In 2016, the world’s two biggest Qatari LNG exporters, Qatar Gas and Ras Gas
announced a merger creating a new entity Qatar Gas which is now the largest LNG producer in
the world (John, 2018). The country made substantial investments in the sector by bringing in 14
LNG trains between 1999 and 2011 and building its production capacity to 78 million tonnes per
year. Majority of Qatar’s LNG exports operate on the basis of long-term oil indexed contracts
with as many as 16 countries, the main markets being USA, Korea, Japan and India. Qatar’s
decision to exit from OPEC from 2019 also implies that country is looking to concentrate its
entire focus on the emerging potential of the global LNG industry (Clemente, 2018). Owing to
growth of the global LNG market, Qatar also ventured into delivering on the basis of short-term
contracts and on-spot demands to countries looking to diversify their import sources.
The LNG Commodity chain in Qatar
The LNG commodity chain of Qatar is a unique integrated model that incorporates the
production from the gas reserve, liquefaction, domestic and international shipping as well as
terminal development. Offshore production facilities are situated 80 km north-east from the

4
Renegotiating LNG contracts in Japan, India, Pakistan and Qatar
mainland with 208 wells supplying 18.5 billion standard cubic feet of gas (“LNG Value Chain”,
2019) with advanced technology, optimum well-head operations and minimal cost (Ibrahim and
Harrigan, 2012). The gas is then flowed into the liquefaction plants which “forms the heart of
any LNG project” (Ibrahim and Harrigan, 2012) and to the 14 LNG trains onshore. Qatar uses
the most efficient and cleanest technologies allowing it to sell at a highly competitive market
value, much lesser than that of other producers. The LNG is then stored at the Ras Laffan
Terminal before being loaded on the vessel to be shipped. In order to minimize the capital costs
of shipping Qatar opted for an increased size of the vessels that also incorporated re-liquefaction
plants to negate “LNG boil off “ ((Ibrahim and Harrigan, 2012).
Renegotiation of LNG contracts with Qatar
The bulk of the LNG trade relied mostly on long-term contracts which allowed continuous gas
supplies for customers and reduced production cost (The Economist, 2015). Qatar which
previously enjoyed a powerful influence over global markets and made profits through its ‘take-
or-pay’ supply and purchase agreements has witnessed an emerging development of
renegotiation of erstwhile inflexible LNG deals in the recent years. The pressure to modify long-
term agreements had been gradually mounting even when the spot prices of LNG were at a
record high which can be linked to the increase in demand from Japan after the Fukushima
disaster. Importers demanded for a reduction in the fixed cost of LNG or removal of the crude oil
dependent slope price percentage. Italy was one of the very few countries which had managed to
negotiate a discount with Qatar on LNG prices in this period.
The major driving force behind the renegotiations is the falling spot price of LNG which gives
leverage to the importing countries to call for modifying their long-term supply contracts for a
better bargain. The prices of LNG under earlier agreements were much higher in 2014 while the

5
Renegotiating LNG contracts in Japan, India, Pakistan and Qatar
spot prices of LNG and crude oil slumped considerably to almost USD 7 per mBtu. Inevitably
importers started shifting towards the spot markets and violating terms of earlier contracts with
Qatar.
A fine example of the renegotiation brought on by heavily differential prices would be Petronet
India, which is Qatar’s largest customer and India’s largest importer of LNG (Bureau, 2018).
India is one of the fastest growing markets for LNG worldwide and was 12th largest consumer of
natural gas in the world 2014 at 50.6 bcm (World Energy Council, 2016). The original contract
between Petronet and Qatar did not allow for changing of prices resulting in India buying its
LNG supplies at a higher market value. In 2015, India was able to renegotiate its earlier contract
and bring down LNG prices to half the cost originally agreed upon. Petronet was earlier paying
USD 13 mBtu for LNG supplies under the 1999 contract and it was able to negotiate it to USD
6-7 mBtu for the contract period between 2016 and 2028. Additionally it was also able to waive
off a penalty of INR 12,000 crore for lower off-take in 2015. Under the earlier contract, the
entire contracted capacity would have had to be paid for under the take-or-pay form of
agreements. In the renegotiated contract, Petronet is expected to buy the remaining contracted
volumes which it had not bought earlier. India is looking at a massive benefit as the deal is
expected to save INR 4000 crores annually for Indian LNG consumers.
Qatar has been known to follow a similar trend of “acquiescing to its customers, calculating that
maintaining strong relationships and potentially expanding contracted volumes would help it
maintain market share ahead of a developing supply glut” (The Economist, 2015). Qatar had
repeatedly waived off the take-or-pay penalty for Poland since mid-2014 taking into account that
the latter’s regasification terminal was not ready at the time to receive supplies.

6
Renegotiating LNG contracts in Japan, India, Pakistan and Qatar
The year 2015 also saw a major long term contract being drawn between Pakistan and Qatar for
a period of 15 years. Natural gas constitutes a major chunk (51% approx) of Pakistan’s primary
energy demand (Forbes, 2018). It is interesting to note that the deal was finalized on LNG prices
being close to USD 15 mBtu which was being considered to be “highly improbable under the
current price climate” by experts (The Economist, 2015). Pakistan had at that point of time
justified the agreement terms “claiming that the deal would provide the lowest LNG prices in
Asia” (The Economist, 2015). However, considering the scenario where Pakistan’s immediate
neighbour India had recently renegotiated contracts not only with Qatar but also with Russia and
Australia, they are also looking for opportunities to renegotiate. Newspaper reports in 2019
reveal that Pakistan has “requested Qatar for reduction in the price of LNG and its supplies on
delayed payments” (Kiani, 2019) under their current long-term supply agreement albeit without
any changes in the other clauses of the contract.
Japan, the largest importer of LNG in the world, imports its major supply of LNG from Qatar. In
2015, it accounted for 36% of the global LNG market (World Energy Council, 2016) while in the
year 2017, it imported 84 million tonnes of LNG. JERA in Japan has also pushed for greater
flexibility in long-term contracts with Qatar in the scenario of an improving global supply
security. It is specifically looking to negotiate anti-competitive contract clauses that prevent
resale of excess supplies in an oversupplied market (Bogle, 2019 and Sheldrick, 2018). It also
wants to harness the benefits of having a combination of long-term as well as short-term
economical spot contracts.
Considering the current environment of LNG contract renegotiations, questions are now being
raised whether Qatar’s “ability to dictate terms to the market” (The Economist, 2016) has
declined over the years. It cannot be ignored that Qatar enjoyed great benefits from long-term

7
Renegotiating LNG contracts in Japan, India, Pakistan and Qatar
agreements with its Asian customers. However, the new surplus supply and diversity of energy
suppliers in the Asian markets have reduced Qatar’s bargaining power significantly. Although it
has to bear the burden of short-term impacts due to renegotiation, Qatar stands to benefit from
these changes in the long run. It must be noted that Qatar has the lowest production cost (USD 2
per mBtu) globally and hence can still make profits from reduced prices. It can also ward off
competition from other LNG suppliers like Iran with which it shares gas-fields. As the world
moves towards cleaner and greener energy options, lowered prices of LNG can also promote
gas-based projects around the world signaling new markets for the country.
Bibliography
Bogle, S. (2019, January 15). Japan tries again for greater flexibility on LNG. Petroleum
Economist. Retrieved from: https://www.petroleum-economist.com/
Bureau. (2018, January 27). Petronet strikes deal with Qatar’s RasGas, to get LNG at half price.
The Hindu Business Line. Retrieved from: https://www.thehindubusinessline.com/
Clemente, J. (2018, December 5). Qatar Wisely Shifts Even More to Natural Gas. Forbes.
Retrieved from: https://www.forbes.com/
Forbes, A. (2018). Pakistan gagging for more gas. Petroleum Economist. Retrieved from:
https://www.petroleum-economist.com/
Ibrahim, I. and Harrigan, F. (2012). Qatar’s economy: Past, Present and Future. QScience
Connect. Retrieved from: http://dx.doi.org/10.5339/connect.2012.9
John, P. (2018, January 3). Qatargas - RasGas merger creates state-owned global gas giant.
Gulf Times. Retrieved from: https://www.gulf-times.com/
Kiani, K. (2018, December 1). Govt considering renegotiating LNG deal with Qatar: minister.
Dawn. Retrieved from: https://www.dawn.com

8
Renegotiating LNG contracts in Japan, India, Pakistan and Qatar
Kiani, K. (2019, January 15). Minister says govt will uphold LNG contract with Qatar. Dawn.
Retrieved from: https://www.dawn.com
LNG Value Chain. (2019). Retrieved from: https://www.qatargas.com/english/operations
Ministry of Foreign Affairs Qatar. (n.d.).Oil and Gas sector. Retrieved from:
https://mofa.gov.qa/en
Mustafa, K. (2018, September 1). Pakistan to renegotiate LNG deal with Qatar if any irregularity
proved. The News International. Retrieved from: https://www.thenews.com.pk/
Sheldrick, A. (2018, October 22). Japan proposes LNG contract clause for resale of cargoes.
Reuters. Retrieved from: https://uk.reuters.com/
The Economist Intelligence Unit. (2015, December 3). Qatar renegotiates some LNG contract
terms. Retrieved from: http://www.eiu.com/home.aspx
The Economist Intelligence Unit. (2016, April 29). Japan to renegotiate LNG contractual terms.
Retrieved from: http://www.eiu.com/home.aspx
The Oil & Gas Year. (n.d.). Qatar: Advantages in Adversity. Retrieved from:
https://www.theoilandgasyear.com/
World Energy Council. (2016). Energy Resources East Asia. Retrieved from:
https://www.worldenergy.org/
World Energy Council. (2016). Energy Resources Middle East and North Africa. Retrieved
from: https://www.worldenergy.org/
World Energy Council. (2016). Energy Resources South and Central Asia. Retrieved from:
https://www.worldenergy.org/