Natural gas trade does not receive the same level of attention as crude oil when it comes to Middle Eastern politics, but when you throw Qatar into the mix, it certainly deserves a look. Qatar is the Saudi Arabia of liquefied natural gas (LNG) markets, accounting for 30 percent of all production. It is also the source for the Mideast’s only major cross border natural gas pipeline trade.
The country now sits a bit more isolated among a group five nations — Saudi Arabia, Egypt, United Arab Emirates (UAE), Bahrain, and Yemen — that cut off diplomatic relations with Qatar, deeming it a supporter of extremism and terrorism. One odd aspect of this group is that Egypt and the UAE count on Qatar for a significant amount of their LNG and pipeline gas supplies.
{mosads}The key question to be answered is whether this diplomatic rift will spill over into the commercial realm. In particular, Egypt was Qatar’s largest market for spot LNG in 2016 — 66 percent or 17 million cubic meters per day (mmcm/d) of total Egyptian LNG buying. If anything, 2017 volumes are ahead of last year’s pace.
Year-to-date flows are roughly double last year at 21-mmcm/d through May. The diplomatic U-turn is all the more surprising when you consider that Qatar played a significant role in covering significant gas shortages in Egypt starting in 2015, when the country’s own output failed to cover domestic demand. While not publicly available, commercial terms had also been considered highly attractive for Egypt to this point.
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While it is possible that commercial flows will persist despite political schisms, PIRA Energy is assuming that the repositioning of spot LNG cargoes will occur with more Atlantic Basin volumes going into Egypt from the U.S., Nigeria, and Trinidad, while Qatar will move more volume to other buyers in the Mediterranean.
Egypt imported spot cargoes from a wide variety of sources in 2016 and was the third-largest spot buyer in the world last year after Japan and India at 28 mmcm/d.
Egypt was far and away Qatar’s largest customer for spot cargoes, although 65 percent of its total LNG exports go to Asian buyers, such as Japan, South Korea and India, most under long-term contract. Due to recent gas developments by BP, Shell and ENI, PIRA believes that Egypt will reach supply self-sufficiency by the end of 2018, but the country is not there yet. The transition is already underway with the country simultaneously importing and exporting cargoes since the middle of last year.
The UAE, which also cut ties with Qatar, also imports smaller amounts of LNG from Qatar via Dubai, but imports large amounts of gas by pipeline. In all, Qatar provided UAE with 30 percent of the gas it consumed last year. At this time of year, when electricity demand is peaking, any reduction in flows would be highly disruptive to the power grid. Flows appear to be normal through Monday. The UAE is also a transit country for Qatari pipeline flows to Oman.
While extremely reliant on Saudi border trade for food imports by truck, the Saudi-Qatar trade relationship does not include gas, but interests are beginning to overlap outside the traditional OPEC oil-centric framework. Only last Friday, the Saudis announced a major initiative to invest in global gas and LNG production for the first time.
The Saudis are chronically short of gas despite having the six largest reserves in the world. In the past, gas imports were a political non-starter, but the emergence of the Saudi Aramco IPO appears to be changing this position. Heretofore, global gas trade had been the stronghold of Qatar. Note that Qatar is also pursuing LNG production outside of Qatar for the first time in order to match its competitors among the major energy companies, such as Shell and BP.
On the political front, what makes this situation tricky is that the U.S. maintains a major military base at Al Udeid in Qatar and the conflict emerges immediately after the Saudis met publicly with President Donald Trump and privately with Russian officials in recent days. Qatar is well known in the region for talking to as many sides as possible in any given conflict, which often works out in its favor.
This time, it apparently has not, and some form of rapprochement will be necessary. Adding further complications to the story, multiple outlets in the Mideast confirmed that a number of Hamas leaders were asked to leave Qatar immediately.
Ira Joseph is the head of global gas and power for PIRA Energy, an analytics unit of S&P Global Platts.
The views expressed by contributors are their own and not the views of The Hill.