Petrostrategies - The World Energy Weekly

Petrostrategies - The World Energy Weekly

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Qatar's departure is weakening OPEC at a critical moment

Petrostrategies, December 17, 2018

Whatever its energy minister may claim, Qatar's announcement of its withdrawal from OPEC is mainly due to the conflict between his country and Saudi Arabia, which has been raging since June 2017. The Qataris would never have left OPEC if their relations with Riyadh had not worsened. With this gesture, they may also be hoping to please US President Donald Trump, who is not very fond of OPEC, to say the least. According to the dictates of economic logic, Doha should have stayed in OPEC and tried to strengthen the organization’s role as defender of oil prices, as Qatar's revenues are almost entirely dependent on hydrocarbons. Qatar produces some 600,000 b/d of crude oil. In addition, it markets 1.6 million b/d of NGL and 77 MMt/annum of LNG, most of which is sold at prices indexed against those of crude oil. “We are not saying we are going to get out of the oil business, but it is controlled by an organization managed by a country”, said Saad Sherida Al-Kaabi, Qatar's energy minister, who was appointed to the post on November 4, 2018. The country in question is of course Saudi Arabia, which not only dominates OPEC, but also takes unilateral initiatives to increase or decrease production.

Qatar's decision to withdraw from OPEC is also motivated by issues relating to its policy of grandeur, which greatly irritates the Saudis. The small emirate wants to play a major role in regional politics and often adopts positions that displease Riyadh (on Syria, Egypt, Yemen, etc.). Within OPEC, Qatar occupies a modest place, although four other member-states (Gabon, Ecuador, Equatorial Guinea and Congo) produce less crude oil than it does. On the other hand, Qatar is the number-one player in the international LNG market. To maintain this rank, Doha has announced a program to expand its LNG production capacity from 77 to 110 MMt/annum. At this level, the country is second only to the United States. The prospect of having the Americans as their only rivals on the international LNG market is quite a thrill for the Qataris.

Qatar's new energy minister is a very active supporter of the policy of grandeur pursued by his country. Very sure of himself, he overshadowed his predecessor while he was still “only” CEO of Qatar Petroleum. Those who know Kaabi couldn’t imagine him playing a minor role of at OPEC meetings. From this standpoint, the Saudis can say that the Qatari withdrawal will make their life easier. This is no doubt true, but the withdrawal is also a warning. If the Saudis continue to try and exert undisputed dominance over OPEC, other member-states may also be tempted to leave the organization. For Saudi Arabia, OPEC is not only a major economic instrument, but also an important pillar of its foreign policy. It gives the Saudis enough weight to negotiate with giants like the United States or Russia. Riyadh has no interest in a weaker OPEC; on the contrary. Saudi Arabia’s Crown Prince, Mohammad bin Salman (MBS), who has no natural predisposition to seek compromise, would do well to take the Qatari precedent into account. If he forgets it, some OPEC member-states will certainly remind him.

In particular, other countries may be tempted to leave OPEC if the US Congress passes a bill called the “No Oil Producing and Exporting Cartels Act” (NOPEC Act), which is currently being debated in the US Senate. The bill aims to make it possible to prosecute the national companies of OPEC member-states, and OPEC itself, for collusion in setting oil prices. The bill’s original version dates back to June 2000. Since then, it has been amended and discussed in Congress several times without success, as previous US presidents opposed it. The 17th version is now being discussed. This time, however, the incumbent US President may not oppose the Congress vote. There is therefore a real risk for OPEC, and Qatar’s departure has weakened the organization at a critical moment.

Qatar was the first country to join OPEC in 1961, shortly after the organization was founded in September 1960 by five countries: Saudi Arabia, Iraq, Iran, Kuwait and Venezuela. Doha had asked at the time to be a founding member, but this was denied. “The withdrawal decision reflects Qatar's desire to focus its efforts on plans to develop and increase its natural gas production”, said Energy Minister Saad Al-Kaabi. “Qatar is proud in its international standing at the forefront of natural gas producers, and as the biggest exporter of LNG”, he added on December 3. “To put efforts and resources and time in an organization that we are a very small player in, and I don't have a say in what happens” is not very practical, Kaabi said. Qatar's exit from OPEC will become effective on 1 January 2019.