Saad Sherida Al-Kaabi, Qatar’s Energy Minister
For some it is such a big news, but for others it is no news at all ― the decision by Qatar to pull out of the Organization of Oil Exporting Countries (OPEC) effective January 2019, after nearly six decades.
While many industry watchers links Qatar’s quitting decision to feud with the Saudi Arabia-led group, Doha is suggesting that it is technical and strategic rather than geopolitical. In communicating its decision to OPEC on 3rd December 2018, Qatar’s Energy Minister Saad Sherida Al-Kaabi said Doha’s decision is not borne out of the political and economic sanctions imposed on the country by Saudi Arabia, Egypt, Bahrain, and the United Arab Emirate (UAE) for allegedly sponsoring terrorism and fueling instability in the Gulf.
Al-Kaabi suggested that the decision to pull out was rather strategic in nature; to focus more on natural gas production and export activities to improve its global position as the leading natural gas producer. He stressed that achieving Qatar’s ambitious strategy will undoubtedly require efforts, commitment and dedication to maintain and strengthen Qatar’s position as the leading Liquefied Natural Gas (LNG) producer. The plan is to increase production by 43% to reach 110 million tons per year (mtpy) by 2024, by leveraging the existing massive, world-class infrastructure and valuable synergies available both inside and outside the State of Qatar.
However, doubts still remain that Qatar’s decision isn’t politically influenced, in the sense that it did not need to quit OPEC to achieve the stated goals as there are currently no OPEC restriction on gas production. Aside that, the costs of the cartel’s membership were not greatly burdensome for the Qatari government in any way.
OPEC’s Influence
Formed in 1960 to coordinate the petroleum policies of its members and to provide member states with technical and economic aid, OPEC also sought to prevent its concessionaires; the world’s largest oil producers, refiners, and marketers (called the Seven Sisters at the time) from lowering the price of oil, which they had always specified, by gaining greater control over the prices of oil through the coordination of their production and export policies. And in the course of the 1970s OPEC members succeeded in securing complete sovereignty over their petroleum resources, with several of its members nationalizing their oil reserves and altering their contracts with major oil companies.
Saudi Arabia occupies the traditional role as the “swing producer” as a result of its spare capacity to stabilize oil markets, making it the de facto leader among the 14 member states ― Libya, Algeria, Nigeria, Ecuador, Gabon, the United Arab Emirate, Angola, Congo, Equatorial Guinea, Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela.
Historically, the group accounted for more than 40% of the world’s crude oil production, and was credited for exporting nearly 60% of the total petroleum traded internationally. Consequently, OPEC’s huge spare capacity that could be easily adjusted to suit the condition in the global oil markets, coupled with its significantly low cost of production, allowed it to exert strong influence on crude oil prices on the international market.
One of the many notable occasions that OPEC had changed the direction of oil prices in its favour, is the Arab-Israeli War in 1973 – 1974, where OPEC’s Arab members imposed an embargo on the United States (U.S.) over its support of the Israeli military; shifting the oil market from a buyer’s to a seller’s market.
While some experts believe that OPEC is a cartel by reason of collusion, though it has not been equally effective at all times; others have however concluded that it is not a cartel, and that it has little, if any, influence over the amount of oil produced or its price. They emphasize the sovereignty of each member country, the inherent problems of coordinating price and production policies, and the tendency of countries to cheat on prior agreements.
Today, some experts are suggesting that the power of OPEC has waxed and waned since its creation in 1960 and is likely to continue to do so, so far as its share of world oil production declines, and the re-emergence of the U.S. as a top oil producer keeps flooding the oil market. However, the group’s recent collaboration with Russia where prices surged upward with the implementation of the production-cut policy, may be another signal of OPEC’s relevance.
Implications for Qatar’s Exit
Today, Qatar is out of OPEC because of the need for “technical and strategic” change, according to Doha. The country finds it sensible to concentrate on LNG which Qatar is better at producing, rather than being part of a group that only deals with oil.
Qatar also sees it as impractical to put efforts, time and resources in an organization that it plays a small role and have little say in what happens. This view was reinforced by UAE’s Minister of States twitter post that “the political aspect of Qatar’s decision to quit OPEC is an admission of the decline of its role and influence in the light of its political isolation”.
But whatever be the rationale, it is worth analyzing the implications of Qatar’s withdrawal from the body OPEC; for Qatar, OPEC, and the wider oil and gas market.
First, Qatar’s pronouncement to leave the group makes little difference on OPEC decisions, in mathematical or economic sense. Compared to Saudi Arabia that produces close to 11 million barrel of oil per day (bpd), Qatar’s oil production capacity is around 609,000 bpd, which makes Doha the 11th largest producer in the then group of 15 members. Analysts agree that Qatar’s production capacity which is less than 2% of the combined OPEC output, is insignificant to have any meaningful impact on the decision making process of the group. In any case, Qatar has no spare capacity given the maturity and small size of its oilfields, and that it was exporting less than its production quota at the time of exiting the group.
Second, as a long standing member of the cartel, Qatar’s decision to exit the group is a symbolic loss; to the extent that it exposes OPEC’s growing weaknesses, and how its influence on the global oil market is waning. It raises the possibility of the end of the cartel, as smaller members considers their position in the longer term, based on the feeling that they are increasingly marginalized when it comes to decision-making.
Lately, it has taken Russia and other non-OPEC countries for the cartel to remain relevant, as it has largely failed on its own to influence oil prices. And the mere fact that it has to rely on non-OPEC members like Russia and Azerbaijan to wipe some barrels off the market, suggest that the group is having difficulty maintaining its authority on the global oil market. Meanwhile, the U.S. has also emerged as a force to reckon with on the global market, further disrupting OPEC’s capability to unilaterally influence supply and prices.
Third, Qatar’s exit from the group could have implications for regional politics, and cost Qatar some political leverage. Although Doha denies that its decision is not linked to the political and economic embargo, some analysts sees it as a reflection of deepening regional division. Some industry watchers are warning that it could cost Qatar some geopolitical leverage as it pulls out of the group; arguing that having a seat and say at the table of OPEC ministers offer countries substantial powers on the global level.
Fourth, the exit of Qatar could be a signal to other member countries that they are better off without OPEC, given the unilateral decisions of Saudi Arabia in recent times. And if that should happen, it would have a huge impact on the oil market; leaving no control over supply as each country could produce as it pleases, especially members of OPEC from the Middle East. Keeping global supply high may be good for low oil prices, but could also deter further investment in the oil market.
Fifth, given that the Trump Administration has been pushing hard to keep oil supply high and prices low, for which it has been very vocal in its opposition to OPEC production quota, Qatar’s exit relieves it from this dispute. By distancing itself from the group, it protects the country and its U.S. investment if the U.S. Congress ever does pass the anti-OPEC legislation, which has reared its head again in recent times.
Lastly, with a current capacity of 77 million tonnes per year (mtpy), natural gas remains Qatar’s main economic engine; accounting for more than 70% of government’s total revenue, over 58% of gross domestic product (GDP), and some 85% of total export earnings. Therefore Doha’s decision to concentrate on its core business of producing and exporting more natural gas would not only enable it consolidate its position, using natural gas as an increasing global lever and placing the country beyond any of its LNG exporting rivals; but it would equally boost its economy by increasing export earnings. Also, as a driving force in the creation of Gas Exporting Countries Forum (GECF) in 2001 with secretariat in Doha, Qatar will have more prominent role on the gas side of petroleum as GECF evolves into a cartel.
Written by Paa Kwasi Anamua Sakyi, Institute for Energy Security ©2019
The writer has over 22 years of experience in the technical and management areas of Oil and Gas Management, Banking and Finance, and Mechanical Engineering; working in both the Gold Mining and Oil sector. He is currently working as an Oil Trader, Consultant, and Policy Analyst in the global energy sector. He serves as resource to many global energy research firms, including Argus Media.