Watching the World Warning for OPEC LNG producers

With David Knott from London [email protected] As a journalist, I always enjoy speeches by Sheik Ahmed Zaki Yamani, former Saudi oil minister and now chairman of London's Centre for Global Energy Studies (CGES). Yamani is an eloquent speaker. More importantly, given my requirement to produce interesting copy, he puts across ideas that make people think. And he is never afraid of upsetting people.

March 31, 1997

3 min read

As a journalist, I always enjoy speeches by Sheik Ahmed Zaki Yamani, former Saudi oil minister and now chairman of London's Centre for Global Energy Studies (CGES).

Yamani is an eloquent speaker. More importantly, given my requirement to produce interesting copy, he puts across ideas that make people think. And he is never afraid of upsetting people.

Yamani was keynote speaker at the Second Doha Conference on Natural Gas in Qatar earlier this month. Most speakers politely congratulated the Qataris for completing recently their liquefied natural gas (LNG) project.

Not Yamani. Instead he warned LNG producers among Organization of Petroleum Exporting Countries (OPEC), including our hosts in Qatar, that they should curb their oil production.

"Some OPEC members are behaving as if they do not belong to the organization," said Yamani. "They tend to produce every barrel they can, hoping that those members that do not do so will understand their behavior."

Tolerance

Saudi Arabia, Kuwait, and U.A.E. have shown greatest restraint, said Yamani. They have been tolerant while oil prices are still high enough, but what will happen when crude oil drops below $16/bbl?

"One way of disciplining recalcitrant members is by flooding the market," said Yamani, "and this could indeed happen."

Yamani singled out OPEC LNG producers Algeria, Indonesia, and Qatar for criticism, because their production of oil beyond their OPEC quota is in conflict with their gas interests.

"Is it sensible for these countries," said Yamani, "to risk harming some of their gas projects, perhaps irrevocably, by pursuing oil output policies that might precipitate a price collapse?

"I can understand countries like Venezuela, Iran, and Nigeria putting their oil interests ahead of their gas. After all, their oil resources are much greater and they stand to benefit from a larger share of the oil market.

LNG vs. oil

"This is not true of all the member states of OPEC, however, which is why those members whose gas reserves are a significant proportion of their resource base should not put development of this gas in jeopardy."

OPEC members' most significant gas developments involve LNG export to markets in the Far East. But LNG would never be able to compete with oil, said Yamani, if environmental considerations were set aside.

Yamani expects the oil price to remain low for the next 5 years or so. Because the price of LNG is linked to oil, new LNG producers face weak cash flows at a time when repayments of project loans are most burdensome.

"The fully built-up cost of delivering Middle Eastern LNG to Japan at the moment is not far from $15/bbl of oil equivalent," said Yamani. "The cost of producing crude oil from a brand new oil field in the gulf and landing it in Yokohama on a brand new supertanker probably does not exceed $7/bbl.

"This is the kind of competition gas is up against. Fortunately, since the newly emerging gas exporters in OPEC are also oil producers, they are in a good position to ensure that oil prices do not harm both their oil and budding gas industries."