The Gulf on the Verge of Explosion Due To Natural Gas

The Gulf on the Verge of Explosion Due To Natural Gas

By Joaquín Robles

01/02/2018

Joaquín Robles is a Bachelor in Business Science, with a specialization in Private Banking and Financial Counseling by the I.E.B. He is also an Account Manager at XTB

On June 5, Saudi Arabia, the United Arab Emirates (UAE), Egypt, and Bahrein announced their decision to cut diplomatic ties with Qatar, closing land borders and banning Qatari planes from their air space, in addition to imposing sanctions on entities from this nation. Doha claims these measures are unfair, assuring they are based on false assumptions and accusing its neighbors, particularly Riyadh, or starting a siege against it.

The oil market seems impervious to geopolitical risk. While four Arab nations imposed an unprecedented ban on Qatar, oil prices rose by 1.6 percent before going down again. However, the fuel to watch is not oil, but gas. If this dispute is not quickly resolved, it could mean a hot summer for the Gulf.

The problem has been latent for a while, with three members of the Gulf Cooperation Council accusing Qatar of supporting terrorist groups, including the Muslim Brotherhood, and being too friendly with Iran. But this in a dramatic turn of events, shortly after U.S. President Donald Trump visited Saudi Arabia, the UAE, Bahrein, and Egypt, the Yemen government and the controversial eastern-based Libya government cut relations with Doha and banned its tankers and aircrafts from their air and maritime space.

Qatar is one of the smallest producers in the OPEC, with 618,000 barrels per day, but condensates like Liquefied Natural Gas add another 1.3 million bpd. Although the country is expected to sustain its commitment to the OPEC production cut agreement, in case it does not, its contribution is too small to constitute a destabilizing factor in the market. Its real power comes from being the world’s largest LNG exporter.

Qatar’s LNG exports should not be affected, even if its tankers are banned from Saudi and Emirates’ waters. These tankers can navigate through Iran’s waters and then through the Strait of Hormuz crossing the normal shipment canal in Omani territory, or remaining in Iranian territory if Oman decides to join the members of the Gulf Cooperation Council (GCC) that cut ties with Qatar.

Any attempt to halt its gas exports could lead to an important crisis that would provoke a serious response from the main LNG importers: Japan, South Korea, and India. If the conflict continues to escalate, the biggest retaliation open to Qatar would be to cut off natural gas exports to the UAE through the Dolphin pipeline.

This project, grouping Total (24.5 percent), Occidental (24.5 percent), and Abu Dhabi’s strategic investment company Mubadala (51 percent), delivers over 600 billion cubic feet per day, more than a quarter of the country’s consumption. With temperatures in the Gulf reaching over 40°C, energy consumption for air conditioning is reaching its peak.

After decades of worrying about Iranian interruptions to Gulf oil and gas flows, the new concerns come from an unexpected source. Fortunately, there are favorable conditions in global oil and gas markets and there is no immediate danger.

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