Credit: © Jan Koller/CTK/ZUMA Wire/TASS
Experts agree that regional and geopolitical developments around Qatar will hardly affect the outcome of the OPEC+ Vienna quotas deal on May 25. Russian Energy Minister Alexander Novak made it clear: “The agreement has to be implemented, and nothing will stand in its way”.
Short-term fallout unlikely but…
Warnings that Qatar will inevitably be kicked out or suspended by other OPEC member states are too far-fetched, just like projections of seismic shifts including a breakup of the strong oil exports cartel.
But is certain to happen? What will be the outcome for the world economy?
Any short-term effects except for the immediate up and down in oil prices are unlikely.
The Strait of Hormuz, the precious channel for 30 percent of global energy exports, is still open for everyone including for the allegedly misbehaving regional player. It is almost inconceivable that the three guards of this narrow but indispensable navigation route (Iran, the UAE and Oman) would want to close it down.
According to Japan’s JERA Co, the main consumer of LNG, Qatargas informed the company that LNG supplies would not be affected. It is a significant statement especially when you recall that Japan is the world’s largest LNG importer accounting for a third of global supplies, and Qatar is known to be the planet’s biggest LNG supplier.
European consumer may shed their worries, too (at least, economic ones) unless the conflict prompted by severing diplomatic ties spirals into a more dangerous standoff.
Even if things turn ugly for Qatar, there are a number of effective steps it can take outside political or diplomatic space. These measures would tip the balance on the regional natural gas market. It is a possible step and does not need to be put into life immediately. The besieged emirate can unlock a new, until now dormant field of natural gas on its territory and dump its capacity on the market. It would first send ripples across the exchanges but over time it might shift the balance of supply and demand. This is a major and yet unstudied gas field. These extra reserves have been kept hidden away under a self-imposed ban introduced in April 2017 to maintain pricing at a comfortable level.
In an earlier episode of similar financial and fiscal prudency in 2015, Qatar showed goodwill and announced a freeze on developing the North Dome field (part of the South Pars / North Dome field it co-owns with Iran). It was honest in living out the self-imposed freeze and the 2016 tally stood at just 77 million tonnes although it could have easily – through a more intense production efforts – gone beyond that figure.
Blow to gas OPEC plans
As an OPEC member, Qatar has long promoted the establishment of a natural gas cartel, similar to the oil group set up in 1960. Some of its OPEC partners were apparently jealous but Russia’s energy sector views it as a constructive albeit a premature idea. However, Moscow did take part in a number of regular conferences in Doha aimed to nurture such an alliance.
In other words, Moscow seems to show understanding but have been straightforward that the concept of a new gas OPEC is too early simply because there is no global gas market, unlike the freely moving along national connecting vessels oil. Its future chains have not yet been linked. But what if today’s acute Qatar’s dilemmas will first slow down and then, conversely, speed up the establishment of such a market?
There are actually two camps, or two ways of thinking, concerning the future of the gas transit industry. Some scientists and analysts favor pipelines.
They say the world needs to opt for a diverse network of links to ensure uninterrupted supplies even if some like those that cross continents cost a fortune to build. Other think-tanks say it is an updated and flawed approach.
Recently, the second camp has got some fresh case to prove their point. Most often it is not exporters and end buyers who are to blame but transit countries or those who claim to be one. As a result, we have the southward Brotherhood pipeline partially idle, the utopian Nabucco ditched, the South Stream called off and the Nord Stream 2 across the Baltic Sea continuously seeing attempts to stall it…
Over these years, Qatar has successfully promoted the technology of liquefaction and shipment by tankers saying it is cheaper and safer in every respect. The emirate does not have any pipeline links even to its neighbors, Saudi Arabia and the UAE. The tanker priority business philosophy has spread around the world taking over entire alliances of transnational holdings, universities and think-tanks.
However, today this school of thought has suddenly found itself to be a minority. The Gulf conflict proves that even this modern, mobile and high tech solution has its cons. Shipments are on the way, but they turn out to be as vulnerable as pipelines.
That’s why idea of a gas OPEC is put on the back burner. For now. But we do not really know what the gas scene will look like in the next couple of years.
Western energy companies step up, Gulf role waning
Excited with a surge in consumer interest in LNG amid the Qatar crisis, the Western powers and their energy companies are extremely concerned over the safety of its supplies. In any case, they want to jump on the bandwagon. They are likely to ramp up their output, build up liquefaction capacity and increase its exports.
You bet they would! Unlike in the previous years of the protracted depression, the business could soon be profitable, and prices could hit the 100 dollar threshold for a 1,000 cubic meters. If things get better, the US will boost shale gas output, speed up liquefaction and construction of terminals to supply this new capacity to the EU. Advanced Australia will join the club by resuming development of its own gas field in Indonesian waters. Unless the GDP of China, the planet’s main industrial powerhouse, slows down even further, the pumps will soon run at full swing.
As a result, the Arab countries that severed ties with Qatar will soon understand that the unfortunate diplomatic crisis is bad not only for the emirate. The duel is bad for the entire Gulf region. It will be losing its centuries-old image of an almost guaranteed reliability as the biggest energy supplier.
If you might remember, it took years to get back to the previous level of relationship following the 1973 oil embargo against the US and the UK over their support for the Yom Kippur War. If you take trade, they never got back to the normal framework based on intergovernmental energy agreements. Most of the contracts moved to the bourgeoning spot market. It is a market with almost anonymous transactions with the oil provided by some of the oil majors. To be honest, it would be extremely undesirable to allow any upheavals with unpredictable ramifications for the market in the 21st century, especially in such a delicate matter as LNG.
In other words, the Qatar crisis is unlikely to make any strong immediate impact on the commodity market in general, but it will definitely have a lasting psychological effect prompting countries towards a rethink of key issues. It is not just about the relationship between the Middle East and the post-industrial West. There is another dimension and we will explain it below.
In terms of natural gas Russia is a competitor
Two similar reports come at the same time from Moscow and Doha.
A squad of trained hawks will now guard the Moscow Kremlin, a tribute to the falcon fashion of the times of Ivan the Terrible who loved hunting so much. Falcons became so popular in the past that there is a famous Moscow park that has been named Sokolniki (from ‘sokol’, or falcon in English).
Much more dramatic news leaked out from Qatar on the recent falcon hunting story when 26 royal family members veered into the Iraqi territory and had to pay ransom worth 1 billion US dollars to Al-Qaeda, a terrorist group banned in Russia. It was only after Doha paid the money that the royalty were able to go back home, along with 50 other captive nationals from the war-torn Syria.
It seems like a coincidence: beautiful and precious wild prey and the hunting rituals have been part of the national tradition in so diverse nations. But it is not just the birds that look similar or the stories. It is much more important the Russia, just like Qatar, speeds up its drive to build up its LNG capacity, and the alarming news from the Middle East forces the authorities to step up the efforts to find consumers on their own.
There is nothing you can do about it, really. We fully empathize with the Arab nation that found itself in such a dire situation (and the Russian president made it absolutely clear in his sincere and peaceful telephone exchange with the Emir of Qatar recently) but we cannot change the laws of competition. In fact, it is tightening in the oil and gas sector. Anyway, we should not slow it down, just as we cannot be happy with the current status quo when Russia owns an only LNG plant as part of the Sakhalin-2 project.
“Russia’s share in global gas reserves is 22-24 percent,” Leonid Mikhelson, head and co-ownder of Russia’s biggest private gas holding Novatec was quoted as saying. “Russia should have the same share on the LNG market”.
Novatec’s Yamal LNG upstream and downstream project would send ripples from the heart of the Eurasian power across the entire world. Russia feels pity for Qatar’s tribulations but the crisis is a strong signal that the country needs to speed up the implementation of its own plans in the industry because from now on they are bound to be profitable.
There are at least seven material factors behind a confident forecast for Russia’s successful LNG future. First, Russia’s Arctic region is home to more than 60 percent of the Arctic hydrocarbon reserves. Second, agile Kremlin regulators opened access to the offshore Arctic areas and the tundra regions to private players, and extra injections have become a reality for northern upstream projects. Third, foreign companies are actively investing into Yamal. While the Vankor oil field operated by Rosneft to the south of Yamal has attracted a consortium of Indian shareholders, Yamal has become the destination for Chinese investment.
Moscow’s trump card? Yes, but not at the expense of others
Even the states that are not allowed to invest because of the tough anti-Russian sectoral sanctions have still found a way to get a share of the future LNG pie.
Japan is one of the investment pioneers into the Yamal LNG project, with its banks bringing a total of $250 million to the northern peninsula. It is just the beginning. Norway’s Statoil and a number of affiliated companies with their high tech drilling facilities are willing to disobey the ‘spirit and letter’ of sanctions. Meanwhile, Brussels (and Norway is not part of the EU), according to Vladimir Chizhov, Russian envoy to the EU, is seeking to soften the sanctions, and perhaps as early as in July we would see a switch from the tough language of sanctions to ‘some restrictions’.
The sixth reason, and a very strong one, is the Northern Sea Route that would be as appealing to LNG tankers from different countries as the traditional routes through the Indian and Pacific oceans. I remember that in the 1990s my Arab friends were surprise to see Russia disregarding such a promising maritime route and the towns that lay along it. These towns were then perceived as an ugly legacy of the Soviet love for overly ambitious projects? I guess my friends were right.
They were right not because they knew that the other routes would also have pitfalls, even though they lie along tropical climate areas. They must have forecasted that outbreak of anti-LNG piracy – in Somali waters and elsewhere - and maritime terrorism that has been tackled including thanks to the Russian navy. Unlike these routes, the Northern Sea Route is not exposed to piracy or military threats that could impede the LNG delivery through the Bering Strait to China, South Korea, Japan and other nations.
Finally, here comes the seventh argument. Due to global warming that Russians generally believe in unlike some other opponents overseas, the ice sheet is receding from the plain northern coast extending the summer navigation season, fortunately. It means that the exorbitant ice pilotage services will stop to be mandatory for LNG tankers.
In other words, it highlights very positive prospects, and Russia will not be that much of a competitor to Qatar. Rising India will be able to absorb all the LNG flows both from the East and the West. The UK, a Qatar customer, is unlikely to prefer Moscow over Doha. Eastern and Central Europe are among other customers for Qatar. Take Poland, which has had oil contracts with Middle Eastern countries. Other export destinations will remain, too. It means there will be enough customers for everyone, and demand would be very high.