VZCZCXRO3819
PP RUEHDE RUEHDH RUEHDIR RUEHMA RUEHTRO
DE RUEHDO #0224/01 0891243
ZNR UUUUU ZZH
P 301243Z MAR 09
FM AMEMBASSY DOHA
TO RUEHC/SECSTATE WASHDC PRIORITY 8922
INFO RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
RHMFISS/DEPT OF ENERGY WASHINGTON DC PRIORITY
RUCNGEC/GAS EXPORTING COUNTRIES COLLECTIVE
RUEHZM/GULF COOPERATION COUNCIL COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 0355
RUEHKA/AMEMBASSY DHAKA 0181
RUEHME/AMEMBASSY MEXICO 0021
RUEHNE/AMEMBASSY NEW DELHI 0386
RUEHOT/AMEMBASSY OTTAWA 0274

UNCLAS SECTION 01 OF 03 DOHA 000224 
 
SIPDIS 
 
EEB FOR DAS HENGEL 
DHAKA FOR POL/ECON 
 
E.O. 12958: N/A 
TAGS: ENRG EPET ECON QA
SUBJECT: DOHA CONFERENCE PREDICTS SHORT-TERM NATURAL GAS 
GLUT, LONG-TERM SUPPLY CRUNCH 
 
---------- 
KEY POINTS 
---------- 
 
-- The global economic crisis is a temporary blip for the 
long-term trend of strong demand growth for natural gas 
worldwide, according to industry leaders who participated in 
the recent annual natural gas conference in Qatar. 
 
-- In the short term, however, depressed global demand will 
result in a large-scale shift in liquefied natural gas (LNG) 
from east to west, as the Atlantic basin has the 
regasifacation and storage capacity to deal with excess 
supply.  In the U.S., weak demand coupled with new sources of 
domestic supply will lead to low prices. 
 
-- There is still a clear division between "firm" markets 
(Asia) and "flexible" markets (Atlantic Basin - the U.S. and, 
to a lesser extent, Europe) for natural gas, though 
increasing interactions between these markets is enhancing 
globalization of the commodity.  The growth in LNG trade - 
with Qatar at the forefront - and attendant spot sales is 
driving much of this changing dynamic. 
 
-- Current low prices, coupled with continued high costs for 
new liquefaction capacity, raises a big challenge for the 
energy industry to invest properly now to meet future demand 
needs. 
 
------- 
COMMENT 
------- 
 
-- Qatari representatives at the conference insisted their 
country is committed to its long-term vision of playing a 
major role supplying all three major markets in Asia, Europe, 
and the U.S.  They occasionally acknowledged short-term 
challenges for the industry, but said they are under no 
pressure to look for new markets, and believe the long-term 
trends still favor natural gas being a seller's market. 
 
-- However, Qatar may need to rethink in the short-term some 
of its price demands, due to the coming global glut of 
natural gas supply.  Unfortunately for Qatar, which will add 
47 mta of capacity in the next two years, its new supply is 
hitting the market right as demand is flagging and spot and 
oil-indexed gas prices are under pressure. 
 
End Key Points and Comment. 
 
Concern Over Global Economic Crisis 
----------------------------------- 
 
¶1. The Seventh Doha Natural Gas Conference, held March 9-12, 
provided industry experts an important forum for debating 
current trends in the natural gas markets.  The Amir of Qatar 
opened the conference, and the sessions featured a wide range 
of government officials, business representatives, and 
independent analysts.  Reduced global natural gas demand due 
to the economic crisis and the attendant disincentive for 
further investments in energy production was a key concern of 
most participants -- e.g., the Amir cited a need for "an 
encouraging price to justify investments," and the Energy 
Minister made it clear Qatar has not yet decided on further 
supply expansions. 
 
Long-Term Trend for Higher Gas Demand, 
Even as Economic Crisis Takes a Bite 
-------------------------------------- 
 
¶2. Most presenters believed demand for natural gas would 
decline relatively less than demand for oil during the 
economic crisis and recover with a continued supply shortage 
persisting in the future, once the current crisis abates. 
 
¶3. Independent analyst (and former BP official) Andy Flower 
predicted that in the short-term, there is likely to be a lot 
of LNG without committed markets - up to 30 million tons per 
annum (mta) of spot sales in 2009 and 50 mta in 2010.  He 
noted the global LNG trade fell last year by 0.8 mta, which 
 
DOHA 00000224  002 OF 003 
 
 
was the first drop since 1981, and there was a 5 percent drop 
in Asian LNG consumption in Q4 2008 compared to 2007. 
Several speakers pointed to the currently low prices for gas 
-- under USD 4 per million btu at Henry Hub -- as providing a 
disincentive for further investment. 
 
¶4. Over the long-term, however, Flower and other analysts 
projected a continued shortage of LNG and said the global 
market may have a shortfall of 120 mta by 2020.  (Note: this 
prediction is notional as it is unclear what global 
production will be beyond 2012 because it takes 4 years 
minimum to set up a new LNG plant).  Much of the future 
supply-demand gap depends on decisions made now and in the 
next few years to start building new liquefaction capacity. 
 
¶5. Flower assessed that it is difficult to see where growth 
in LNG supply will come from.  The industry is in a "wait and 
see" mode because of the financial crisis - especially 
because commodity price falls haven't translated yet into 
lower liquefaction plant costs.  Still, he projected that 
global LNG demand would grow 5 percent a year between 2013 
and 2020, after averaging 7.4 percent annual growth between 
1964 and 2008. 
 
¶6. Several other speakers pointed to trends leading to 
continued strong growth in demand for LNG imports worldwide: 
 
-- China and India are now entering an energy-intensive phase 
of development.  Lower natural gas prices could prompt these 
and other developing economies to alter their energy 
production capabilities in favor of natural gas-fired 
production - significantly adding to pressures on supply over 
the next several years.  (Note: Just before the conference 
PetroChina signed a new 25-year contract with QatarGas for 3 
mta of LNG.) 
 
-- Carbon reduction requirements in Europe and elsewhere 
could accelerate adoption of natural gas as a cleaner fossil 
fuel. 
 
-- Many new countries are planning LNG imports for the first 
time to diversify their energy sector, while many former 
exporters are also becoming importers (e.g., Canada, Mexico, 
Indonesia). 
 
Steps Toward Globalization of Natural Gas, 
Though Regional Divergence Continues 
------------------------------------------ 
 
¶7. Birger Balteskard, Commercial Manager for ConocoPhillips 
UK, assessed that the growing use of natural gas in the 
Atlantic Basin's flexible market will over time require 
higher commodity prices that compete with Asia's long-term 
contracts - a possible first step towards globalization of 
natural gas as a commodity.  In a corollary to this, Flower 
noted that price convergence within the Atlantic Basin is 
likely over the next few years due to market flexibility 
driven by LNG growth. 
 
¶8. Note: LNG spot sales have been rising and continuation of 
this trend will support price convergence.  Such sales 
accounted for about 20 percent of LNG trade in 2007, 
according to Jean-Luc Colonna of GDF Suez.  Still, LNG is 
only a portion of overall natural gas demand. 
 
¶9. Kathleen Eisbrenner, Executive VP for Global LNG at Shell, 
argued that global LNG markets are still resisting 
convergence.  Asian customers in particular see a supply 
security benefit to long-term contracts, while shale gas 
plans in the U.S. are undercutting the rationale for imports. 
 As a result, she expected U.S. Henry Hub prices to remain 
decoupled from global natural gas pricing, particularly if 
new technologies and availability of shale gas resources 
helps the U.S. successfully reverse its long-term decline in 
domestic production. 
 
¶10. Eisbrenner pointed to Europe as "the place to watch the 
next two years."  Investment and demand there can determine 
how much market share LNG deserves. 
 
 
DOHA 00000224  003 OF 003 
 
 
U.S. Market Seeing Fundamental Changes 
-------------------------------------- 
 
¶11. U.S. demand for LNG imports is now forecast to be 
dramatically lower than previously thought (Balteskard cited 
figures of demand for 13 mta of LNG, which is 75 percent less 
than predictions four years ago).  David Small from Trinidad 
and Tobago's Ministry of Energy cited estimates of 
recoverable gas in U.S. shale basins as now dramatically 
higher than before (742 trillion cubic feet estimate in 2008, 
compared to 215 tcf estimate in 2006). 
 
¶12. At the same time as domestic gas supply is increasing, 
the U.S. is the "market of last resort" for LNG.  In the 
summer, when natural gas demand is low, there is a "demand 
push" where excess gas is delivered to the U.S., usually at 
low prices.  A slackening of demand due to the economic 
crisis only accelerates this push.  The unbalanced situation 
is compounded by the possibility of cheap domestic shale gas. 
 
¶13. Small predicted the U.S. swing market would take center 
stage in 2009, and sellers will receive low prices for their 
gas. 
 
Qatar the Major Market Player 
----------------------------- 
 
¶14. The steadily increasing importance of Qatar to the global 
natural gas trade is obvious from a quick look at the numbers 
presented at the conference.  Qatar is projected to boost 
output by about 20 mta in 2009 (to about 50 mta), and should 
reach 77 mta by 2010 when all the LNG trains under 
construction have been commissioned.  The addition of 47 mta 
in Qatar amounts to half the 95 mta of new global capacity 
coming on-line between 2009-2012, and will cement the 
country's place as the world leader in LNG exports. 
 
¶15. Qatar's LNG-centric export strategy -- based on using 
mega-tankers from its central geographic position to supply 
major consuming centers in Asia and the Atlantic Basin -- 
will help the small state play a leading role in any 
harmonization of global natural gas markets.  Fully 25 
percent of global LNG supply will come from Qatar post-2010. 
In comments at the conference, Qatar's Energy Minister 
Abdullah Al-Attiyah said that developing further gas 
production capability is "under study" and Qatar is "not in a 
hurry" to develop additional supply capacity. 
 
Artificially Low Prices Keep Middle East 
Natural Gas Markets Distorted 
--------------------------------------- 
 
¶16. Michael Corke of Pervin and Gertz, Inc., in a 
presentation on natural gas in the Middle East, pointed out 
that Iran and Qatar are the two dominant regional producers 
and their capacities and policies are essential for 
forecasting the region's gas supplies.  Corke said Iran has 
been successful in using gas for domestic production but 
still lags far behind Qatar in the LNG sector. 
 
¶17. Fereidun Fesharaki of FACTS Global Energy noted that most 
MENA countries keep gas for domestic use priced well under 
market value, leading to excessive demand.  He argued that 
Iran and Qatar are very different as producers.  Iran has 
very little export room, and LNG exports are unlikely to 
materialize there before 2015 at the earliest.  The majority 
of the Iranian parliament and society are against exporting 
gas, as they want to consume it at home.  The government is 
in a dilemma, in Fesharaki's view, because it can't change 
the domestic price fast (for fear of unrest) and it faces 
strong popular opposition to exporting the product.  He 
concluded by observing that even the most optimistic scenario 
for Iran suggests it will only produce 20-36 mta of LNG in 
the next few years - not at all in Qatar's league. 
 
LeBaron