Minimal risks of a decrease in oil productionl

13 july 2017 | TEK Rossii

"In Qatar, Russia does not have any assets in oil and gas industries, so companies can only be affected indirectly, that is, by changes in regional gas markets," said the Analytical Center expert Svyatoslav Pikh. At the beginning of summer a number of states broke off diplomatic relations with Qatar, ceased air flights, closed their airspace, and severed trade ties. In less than a month, Saudi Arabia and its allies have issued a 13-point ultimatum to Doha as the price for normalization of relations, but Qatar declared that the demands were impossible to meet. TEK Rossii correspondents asked experts how the Qatar crisis would affect the energy market, including that of Russia.

Svyatoslav Pikh
Svyatoslav Pikh
Department for Fuel and Energy Sector

Isolating Qatar can provoke a number of geopolitical risks for the oil and gas market, such as increased Suez Canal passage prices for Qatar gas carriers and the severance of economic ties with UAE and Egypt, which took Saudi Arabia's side in the conflict. "If Egypt increases taxes on Qatari carriers for passage through the Suez Canal, part of the spot volumes or free capacities may be diversified towards the Asia-Pacific market because of the increase in transport costs caused by the need to by-pass the African continent," Mr. Pikh explained. Which, according to the expert, could provoke an increase in gas supply and lower prices for LNG in the Asia-Pacific region, and the local Russian natural gas consumers will have the opportunity to optimize the supply portfolio. "Thus, the purchases of Russian gas and revenues from its sale may decrease," Mr. Pikh said. According to the expert, possible shortages of Qatari fuel to Europe can lead to insignificant price increase in European indices. Then, the demand can be partially met by the American LNG or Gazprom's gas, he believes.

The termination of Qatar's economic co-operation with the UAE or Egypt, which are using Qatari LNG, may lead to a reduction in LNG supplies by 1.3 and 6.4 million tonnes per year respectively, the expert said. He believes that the suspension of pipe-line gas supplies from Qatar to the UAE (now make up 17.7 billion cubic meters annually) is quite possible. "Such a reduction can open a free niche in the market that will increase the demand for spot LNG supplies in these countries for the period of the crisis, which will enable the export of free capacities of Sakhalin LNG there, if cost-effective," the analyst said.

According to the expert, the risks of a decrease in oil production remain minimal. "Qatar is not a large oil producer (1.9 million barrels per day), in the Middle East region in 2016 only Oman had lower rates (1 million barrels per day). The share in the OPEC basket is determined in proportion to the state's production, therefore Qatar's share is not significant, unlike that of Saudi Arabia, Iraq, Iran or Kuwait, amounting to more than 60 % of the basket. Even if Doha suspends its obligation to reduce oil production, this will not significantly affect the OPEC agreement on the reduction of oil production," Mr. Pikh explained.

As to Russia, the expert sees no threat of direct damage, however, the country's revenues and sales may decrease. "This is a possible consequence of the increase in gas supplies in the Asian-Pacific market, but it will not necessarily happen," Mr. Pikh said. "It should be seen more like a warning rather than an irreversible consequence. Before that, a whole chain of events should happen: from the blockade and redirection of the flows to the refusal to purchase long-term contracts from Russia and the purchase of Qatar's gas at spot prices."