Qatar's dispute with Arab states puts LNG market on edge

Qatar’s Ras Laffan Industrial City

Singapore/London (Reuters)—Saudi Arabia and key allies have cut ties with Qatar, the world's top seller of LNG, stoking concerns over any supply disruptions to neighboring countries spilling over into global gas markets.

Saudi Arabia, Bahrain, and the United Arab Emirates and Egypt—both highly reliant on Qatari gas via pipeline and LNG—said that they would sever all ties (including transport links) with Qatar, an escalation on past diplomatic spats.

They accuse Qatar, which supplies roughly a third of global LNG, of supporting extremism.

US Secretary of State Rex Tillerson, who accompanied President Donald Trump on his trip to Saudi Arabia last month, is the former CEO of ExxonMobil, Qatar's key Western partner in building its giant LNG export plants.

As the rift lifted oil prices, LNG traders took a wait-and-see approach, alert to the potential disruption of regional energy flows but erring on the assumption that any trade shocks could be contained given well-supplied global markets.

Qatar's top clients in Japan and India quickly received reassurances that supplies would continue as usual.

Within hours of the diplomatic break, the UAE barred all vessels coming to or from Qatar using its popular anchorage point off Fujairah.

The ban impacts about six LNG vessels linked to Qatar now anchored in the Fujairah zone that may need to be moved out.

Little indication yet of LNG supply being hit. While some analysts believe that this will not impact exports of Qatari LNG outside the Arab world, or LNG and gas pipeline exports within the Arab world, traders startled by the development began to plan for all eventualities, especially any upsets to piped gas supplies from Qatar to the UAE.

The UAE consumes 1.8 Bcfd of Qatari gas via the Dolphin pipeline, and has LNG purchase agreements with its neighbor, leaving it doubly exposed to tit-for-tat measures. Thus far, flows through Dolphin are unaffected, but traders say even a partial shutdown would ripple through global gas markets by forcing the UAE to seek replacement LNG supply just as its domestic demand peaks.

With LNG markets in bearish mood and demand weak, the UAE could cope with Qatar suspending its two to three monthly LNG deliveries by calling on international markets, but Dolphin piped flows are too large to fully replace.

Spot LNG prices have not yet reacted. While relying heavily on Qatari LNG brought in by Swiss commodity trade houses, Egypt is less vulnerable than the UAE because it has no direct deals with Qatar, domestic gas output is squeezing out the need for imports, and traders would be liable for any moves by Qatar to restrict exports.

"Trafigura, Glencore and Vitol frequently take LNG from Qatar and deliver it to Egypt, but they take ownership of the cargos at the Qatari port and don't use Qatari ships, meaning technically that Qatar shouldn't have sway," one trade source said.

In reality, Qatar can block exports to certain countries by issuing so-called destination restrictions.

Egypt is halfway through its annual LNG cargo delivery program for the year, with 50 shipments left to arrive, of which at least 10 are of Qatari origin. Retaliatory measures such as suspending LNG supply deals would leave Qatar free to push more volumes into Europe, where it has access to several import terminals.

Under that scenario, trade houses with supply commitments to Egypt could turn to the US, Algeria and Nigeria for replacement cargos.

The deterioration in ties between Qatar and Egypt contrasts with 2013 when the producer gifted five LNG cargoes to Egypt—when Mohamed Mursi, leader of the Muslim Brotherhood, served as president.

 

(By Henning Gloystein and Oleg Vukmanovic; additional reporting by Nidhi Verma in New Delhi, Rania El Gamal in Dubai, Mark Tay and Seng Li Peng in Singapore and Eric Knecht in Cairo; editing by Susan Thomas and David Evans)

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