The Fuse

Energy Virtually Untouched by GCC Meltdown

July 24, 2017

Guest Post by Matthew M. Reed | @matthewmreed

Matthew M. Reed is Vice President of Foreign Reports, Inc., a Washington, DC-based consulting firm focused on oil and politics in the Middle East.

The Gulf Cooperation Council (GCC) is currently facing its worst internal crisis in its 36-year history. This year’s meltdown marks the second time in three years that Qatar’s closest neighbors—Saudi Arabia and the UAE—have severed ties with Doha and issued a list of demands. This time they went as far as ejecting diplomats and cutting off all land, air, and sea traffic. Bahrain predictably sided with Saudi Arabia and the UAE. Meanwhile, the two other GCC members haven’t picked sides. Oman remains neutral (as always) and Kuwait has taken the lead as trusted mediator.

To end its isolation, Qatar is being asked to shutter media outlets, including Al Jazeera, and cut ties with activists and mainstream Islamists, as well as extremists. The demands are severe but unsurprising, as Saudi Arabia and the UAE have made it clear they feel that Qatar’s policies directly undermine them. But Qatar’s influence has been built on decades of dealing with everyone—no matter how controversial—and broadcasting voices that serve its interests. The latest GCC crisis appears intractable and thus existential. Since June 5, when Saudi Arabia, the UAE, Bahrain, and Egypt announced their boycott, neither side has shown much flexibility.

The major players in this drama also happen to be major energy exporters. Together, Saudi Arabia and the UAE pumped about 13 million b/d last month, supplying 40 percent of OPEC’s total crude output. Qatar is the world’s top LNG exporter with big plans to raise output over the next five years. After the initial boycott measures were announced, there was much apprehension about how the energy trade might be impacted—both regionally and globally. At first confusion emerged about sea trade restrictions. Then on June 28 the UAE’s ambassador to Russia, Omar Ghobash, floated the idea of forcing customers to choose between Qatar and the rest of the GCC. Suddenly, the prospect of a massive disruption or dislocation was very real.

With only a few minor exceptions, all sides have taken care to protect energy flows. In fact, the boycotting states and Qatar have generally avoided escalation since the rupture was formally announced.

But with only a few minor exceptions, all sides have taken care to protect energy flows. In fact, the boycotting states and Qatar have generally avoided escalation since the rupture was formally announced. Almost two months into this crisis, energy is not being used as a source of leverage by either side, and with good reason.

Take the most dire—but unrealized—threat to date: the “us or them” trade restrictions considered by the UAE. In practice, that would be a disaster because many customers around the world, and especially in Asia, depend on GCC crude and Qatari gas. Japan is the perfect example. It’s the world’s largest LNG importer, and in 2016 about 15% of its LNG imports were sourced from Qatar. (Japan has come to rely on LNG for electricity generation more and more since the 2011 Fukushima nuclear disaster.)

But Japan is also a major importer of crude oil, especially from GCC states. Together, Saudi Arabia and the UAE supply more than half of Japan’s crude oil imports. That oil is refined into transit fuels (gasoline, diesel) and plastics. Substituting for one or the other would be extremely difficult and costly; it would compromise long-term contracts and face stiff resistance from Tokyo. Taking this logic a step further, if the UAE forced buyers to choose sides it would presumably cut itself off from Qatari gas as well. Some 25% of the UAE’s gas comes from Qatar via the Dolphin pipeline.

So far, the UAE is the only energy buyer to experience a material disruption because of the GCC showdown.

So far, the UAE is the only energy buyer to experience a material disruption because of the GCC showdown. Two of its refineries, Jebel Ali and Ruwais, were forced to halt imports of Qatari condensate when all sea traffic was suspended on June 5. Last month, there was confusion over whether ships coming to and from Qatar would be allowed to fuel up at the UAE’s bunkering hub in Fujairah, which is common for tankers arriving and departing from the Gulf. Reports suggest that restriction was lifted after only a week (Qatari-flagged vessels are still banned from UAE ports.) Other restrictions on “co-loading” tankers with Emirati and Qatari crude were eased almost immediately after shippers started to complain—literally within days.

Qatar, for its part, could have responded by cutting off gas exports to the UAE, which is suspected of instigating the crisis on false pretenses back in May. But doing so would have been counter-productive for no less than three reasons. First, it makes little sense to forfeit the revenue. Cutting off the UAE would also have the effect of cutting off Oman, which is tied into the same pipeline network. Alienating a neutral country and losing even more revenue is not a winning strategy. There’s also the reputational cost of taking a hostile action against a neighbor, when Qatar is advancing the narrative that it’s the victim.

The appeal of more extreme measures could grow over time. “Nuclear options” like forcing trade partners to choose between the boycotters and Qatar could still be adopted later even if they seem absurd or reckless now.

The GCC crisis has largely been a distraction for markets. Both sides have shown concern for those customers and interests which are caught in the middle. Restraint rules for now—but how much longer will it last? So far the “boycott” has proven affordable for both the boycotters and the boycotted. Qatar’s Emir Tamim, in his first speech since the crisis began, sounded defiant on July 21. Everyone seems to think time is on their side, meaning the crisis could last months or even years.

If that’s the case, the appeal of more extreme measures could grow over time. “Nuclear options” like forcing trade partners to choose between the boycotters and Qatar could still be adopted later even if they seem absurd or reckless now. The trick for the United States, as it seeks common ground and a unified GCC position, is to find a solution before either side feels it must resort to threatening energy.

ADD A COMMENT