And so it came to pass, with one of OPEC’s members’ smallest
producers – Qatar – making its surprise announcement that, effective January
2019, it would leave the organization.
The announcement came just days before the group meets in
Vienna and when the oil markets were looking for signs of OPEC and non-OPEC
producer cohesion and price stability.
While the Qataris put out statements to justify their
decision to leave the OPEC family which they joined as one of the founding
members in 1961, their exit has opened up some debate on the long term
viability and structure of OPEC in the face of multiple threats.
The official Qatar announcement to exit OPEC – which has 15
members including Qatar – was couched in terms that this was a purely business
driven decision and was not driven by politics.
But in an oblique reference, without naming Saudi Arabia,
Qatari Minister of State for Energy Affairs Saad al-Kaabi said, “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.”
So why the sudden Qatar surprise decision? According to the
Qatari minister this was because it was not practical “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.”
Instead, Qatar would focus on gas production. By all
accounts, Qatar is indeed a minnow, producing around 650,000 of barrels of oil
a day, compared with Russia’s 11.37 million barrels a day, and Saudi Arabia’s
11.1 million barrels a day in November.
In the natural gas and LNG domain, it is a different story
and explaining Qatar’s decision, Energy Minister al-Kaabi said, “We don’t have
great potential (in oil), we are very realistic. Our potential is gas.”
LNG market
But Doha is an influential player in the global LNG market
with annual production of 77 million tons per year, based on its huge reserves
in the Gulf, and shared gas field with Iran.
The Qataris apparently want to become “the Saudi Arabia” of
gas production and the decision to focus on gas was part of a long-term
strategy and the country’s plans to develop its gas industry and increase LNG
output to 110 million tons by 2024.
It was a purely strategy and business decision said Qatar.
Doha plans to build the largest ethane cracker in the Middle East. Ethane
crackers break gas down into ethylene, the main chemical used in plastics,
resins, adhesives and synthetic products.
Qatar’s withdrawal from OPEC may not have any lasting impact
on the price of oil but while its departure might not mean much for OPEC’s
influence over the oil market.
According to some analysts, it is important to see the
decision within the broader geopolitical climate in the Middle East, especially
Qatar’s relationship with OPEC’s de facto leader Saudi Arabia which has been
leading a regional blockade on Qatar that has seen trade and travel links
severed since June 2017.
While Qatar’s energy minister insists that the decision was
not political, the withdrawal from OPEC after 57 years in the club is just another
way that Qatar and its Gulf Arab neighbors are growing further apart as
relations deteriorate but offers a historic turning point of the organization
toward Russia, Saudi Arabia and the United States, the three mega oil producers
with roughly 33 million barrels per day of production between them or more than
a third of global output.
The key issue is whether other smaller or disgruntled OPEC
members who feel marginalized in a new unofficial super producers club between
Saudi Arabia and Russia, who now make key production decisions, would follow
Doha’s move.
Should this happen then in that scenario OPEC would have no
major influence, as control is too strong a word to use given rampant US shale
production, over supply or demand as each individual country could just do what
they like causing market uncertainty and more price volatility.
Major ‘leavers’
But this assumes that more “leavers” are major players and
an OPEC existential crisis would certainly be more realistic if countries like
Iraq, Libya, Venezuela or Nigeria decided to go the Qatar route.
There is no indication that any of these countries are
considering this although a primary candidate is Iran, which has been fretting
at the ever closer Saudi-Russian energy partnership and the proposed new
consensus decision making process to make and execute production quickly based
on changing market conditions, as opposed to the laborious and discredited
cumbersome unanimous OPEC voting that Iran prefers.
For now, however there is optimism that Saudi Arabia and
Russia are committed to keep the supply under control and have been
increasingly deciding output policies together, under pressure from US
President Donald Trump on OPEC to bring down prices but deciding when it is
also right to try and stop a downward spiral in oil prices deemed to be harmful
to oil dependent economies.
Qatar’s exit or divorce from the OPEC family is probably a
blessing in disguise for that organization to try and reassess its future role
in a far more complicated energy and geopolitical world than when it was first
established in a period of fervent resource control nationalism.
The organization is facing challenges on many fronts,
whether from environmental lobbying against fossil fuel and the increasing use
of renewable energy, to continuing accusations that it is a cartel that acts in
monopolistic fashion and sets prices, which is not patently true given the
extraordinary surge in US shale production from a multitude of private sector
companies, entering and exiting the sector depending on oil prices,
availability of finance, technology break through and geology.
Such accusations whether driven by presidential tweets, but
more seriously by US Congressional threats such as the proposed NOPEC Act
ensures that OPEC members have to take such legal action seriously and some
have made the observation that Qatar has decided to leave OPEC so as not to
face such future litigation against it if it remained within the organization.
However, in a perverse way, should Qatar ever become the
equivalent of Saudi Arabia in the LNG and gas sector in the future and dominate
that market, then that country could conceivably one day may also be faced by
legal anti-trust lawsuits on the ground that it dominates the gas market and
sets monopolistic prices.
Scenario analysis
The news that one of Saudi Arabia’s leading energy think
tanks – KAPSARC – is undertaking various scenario analysis on whether the
Kingdom should leave OPEC, associate with OPEC in a different format or remain
as is.
The Saudi Energy Minister denied that the Kingdom is
considering leaving OPEC and rightly said that think tanks by their very nature
have to conduct such “what if” scenarios.
But Qatar’s exit will spur this debate, as one consideration
would be an association with OPEC like Russia once the Aramco IPO has been
completed, especially of Aramco is listed in litigious domains where investors
could take action if Aramco’s post IPO production decisions are based on
sovereign decisions and not on market forces to the detriment of shareholder
value.
This is the constant argument put by Russian semi privatized
energy companies when the Russian state asks them to join in OPEC mandated production
decisions based on higher national political interests.
In the medium term, OPEC could re invent itself, ensuring
that OPEC countries carry out joint energy investment projects such as
co-mingling and refining different crude oil products, developing and sharing
technology among members, especially poorer ones to enhance capacity,
establishing professional market assessment experts on the ground in key
consumer nations so that the organization has first hand information on demand
trends instead of depending on secondary sources, and, above all, in
re-visiting the archaic establishment by-laws that gives an equal vote for each
OPEC member whether they are producing 50,000 barrels a day or 10 million
barrels a day.
This is inequitable and no international organization like
the IMF or World Bank adopts such an equal voting system. No wonder then that
the Kingdom feels that the time for unanimous voting is over.
In the final analysis, OPEC will survive the Qatar jolt but
how it evolves and adapts is going to be a key question to its survival to
ensure its continued relevance.
