Iran’s response crucial in Saudi-Qatar spat

The article below appeared on 15th June, 2017 in The Analyst, a weekly column by Peter Stewart in the Interfax publication Natural Gas Daily.
 
This is not a storm in a teacup. Qatar has supported Saudi Arabia in its proxy war against Iran in Yemen and has been part of the Gulf Cooperation Council (GCC) – which also includes Bahrain, Kuwait, Oman, Saudi Arabia and the United Arab Emirates – since it was founded in 1981. But its joint ownership of the world’s largest gas field means it has closer ties with Iran than its Arab neighbours.
Saudi Arabia’s decision to up the ante in its long-simmering dispute with Qatar is a high-risk strategy. Although all sides are scrambling to defuse the crisis, there is a relatively low but nonetheless real risk that the rift with Qatar will spiral out of control. Airspace could be a trigger point. The geographical distances involved are tiny – Qatar’s capital Doha is just 100 km from the Saudi border, while Bahrain’s capital Manama is just 140 km from Doha. The UAE and Iran are separated by less than 80 km at their nearest point. Flights from Qatar have to pass over Bahrain’s airspace. Iran has responded to the crisis by sending food shipments by air and sea to Qatar and by opening its airspace to 100 new Qatari flights per day.
If the spat were to escalate, the stakes could not be higher. Qatar is the world’s biggest LNG exporter, and with Iran it straddles the largest gas field in the world. The field, known as the North Dome in Qatar and South Pars in Iran, is a single gigantic pocket of gas and condensates formed hundreds of millions of years ago in the Permian and Triassic eras. It holds an estimated 51 trillion cubic metres of gas.
Riyadh has accused Doha of backing Shia militant groups allied to Iran in Saudi Arabia and Bahrain, and it has also accused Qatar of supporting the Houthi rebels in Yemen – even though Qatar has provided support for the Saudis’ military campaign there.
Impact on LNG market
The flare-up in Saudi-Qatari tensions has had an immediate impact on trade flows. LNG shipments are being rerouted because of the blockade. Interfax Global Gas Analytics has said the row will force Qatar to sell more LNG on a spot basis, while Egypt and Dubai will need to find alternative sources of the fuel. Qatari cargoes to these countries have already been diverted. Another potential destination for rerouted Qatari shipments is northwestern Europe, including the UK. Qatari LNG carriers will no longer be able to bunker at Fujairah. Oil shipments are also being affected.
In the longer run, however, a realignment of geopolitical allegiances could have important ramifications for investment. Qatar has used gas from North Dome to build an LNG export capacity of 77 mtpa and to provide power for the country’s residential and commercial sectors. It has also developed a GTL and fertiliser industry. Iran has ambitions to develop its gas resources through pipeline and LNG exports, and to expand its petrochemical industry to make use of the NGLs produced by the field. It has been stymied in the past by technological constraints as a result of sanctions by the United States and the EU.
The GCC has so far provided a united front against Iran, but it has been split into two factions for years. Saudi Arabia and Bahrain are Sunni countries with large Shia populations, while the UAE has long-standing border disputes with Iran over islands in the Gulf, meaning the three countries are united in the face of the perceived threat from Tehran. Saudi King Salman bin Abdulaziz Al Saud led a 2011 proposal for greater GCC integration intended to counter Iranian influence in the region.
The less-hawkish group includes Qatar, Kuwait and Oman. Kuwait has refused to join the blockade of Qatar and is offering to mediate in the crisis. Oman has sent food shipments to Qatar and has opened new shipping traffic between the countries. Oman is relatively non-aligned in Middle Eastern politics and has discussed building a pipeline to import Iranian gas for its LNG plants. Kuwait, meanwhile, is a key LNG importer in the region. The joint development of the Dorra field with Saudi Arabia in the Neutral Zone between the two countries was put on hold in 2013, and Kuwait’s LNG imports have subsequently soared. Iran also lays claim to Dorra.
It is unclear what diplomacy can achieve at this stage. US Secretary of State Rex Tillerson and his Russian counterpart Sergei Lavrov have called for negotiations. Turkey has warned that the crisis would have global ramifications were it to escalate and has sent its foreign minister to Doha to try to mend fences. The Turkish parliament approved sending troops to Qatar on 7 June – just two days after Saudi Arabia and its allies severed diplomatic ties.
It is difficult to predict specific outcomes and whether the rift will be permanent. A previous spat in 2014 took nine months to resolve, but history suggests that diplomacy will eventually prevail. However, the complex backdrop of Iran and Saudi Arabia’s battle for supremacy in the Middle East makes a swift and permanent resolution unlikely.
By Peter Stewart