Qatar – Situation risk management

Over the weekend, Saudi Arabia and the United Arab Emirates cooperated to close airspace and borders with fellow-Sunni Qatar over the alleged sponsoring of IS and other terrorist activities.  Even for Middle East and East-West affairs, this development has an unusually complex mix of known and hidden political and economic ingredients.

This note discusses the situation with focus on implications for LNG supply.  The base case is that the significant pressures exerted on Qatar will bring required changes in Qatar, and that operational changes will ensure that LNG flows can be maintained for some time at moderate extra cost even if the Suez Canal is blocked.  However, extensive LNG supply disruption can happen in case of inability to maintain a serviceable trains or if the conflict escalates.


Qatar has long had fundamentalist and isolationist leanings, and has not always been considered a friendly and good Arab neighbour.  For example, both Kuwait and Turkey have only been granted short-term LNG contracts, and Iran has voiced irritation that Qatar extracts a disproportionate share of the giant North Field/South Pars natural gas resources, straddling the Qatar-Iran border.  Qatar also did not oppose Saddam Hussein’s invasion of Kuwait.

Juxtapositions flourish; while Saudi Arabia has been fiercely fighting US shale oil and deflecting human rights criticisms, Saudi-American friendship was reaffirmed through the latest arms deal.  Although the US has its largest Middle East military base in Qatar, President Trump supported the Qatar embargo in a morning tweet on Tuesday, June 6.  From the US point of view, the rapprochement between Iran and Qatar may also partially explain Trump’s position.

Another factor influencing the US support of the Qatar embargo is the US withdrawal from the Paris COP-21 accord, and priority for the development and monetization of US domestic energy resources.  While domestically the focus is on coal and oil, US international ambition focus is on natural gas.  The low oil price in the past three years showed Saudi Arabia and OPEC that the market can absorb and manage US shale oil.  The situation and near-term prospects for the coming wave of massive new LNG projects are less favourable.

Projections of a 100 mt global oversupply of LNG accumulating over the next three years is bad news for producers, particularly in the US Gulf and Atlantic Coast where many of the new projects are concentrated.  Demand cannot absorb the majority of these volumes, and new LNG will meet competition from existing gas producers, legacy contract frameworks and downstream capacity positions.


Qatar is the incumbent LNG superpower, and it has institutionalized marketing and sales support from its international partners through equity and operational roles.  Both Exxon and Conoco are “foundation” investors in Qatari LNG, and it seems likely that LNG has been a principle consideration in the US support for the embargo.  In fact, some US interests have traditionally favoured securing a more substantial control of Middle East positions.

However, an embargo of Qatar with the Suez Canal closed for Qatari LNG will not offer material relief for US liquefaction plants.  Only the blocking of Qatar-originated vessels from the Strait of Hormuz would have material effects.  This would be much more complicated to operationalize, and is a radical measure that would rapidly create collateral effects and untenable national and international tensions.

Even with a limited LNG embargo based on closing the Suez Canal, Egypt might find it problematic to stop LNG cargos from Qatar to the Ain-Sokhna FSRUs, south of Suez.  An obvious solution, perhaps already considered, could be for the US to guarantee Egypt an alternative supply from the US.

The question is whether the involved parties will take time to reflect on consequences, assessing options, and to respond constructively over the immediate period ahead.  In the near term, food supply and basics are likely to dominate discussions to resolve the situation.  While international markets will worry about LNG and other Qatari exports, product flow may not be substantially disrupted in the short and medium term.

In reality, even in the case of a complete lock-out from the Suez Canal, Qatar may suffer little more than moderately reduced netbacks by drawing on a combination of fleet overcapacity, fast-steaming around the Cape and trade re-flowing.  Assuming the use of 160 kcm ships for incremental transportation requirements, iGIS/LNG model results show a maximum need for 11 such ships during the summer and 18 ships for winter loads.

The Qatari fleet has a moderate utilization rate even during winter, and the scheduling system is efficient.  In fact, fast-steaming with maximal loading and increased use of Q-max vessels could theoretically completely eliminate the need for short-term charters.  When schedules permit, Qatari LNG ships routinely sail the Cape route for European trades and presently, Bu Samra and Umm Slal are on inbound and outbound journeys, respectively.

However, if a possible Suez Canal lock-out situation should persist into the fall (and not escalate), Qatar might wish to tactically secure some short-term additional tonnage to preserve flexibility.  Other than for the significantly increased tension and apparent uncertainty, the overall economic effect on the LNG market and LNG shipping could remain minor.


One of Qatar’s key challenges to resolving the current situation is to understand who to actively satisfy, and who to placate beyond Saudi Arabia: The Gulf Cooperation Council? Egypt? Iran? The US?  On its part, Egypt needs to see that Qatar-originated support for terrorism stops.  The outcome of Iran’s recent presidential election could give hope that Iran will not openly interfere if the conflict is resolved relatively swiftly.  The US role appears harder to assess.

Much depends on Qatar’s initial political response.  Qatar could defuse the brunt of the current tension by visible measures to stop the collection and transfer of money to terrorist activities.  The initiative lies with Qatar, and the general strategy could be to adopt measures at least as strong as Saudi Arabia, also a Sunni and religiously conservative country.

In terms of LNG market effects, the current standoff probably could not have come at an easier time, with low summer demand for natural gas in main markets.  Yet, the key role of Qatar in world LNG and natural gas require continued monitoring and action plan assessments.  An extended embargo, for example related to essential personnel, or a long conflict can make it increasingly difficult to maintain plants.  A suitable alert level as of 6 June is for a possible “n-1” contingency situation.

Eikland Energy offers bespoke continuous assessment of Qatar’s Ras Laffan LNG operations on the basis of train-level intelligence, inbound and outbound vessel monitoring with 4-week horizon, and identification of possibly impacted buyers.  For example, as of 6 June there are 16 tankers at Ras Laffan anchorage, 3 in berth, and a further 2 tankers at Khor Fakkan anchorage, outside of the Hormuz.  A new complete train-level assessment is expected on June 11.  The assessment can be combined with comparative analytics at any LNG terminal of interest.  Call +47-99517555 (Norway) for information and sample table.