Qatar Fights Back with Gas Strategy: Comment

Qatar has been boxed in as its neighbours threaten harsher sanctions or other methods of bringing it into line, but Doha is pursuing an aggressive energy strategy.

Without tackling the negative impact of possible severance of energy ties with the UAE, Bahrain, Egypt or Saudi Arabia, Qatar said July 4 – a month after the start of the Saudi-led blockade – that it will be boosting LNG production by around 30%, aiming at a total capacity of 100mn metric tons/yr of LNG. 

Just a day after Doha denounced the list of demands by Arab countries, state-owned Qatar Petroleum said the new production was linked to a decision to double the anticipated output from a new gas project on the southern portion of its vast subsea North Field, furthest from Iran. 

At the same time, the Qatari foreign minister criticised the UAE over its economic boycott. The conflict between Qatar and its neighbours could now have a direct energy component. Minister Al Thani already has indicated that Doha could decide to cut gas supplies to Abu Dhabi, which was ruled out as an option earlier in the conflict, and most analysts even said it could not happen.

For the UAE as a whole, and Abu Dhabi in particular, ending gas supplies through the Dolphin pipeline would be painful in the short term, as Doha fuels around 40% of the UAE’s electricity needs. Even though the minister hinted at a possible gas supply cut, Doha until now rejects any options to escalate the conflict even more. A military confrontation is not yet on the table either but the threat of one is growing.

Qatar’s overall power position is a twofold one. When looking at its impact on the global LNG markets, the tiny Gulf Arab state is a virtual monopoly in several regions, but its customers, and its Arab neighbours, also understand that in the coming years, Qatar’s pivotal LNG position is under severe threat. New entrants are taking market share in Asia and competing directly with Doha in European markets.

At the same time, Doha’s dreams of supplying LNG to the USA have not materialised, as the latter has now itself entered LNG export markets thanks to shale gas. Still, Qatar still dominates for now.

But as geopolitics enter the Qatari LNG markets, partly owing to the emergence of Iran and Russia, a regional Arab conflict could mean a direct and imminent danger to Qatar’s regional and global power projections. Confronted with economic and financial demands by its GCC neighbours, Doha could also be facing a new threat, outside the Gulf. Arab countries already have openly discussed the option of blocking supply lines to Doha, interfering with, or constraining, shipping lanes to the peninsula; while potential investors and operators in Qatar could face an outright request by the likes of Saudi Arabia or Egypt to assess their own positions and allegiances.

Conflicts of interest

Companies working in the Middle East, such as Anglo-Dutch Shell, French Total, US ExxonMobil or Kremlin-backed Rosneft, could face a direct confrontation with regards to their local operations or investments, if they continue to be involved in, or linked to, Qatari operations.  A full confrontation between Qatar and the Saudi coalition could, and most probably would, lead to a situation in which international companies will need to decide which investments or projects to put on hold or terminate, in order not to lose their access to the main Arab markets.

The problem has been simmering for a long time, with three of Qatar’s GCC colleagues blaming it for backing Islamist groups including the Muslim Brotherhood, and being too friendly with Iran. But in a dramatic escalation shortly after the US president, Donald Trump, visited Saudi Arabia, the UAE and Bahrain, along with Egypt, the shaky official government of Yemen and Libya’s contested eastern government broke relations with Doha and imposed a ban on air, land and sea travel. Much of Qatar’s food and key equipment comes by land from Saudi Arabia, or reshipments through Dubai’s Jebel Ali port.

Qatar is one of the smallest oil producers in Opec, at 618,000 barrels/day, but condensate (light oil) and natural gas liquids, which are by-products of its giant North Field, still add about another 1.3mn  b/d. Until now, there have been no signs that Doha is reconsidering its position with regards to Opec or the existing production cut deal. Even if Qatar takes a more independent or even pro-Iranian position, its contribution is small. Its real power comes from being the world’s largest liquefied natural gas exporter.

The future of Qatar’s LNG and oil exports however could be bleak. At present, most of the country’s exports have been barred from Saudi and Emirati waters. A real impact on Qatar’s position would be if a very strict approach is put in place, including Cairo. Constraints through the Suez Canal shipping lane would spell disaster to Qatar, as its exports to Europe all pass that way. International law at present prohibits it, but Cairo might invoke a force majeure or national security position. At the least, Qatari vessels – or those going to Qatar – could face delays or other constraints.

If all of this is put in place, Qatari vessels would have to sail via Iranian waters and then pass the Strait of Hormuz via the usual shipping lane in Omani territory, or stay in the Iranian sector if Oman joins its GCC colleagues in the blockade. International pressure will be put on the Arab countries in that case, but existing bilateral economic relations between Saudi Arabia, UAE, Egypt and its international clients could mitigate this pressure. At present, the main issue for Qatar-bound vessels is the fact that they are now not allowed to call at Fujairah in the UAE, the region’s main bunkering port.

Doha has very little room for manoeuvre. As the peninsula state shares its North Field, the world’s largest gas field, with Iran, and has many vulnerable offshore installations up to the Iranian border, Doha has at present no real negotiation room with the Arab countries as a large part of its national security and its continuing prosperity depends on good relations with Iran. Doha also is playing at present two other cards, Russia and Turkey.

Ankara is at present fully behind Doha, not only economically but also ideologically. At same time, Qatar is playing its economic power position in its relation with Moscow, after underpinning state oil firm Rosneft’s share sale in December.

Heightened risk

Doha’s rejection of the Arab countries’ 13 demands increases the risk of conflict severely. Doha’s intricate threat to the UAE that it could cut of gas supplies to the Emirates is not taken well by the others. A real stop of Qatari gas supplies via the Dolphin pipeline would take out 2bn ft³/day in Abu Dhabi’s gas imports, or around 25-30% of total demand. It would be a direct attack on the security of the UAE’s main economic power Abu Dhabi and bring French oil major Total, US independent Occidental and Abu Dhabi’s sovereign wealth fund Mubadala into the conflict.

Of the total supplies to the UAE, around 200mn ft³/day is being transferred to Oman, which would push Muscat into the arms of Saudi-led coalition partners.

Without any doubt, the UAE has already been preparing for this option. The options available are related to LNG imports via LNG import terminals at Dubai and Ruwais in western Abu Dhabi. The current LNG import capacity however is not enough, even if sourcing could be committed from Australia or other places. Abu Dhabi could take another measure, declaring force majeure on its Adgas LNG exports to Japan and increasing existing gas production at home.  Some diesel substitution is also possible.

The next weeks or even days could set the stage for a new alignment scenario in the Gulf region, potentially with a military conflict still in the offing. Internal pressure on the Al Thani family is also expected to grow.

Buyers mull their options

For Qatari LNG customers the current crisis is a possible wake-up call. After relying for decades on Qatari LNG supplies, which were secure and always available, the need for a further diversification of suppliers is clear to most. Doha’s leading position in the market, even if it achieves its new target of 100mn mt/year, is under pressure. The growing instability in the region, the ongoing confrontation with its Arab neighbours and the possibly extremely negative fall-out, will frighten most customers.  At the same time, international customers are expected to increase their spot market contracts, which will be a direct threat to the traditional long-term contracts that Qatar LNG has been asking for. 

Higher shipping costs when dealing with Qatar will also play a role. The diplomatic rift means gas tankers, and other vessels with destination Qatar, are not able to bunker at the port of Fujairah or Jebel Ali, the main hubs for the region. All parties are now going to need to bunker in Singapore or elsewhere. While the UAE port authorities restrict international vessels from travelling to and from Qatar, along with Qatar-flagged ships, from entering its harbors, costs will increase.

For regional politics the current situation is unknown territory. Diplomatic spats between Gulf Arab countries are normally solved in a Shura approach, behind closed doors in family gatherings. This is no longer an option. The crisis has become almost supra-regional owing to direct support and links with two major non-Arab Islamic military powers: Iran and Turkey. Analysts doubt if the other Gulf Arab countries or Egypt had foreseen this escalation.   

The military situation at present is still very clear. If Turkey and Iran do not fully support Qatar in a military confrontation with the Saudi-Egyptian alliance, a lightning strike will end the Emir’s reign within a day. The situation changes dramatically if Iran and Turkey, which already has a military base in Qatar, opt to take part in a fight against the Saudi alliance. A peninsula-focused action could soon become a supra-regional confrontation, which the US and Russia will be pulled into. Both scenarios are still possible but not wanted.

The situation will develop over the coming weeks, but the outcome is unclear. If Doha continues to support the Muslim Brotherhood, Hamas and Iran, its neighbours will work towards a substitution of Qatari gas supplies. The loss of these Arab LNG clients will hurt Qatar severely but it is not lethal. A bigger threat would be the Arab alliance putting pressure on other customers, such as western Europe or Asian clients, to boycott Qatari LNG. 

At present, based on the oversupply expected between now and 2022, clients are more than able to find different supply sources.  Geopolitically the situation is very diffuse. In a worst case scenario, Doha will align itself with Iran, while trying to get in Turkey too.

A full confrontation in that case will become a supra-regional military issue, which is not wanted by all. Looking at temperatures at present in the region, one wrong decision could however lead to the inevitable. Looking at the harsh discussions in the media, even an incident in Syria, Yemen or even Libya, could bring the region’s stability to a collapse.  

Cyril Widdershoven,

Energy and political risk analyst, specialising in Middle East and North Africa