Last week, Saudi Arabia, the UAE, Bahrain and Egypt cut diplomatic and economic ties with Qatar, accusing Qatar of supporting extremism. The measures are of unprecedented severity in modern GCC diplomacy with adverse consequences on Qatar, not least for its reputation as a business and international and regional transit hub and a host for international events, including the 2022 World Cup. While there are many efforts for mediation underway, it will be difficult to bridge the gap between Qatar and Saudi Arabia and its closest allies. At the root of the dispute is a fundamental difference in foreign and regional policy. For years now, Qatar has operated a pro-active foreign policy, supporting the Muslim Brotherhood and its affiliated militant groups across the region. By supporting such groups, Qatar has been able to punch above its weight and establish itself as a key player in the region’s affairs. In contrast, Saudi Arabia and the UAE have long banned Muslim Brotherhood and consider the movement as a major threat to their countries’ political stability. So, it should come as no surprise that Qatar and Saudi Arabia have found themselves pitched against each other in regional power struggles in places like Egypt, Syria, Libya and Palestine. Also, Qatar has always adopted a cautious approach towards Iran, eager to promote economic and cultural links and careful of not provoking the country that controls the other half of the North Field (known as South Pars in Iran). Saudi Arabia on the other hand considers Iran as a threat and destabilizing regional force that should be confronted by building an alliance with the US and other Muslim countries.
Volatility risk for energy markets
Further escalation is unlikely, but the dispute will not be resolved anytime soon, unless Qatar makes some very painful concessions. Therefore, oil and gas markets need to get prepared for a flow of headline news, which could induce some volatility from time to time, although the impact of the current escalation on oil and gas market fundamentals is rather limited. In terms of oil market, we see a limited impact on balances or prices. Qatar’s crude oil production has been in decline for many year and currently stands at around 0.6 mb/d, with limited upside potential. The extraction of natural gas from the North Field is associated with the production of large volumes of condensates and NGLs, exceeding the volume of crude oil production. There has been some speculation that the current dispute could derail the current OPEC-NOPEC deal, but there is no basis for such speculation. After all, many OPEC members are politically opposed (for instance Iran and Saudi Arabia) and more recently Russia and Saudi Arabia succeeded in forging an output deal despite the fact the two countries disagree on many key issues including Syria, Yemen and Iran. But even in the unlikely event that Qatar’s membership of OPEC is revoked, Qatar is one of the organization’s least significant oil producers, accounting for under 2% of group oil output and its contribution to the current output cut is minimal. However, the closure of the maritime space will disrupt some of traditional shipping routes, as Qatari crudes are often co-loaded into VLCCs with other crudes from the region. Platts, the price reporting agency, has already restricted Qatari loading crude in its pricing process. On the demand side, given Qatar’s importance as a regional and international air travel hub, short-term demand, especially for jet fuel, may be affected as many flights out of Qatar get cancelled. If the current restrictions last for a long time, then there is a serious risk to Qatar’s ambition of becoming an international and regional transit hub.
Swing supplier for LNG hanging in the balance
In terms of gas market, Qatar is a global LNG player. Its LNG exports only began in December 1996, but they have risen rapidly over the last few years with current capacity standing at 78 million tons per annum (mtpa). Because it is located roughly equidistant between the major consuming centers of Asia and Europe, Qatar sells its LNG to markets in both the Atlantic and the Pacific Basins and has held a strategic role as a ‘swing supplier’ between these regions. This has given it an importance in world LNG markets even beyond that resulting from its large LNG export volumes. Despite Qatar’s massive gas production and the potential to satisfy growing demand from its GCC neighbors, its pipeline regional exports remain limited. Plans for a GCC-wide gas grid failed over a series of political rows and tensions and pricing issues. A smaller version of the gas grid concept has translated into the Dolphin pipeline, which transports Qatari gas at relatively low cost to the gas-hungry markets of Abu Dhabi and Oman. Will the current dispute affect Qatar’s gas exports? For now, there is no indication that Qatar’s exports of LNG, oil or NGLs will be impeded, although bunkering at Fujairah has been halted for Qatari-flagged vessels or those heading to or leaving Qatar. Qatari ships may be forced to operate in Iranian Exclusive Economic Zone (EEZ) waters if they are banned from the Emirati EEZ. According to some reports, this is already creating chaos, pushing shippers to find new points for refueling with the risk of increasing costs and delaying deliveries.
Long-term effects difficult to quantify
Qatar shipping should retain use of the Suez Canal, which is governed by international agreements. But Egypt could reduce the canal-fee discount offered to LNG ships, making transits more expensive for Qatari LNG carriers and reducing Qatari LNG competitiveness in the European market. Pipeline gas (Dolphin pipeline) and LNG exports to the UAE are set to continue for now, as are LNG exports to Egypt, delivered through trading companies. But the UAE could source additional LNG cargoes to reduce or halt its import of Qatari gas (currently 2bn cf/d) via the Dolphin system, which could be put some pressure on spot prices, but such pressures will be short lived as the LNG market is oversupplied. Equally, Egypt could bar LNG of Qatari origin, but there is no evidence yet that Egypt will take such a move. While the impacts of the current escalation on energy markets are likely to be limited, the same can’t be said for the stability of the Middle East. The region is already undergoing a ‘regional’ civil war, which has fragmented countries, created new geographical boundaries, and increased the power of non-state actors. The current rift within the GCC, if not contained, will only amplify the regional civil war, increasing the risk of further fragmentation, more intense proxy conflicts, and higher instability, which although may not have direct impact on immediate oil and gas supplies, it will impact the long-term productive potential of the region.