Qatar, LNG, and the Suez Canal

World Oil

JULY 2017 / Vol 238 No. 7

The recent crisis that has begun in the Gulf—which led to the boycott of Qatar by Saudi Arabia, the UAE, and Egypt—has raised several questions about Qatar’s natural gas and LNG resources, that serve as a supply source to neighboring countries and global markets.

The recent crisis that has begun in the Gulf—which led to the boycott of Qatar by Saudi Arabia, the UAE, and Egypt—has raised several questions about Qatar’s natural gas and LNG resources, that serve as a supply source to neighboring countries and global markets. It also begs the question of whether Egypt even will allow Qatar LNG tankers to pass through the Suez Canal.

Qatar is an oil and gas exporter, the largest LNG exporter in the world, a member of OPEC, and a founding member of the Gas Exporting Countries Forum (GECF). In the midst of the currently unprecedented diplomatic crises in the Gulf, will Qatar leverage the power of its LNG and natural gas exports by restricting supply to opponents? When one examines historical examples of the use of such methods, conventional wisdom states that Qatar will not, and should not, use its market share of LNG and natural gas as a weapon to achieve its political goals.

Reliability is the key for success. The objective of every large producer with vast reserves is to ensure a stable, long-term market for its products. For this objective to be achieved, the supplier must be reliable, above all else. For this reason, sometimes, we see countries and companies sacrificing short-term profit to maintain their reputation as a reliable supplier of energy.

Conventional wisdom. Evidence from the oil market shows that it takes up to 15 years to regain lost crude customers. Russia, despite all the pipeline politics, economic sanctions, and the ups and downs of the European economies, has continued to be a reliable supplier of natural gas to Europe. After learning from the boycotts of 1956, 1967, and 1973, Saudi Arabia has also continued to be a reliable supplier of oil to its customers, even under dire circumstances. It has even gone a step further by building storage facilities near the heart of its markets in Asia. Based on the same conventional wisdom, Egypt has not allowed its politics to interfere in the Suez Canal since the 1970s, despite a revolution and a coup in the last five years.

Qatar is no exception. Just like the others, its objective is to be a reliable long-term supplier of energy, despite political turmoil. In fact, Qatar cannot afford to play games with its LNG exports at a time when U.S. and Australian producers are ready to take any market share they can. To mitigate the impact of the boycott by neighboring countries, Qatar needs all the revenues it can get, and it cannot afford reducing LNG exports and cutting off natural gas supplies to the UAE and Oman through the Dolphin pipeline.

Cutting off production and exports will not only reduce Qatar’s revenues, but the cost of curtailing production, and then restarting it, would be prohibitively high. These methods may also subject Qatar to litigation by its partners and customers.

Bottom Line: It is not in the interest of Qatar to cut LNG and natural gas exports, and thus, the country is not expected to do so.

Can Egypt block Qatari LNG from passing the Suez Canal to Europe? The international convention agreed upon by Egypt and several maritime powers in 1888 in Constantinople guarantees free navigation in the Suez Canal. Egypt cannot deny passage to any civilian or military ships through the canal. However, article 10 of the agreement, allows Egypt to block the ships of countries at war with Egypt. Still, article 10 is vague, and can be explained or manipulated in different ways.

The reason for its addition to the agreement, and the way in which it was added, makes the article even more difficult to sort out—even by specialized legal scholars. Even if we side with the argument that Egypt can block ships, one thing is clear: Egypt must declare war on Qatar, or Qatar must declare war on Egypt, to allow Egypt to legally ban Qatari LNG from passing through the canal. Despite the severity of the dispute with Qatar, we are not at that war stage yet.

Five additional factors to consider when discussing Qatari LNG and the Suez Canal:

1. Just like oil and gas producers, Egypt wants the canal to be reliable. If not reliable, the substitute is readily available: going around Africa.
2. Revenues from LNG tankers are badly needed by the Egyptian Government.
3. While only a small percentage of Qatari LNG is exported through the canal to Europe, many of the LNG tankers carrying Qatari LNG do not carry the Qatari flag.
4. Egypt itself receives Qatari LNG. In Fact, Egypt continued to receive Qatari LNG, even at the height of the crisis.
5. Banning Qatari LNG from passing through the canal will anger the European countries that depend on Qatar LNG. Egypt cannot afford to anger these countries.
6. Finally, there is a possibly that if Egypt blocks Qatari LNG from passing the canal, Qatar might cut natural gas exports via the Dolphin pipeline to the UAE, where natural gas is badly needed in the summer months. Egypt will not act in a way that would hurt its best ally, the UAE.

It’s worth noting that the decision to widen and deepen the canal more than 15 years ago was motivated by the expansion of the Qatari LNG industry, where LNG tankers received preferential treatment by the canal authority, with lower rates and other perks.

Bottom Line: It is not in the interest of Egypt to block Qatari LNG from passing the Suez Canal. Qatar’s LNG and natural gas will continue to flow despite the severity of the crisis. 

Source:

http://www.worldoil.com/magazine/2017/july-2017/columns/oil-gas-in-the-capitals