Game of Thrones: Qatar’s diplomatic crisis

On 4 June, multiple Middle East and North African countries broke off diplomatic ties with Qatar. A2 analyses the impact for businesses.

 

 
INTRODUCTION

On 4 June, a coalition comprising Bahrain, Egypt, Saudi Arabia and the United Arab Emirates (UAE) cut off diplomatic ties with Qatar, quickly followed by Jordan, the Maldives, Mauritania, Yemen and Libya’s self-proclaimed eastern government. The coalition also imposed an economic and travel embargo, in an attempt to shut off Qatar from the outside world.

Diplomatic staff have been recalled, Qatari diplomats ordered to leave, and state-owned airlines, such as UAE-owned Emirates, have ceased transit to or from Qatar. Saudi Arabia, meanwhile, has gone one step further, shutting the border between itself and Qatar. This blocks off Qatar’s only overland access-and-egress route, a vital gateway for supplying the small country.

The reasons behind the cutting of ties are due to Riyadh’s frustration at Doha’s independent foreign policy, as well as its continued support for Islamist movements such as the Muslim Brotherhood, which coalition countries – particularly Egypt – regard as terrorist organisations.

A published list of Saudi demands includes that Qatar break off diplomatic relations with Iran, take action against the Palestinian non-state armed group Hamas – which has the support of Doha – and pledge to bring its foreign policy in line with that of the Gulf Cooperation Council (GCC). The demands also include an order for Doha to shut down Al Jazeera, the pre-eminent regional news agency which has often criticised the policies of coalition countries in the past.

In response to the coalition’s action, the Iranian and Turkish governments, hostile to Saudi Arabia’s hegemonic ambitions, have mobilised in support of Qatar. Tehran has offered to open its airspace to Qatari aircraft and begun resupplying the country via aircraft and its merchant marine to make up for any shortage of base goods. Ankara, meanwhile, has deployed Turkish reinforcements to its base in Qatar.

ANALYSIS

Gas

Qatar is one of the world’s foremost gas exporters, and alongside Iran controls the world’s largest gas field, the South Pars/North Dome offshore field. Gas exports account for nearly 55 per cent of Qatar’s total exports, worth an estimated USD45 billion, and provide around a third of the world’s global liquefied natural gas (LNG) supply. This means that any disruption to Qatari gas supplies will have an outsized effect on the global market.

The cutting of regional ties has implications for this vital revenue stream. Qatar exports to five Middle East and North African (Mena) clients, namely Egypt, Jordan, Kuwait, Oman and the UAE, which make up around 10 per cent of Qatari gas exports. The loss of Egypt and the UAE as customers will therefore reduce Qatari export totals.

Furthermore, although Qatar has its own gas production and port facilities, such as Ras Laffan Industrial City, tankers typically refuel at the larger Fujairah port, located in Emirati territory. Currently, the crisis means that the UAE is preventing Qatari-linked vessels from using Fujairah. Despite an official statement from the UAE government that this only applied to UAE-owned or -flagged vessels, some masters are still reporting issues using UAE port services after lifting Qatari cargo. This means that Qatari companies such as Qatargas, a business partially owned by state-owned Qatar Petroleum, are being forced to re-route vessels to refuel at alternative destinations. This has the twofold impact of raising costs and slowing down delivery times.

Finally, there is a risk that the UAE will escalate political pressure on Qatar by forcing a shutdown of the Dolphin pipeline. Dolphin is an undersea gas pipeline that transports Qatari-extracted gas to the UAE, and onwards to Oman, with a capacity of around 2 billion cubic feet of gas per day. Although operations at Dolphin are currently continuing as normal, there is a risk that the UAE will seek to shut down the pipeline. This will not only undermine Qatari gas exports, but could have major implications for UAE-based businesses. The UAE is a net gas importer, and Dolphin is its only pipeline. Any shutdown of Dolphin will therefore force the UAE to rely exclusively on maritime LNG imports, which will lead to rapid inflation of energy prices in the country.

Gas exports account for nearly 55 per cent of Qatar’s total exports

A2 advises companies working with or supporting the Qatari gas industry to immediately ascertain whether higher exportation costs will have a knock-on effect on business operations. Although the industry is currently continuing as normal, managers should consider whether business continuity can be ensured in the event of a full-scale embargo by coalition countries. Meanwhile, UAE-based managers should assess their corporate gas consumption, and have crisis plans in place to source gas from alternative locations should Dolphin go offline.

Inflation

Over 40 per cent of Qatar’s food imports enter the country via the overland border with Saudi Arabia. The decision to close the border has forced the country to rely on air and sea supply for all goods. Moreover, Qatar imports 85 per cent of its food supply from Bahrain, Egypt and the UAE, worth around QAR18 billion (USD4.95 billion). The embargo will push up prices, an issue compounded by local residents’ panic-buying of foodstuffs and other supplies from supermarkets nationwide. Although this effect has been alleviated due to supplies from Iran and Turkey, resupply efforts will be insufficient to entirely quell inflation.

The most immediate impact this will have on businesses is the rapid reduction in purchasing power of local staff, who will find it increasingly difficult to remain food secure. Simultaneously, A2 notes that import shortages will not be restricted to foodstuffs, and a lack of materials and resources will increase purchasing costs for companies in sectors ranging from construction to logistics. This, in conjunction with the increased costs of exportation – given the closure of the land border – will contribute to rapidly increase corporate operating costs. Given the historical stability of Qatar as a commercial hub, it is unlikely businesses will have resilience plans in place for such a scenario.

A2 recommends that managers immediately ascertain the extent to which business costs will increase as a result of the ongoing crisis. If the costs are prohibitive, managers should consider temporary reduction or shutdown of corporate operations until the situation stabilises. Managers of companies with a presence in another country should consider whether it would be feasible to temporarily redeploy assets outside Qatar, should the political situation render normal business operations untenable.

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