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By Justin Dargin
Last month, Qatar and China agreed to a $60 billion, twenty-seven-year deal for liquefied natural gas (LNG). The deal made headlines across the world-particularly as Europe struggles to reduce its dependence on Russian energy and as other countries increase their natural gas consumption in a bid to decarbonize. Below, Justin Dargin explains what makes the deal so unique and why so many countries are watching it closely.
Why is this deal so notable?
The landmark deal, which will export 4 million tons of LNG per year to China, is notable for several reasons. As the longest LNG supply contract signed to date, it signifies that long term, oil-indexed LNG supply contracts are still an essential method for buyers to ensure the security of their supply and for suppliers to maintain the security of demand. These types of contracts, despite predictions that they would become increasingly irrelevant, show that enduring price volatility and geopolitical disruptions are still a significant concern for LNG buyers. Qatar believes they are vital to enhancing market stability supplies as Europe struggles to reduce its dependence on Russia and as other countries increase their natural gas consumption in a bid to decarbonize their macroeconomies.
Additionally, this deal showcases how China is becoming increasingly important in the global LNG market, as it seeks to fuel its manufacturing base while transitioning away from more carbon-intensive fuel sources, such as coal. And at the same time, this deal demonstrates the growing role of Chinese energy companies in the Middle East.
Chinese companies are increasingly edging out Western companies in equity stakes and production agreements in the Gulf and elsewhere. Previously, Western energy companies were the legacy partners of energy-rich Gulf countries, able to forge commercial ties upon the bilateral relations with their home governments. Chinese state-owned energy companies historically did not have the expertise to compete on an equal footing with Western energy companies. This contract highlights how the situation is rapidly evolving. The potential participation of China in Qatar’s North Field would give Chinese energy companies a foothold to gain access to the global best standards and quickly learn and incorporate the managerial and operational expertise that was the somewhat exclusive provenance of Western international oil companies.
As natural gas-and by extension, LNG-has become a significant driver in the low-carbon energy transition, Qatar has emerged as a key producer, able to ship large quantities of gas rapidly on short notice. Its position as one of the world’s largest LNG exporters now places it in the same league as Saudi Arabia in the international oil market. As Qatar’s LNG capacity expands from 77 million tons per year to 126 tons, its geopolitical significance will rise in tandem.
What was the relationship between China and Qatar before this deal, and how will this deal change it?
The two countries tentatively formed diplomatic relations in 1988 and have been incrementally forging stronger ties in various economic and geopolitical spheres.
Qatar has generally been nimble in pursuing its competing geopolitical ambitions between East and West. It has forged relations with Israel while still supporting Palestinian organizations, and it hosts the American Central Command while serving as a conduit for the Taliban. Qatar also deftly manages its delicate position between Iran and Saudi Arabia while attempting not to antagonize either side unduly.
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. Its entry into the Gulf energy sector-including entrenching itself as a significant stakeholder in the largest natural gas field in the world-is part of a multifaceted engagement strategy to expand its economic and geopolitical footprint.
How has Russia’s war in Ukraine factored into this deal?
The Russia-Ukraine conflict undeniably drove Beijing to seek a long-term purchase agreement with Qatar. As international competition increases for LNG supplies-driven in large part by both the post-pandemic global demand resurgence and the Ukraine conflict-China wants to make certain it can fulfill domestic demand for years to come while avoiding disruption from extreme price volatility or bidding wars with European customers. Beijing also foresees that future LNG supply may be constrained as many countries-principally European-are moving towards natural gas in power generation to meet diversification and decarbonization goals. Additionally, as the West and other regions transition from Russian hydrocarbons, Qatar is positioning itself as a long term, stable energy exporter that will not allow geopolitical considerations to disrupt its supply. As a result, long-term engagement with Qatar fits well into China’s overall geostrategic aims in the MENA region as Russian becomes increasingly marginalized.
China’s economy has been sputtering under its Zero COVID policy. Why would China want to sign a deal now?
China’s LNG imports have fallen by nearly a fifth year-on-year for the first three quarters of 2022. Its strict coronavirus policies have been a boon for Europe, as its slowed economy has freed up substantial amounts of LNG supply that have supplanted Russian gas exports-especially as it seeks to fill its storage ahead of the crucial winter heating months.
After recent protests, the Chinese government abandoned its strict coronavirus rules, and a surge of infections has followed. But eventually, regular economic activity will resume, so China is looking ahead. Its long-term LNG supply contract, likely the first of many, is based on the understanding that there will be more competition in the international market for LNG.
China is the largest emitter of greenhouse gases (GHG). How might this deal impact any climate change initiatives?
Although China is still the largest global consumer of coal than all other countries combined, the government has indicated that it intends to reduce its coal consumption over the next several decades and instead use more natural gas to meet its carbon mitigation goals. Yet, at the same time, it is not an overstatement to state that China is still addicted to coal. China has expanded its coal mining and building of coal-fired power plants, which had the impact of ramping up its 2021 GHG emissions by approximately 6 percent-the fastest rate increase in decades.
For China to curb its GHG emissions, it needs to shift its stance toward energy security. The Chinese government has historically viewed coal as the most viable means to become less reliant on foreign oil and gas supplies. So long-term LNG supply contracts, like the one with Qatar, are formulated to allay Chinese these concerns.
This deal was announced right as the World Cup opened in Qatar, to much controversy-including accusations of sportswashing and human rights violations. Does this deal have any impact on Qatar’s reputation?
No, it will not. The Gulf has been under scrutiny for its human rights record since human rights promotion became a critical aspect of Western foreign policy. As Egypt had experienced during its hosting of COP27, Qatar understood that hosting an international event of this scope would bring significant scrutiny to its human rights record.
Many developing countries have preferred to seek engagement with China (and Russia, previously) because Beijing considers its economic interests of more importance than the domestic affairs of its partners. Qatar acts similarly with its partners, and it perceives its growing importance in the worldwide energy transition and European diversification efforts as the main drivers of how major powers interact with it, with human rights concerns taking a backseat.
This example can be seen with perhaps the even more stringent recriminations directed toward Saudi Arabia and Crown Prince Mohammed bin Salman. Even though there were widespread allegations that Saudi government operatives were responsible for the death of Jamal Khashoggi, due to Saudi Arabia’s importance in the global oil market, much of the official criticism was muted, as Western countries pursued their self-interests.
Furthermore, while the Gulf countries’ treatment of their expatriate workers has much to be desired, over the long term, as countries begin to develop economically, human rights policies tend to improve dramatically. A review of the tortuous industrialization process in the West may clearly exemplify this. As the West began to industrialize, there were widespread human and labor rights violations, such as during the Victorian era in the United Kingdom or during the nineteenth and early twentieth centuries in the United States. So it is perhaps an axiom that once a country reaches a certain developmental level, human and labor rights will develop in accordance.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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