In the game of chicken gripping the Persian Gulf, Qatar is responding to recent overtures from its Gulf Cooperation Council (GCC) neighbors by slamming its foot down on the gas – liquefied natural gas, to be precise. Over the past few weeks, Qatar’s government has been busy promoting a diversification program that will purportedly reduce the nation’s economic reliance on its LNG exports. Their message – borrowed from the Russian playbook - is quite simple: the blockade, instead of being a hindrance, is an opportunity. But that bold claim isn’t backed up by facts.
Harvesting natural gas from beneath the Persian Gulf has so far been an extremely lucrative pursuit; LNG has made the minuscule state the world’s richest country, rocketing per-capita GDP to among the highest levels of any country on Earth. Qatar’s South Pars/North Dome gas field (shared with Iran, Qatar’s neighbor on the other side of its Gulf) holds estimated known reserves of 51 trillion cubic meters. Those numbers are not exact, of course: BP has estimated Qatar’s reserves at 24 tcm and Iran’s at 35.
While that colossal supply of LNG is not likely to be exhausted any time soon, Qatar has indeed taken a few small steps over the past several years to diversify its over-exposed economy. Currently, petroleum and liquefied natural gas still provide the government with 85 percent of its revenue. Those steps have now taken on greater urgency since the start of the crisis. Doha has invested in promoting itself as a tourist destination and is now propping itself up as a “regional business hub,” dumping large amounts of money in projects including expansions and upgrades to Hamad International Airport.
However, any outside investor taking the Qataris at their word should think twice. Tensions between Qatar and the rest of the GCC are already spilling over into the country’s future economic prospects. Moody’s has downgraded Qatar’s bank outlook while specifically citing concerns about the ability to successfully diversify, and a Bloomberg survey of economists predicts Qatar will see its slowest rate of annual growth in over two decades.
Qatar is also undermining its own diversification messaging by doubling down on production. The country was already in the midst of a rise in LNG exports, having broken a twelve-year moratorium on new drilling in its North Field. The new drilling will eventually yield up to 2 billion cubic feet per day, which translates into 400,000 barrels of oil. Qatar’s motives were fairly obvious – moving quickly to turn on a new spigot of natural gas in the face of rising demand.
Plans to bump gas production from the North Field by twenty percent (increasing Qatar’s overall LNG production by thirty percent, to 100 million tons) were announced a month after the crisis began, and the diplomatic fallout has only increased this new drilling. The rationale is easy enough to understand: when Saudi Arabia, the UAE, Bahrain, Egypt, and Yemen severed diplomatic relations with Qatar, the emirs found themselves a pariah of the GCC nearly overnight.
In their stead, Qatar has a few (bad) options that are problematic for future growth prospects. Iran and Turkey are now the primary players supporting Qatar in the blockade, but if these are the markets Qatar wants to offer access to as a “regional hub,” things are off to a bad start. Global business interests have to account for concerns over the rule of law, lagging reforms, political instability and ongoing conflicts in Turkey; remaining U.S. sanctions and the prospects of the Obama-era nuclear deal falling apart make any business venture in Iran a daunting prospect. Qatar’s cultivation of closer ties with Iran has been a significant misstep in its overall approach to the region, smoothing their joint custody of North Field/South Pars but aggravating both the GCC and the United States.
Despite the mutual recriminations between Qatar and the GCC, the current state of affairs is ultimately a self-inflicted wound for the Qataris. On top of fostering close ties with Tehran, their policy of backing regional rebel and anti-government forces like the Muslim Brotherhood, Hamas, elements affiliated with al-Qaeda in Syria, the Taliban, and other insurgencies have alarmed the rest of the GCC. Qatari leaders also earned direct, unapologetic censure via Twitter from President Donald Trump himself. The country is now isolated politically and economically from it most important regional partners.
As such, the “reforms” being unveiled by Qatar’s government are quite clearly temporary salves to lightly bandage over a sucking chest wound. Australia’s massive Ichthys gas field is slowly coming online and the country is expected to become the world’s leading exporter of LNG by 2020, while the U.S. is slowly ramping up exports. Even Russia is threatening Qatar’s crown: the Yamal field facility is expected to launch this year and will produce 16.5 million tons of LNG per year by 2019. At the same time, Qatar’s LNG revenues are at risk: spot Asian LNG prices have cratered from over $20 per mmBtu in 2014 to a bit over $6 in August. It wouldn’t be surprising if Qatar’s trade partners will seek to extract better LNG rates from the country once current deals laps. The emir are under threat from multiple fronts, increasingly isolated and with few alternatives.
The bottom line is that the GCC crisis puts Qatar on the road to economic ruin in the long term. For all its talk of the embargo as an opportunity, the only way for the country to seriously pursue any substantive economic reforms is in conjunction with its GCC neighbors: without access to Saudi and Emirati markets and at odds with Western markets, the Qatari economy will never be able to tempt outside investors. The blockading nations have already made overtures and offered to open a dialogue with Qatar, so long as the Qataris act in good faith to cut off the terrorist financing that passes from and through their territory.
The harsh reality for Qatar is that there is no way to "win" this impasse. Given the comparative weight and geopolitical influence of Qatar and the wider GCC, the only way out will be to accept what will soon be a fait accompli.
By Scott Belinksi for Oilprice.com
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