UPSC MAINS 2019: Why Qatar has left OPEC, and how the decision will impact oil prices, India

Organization of the Petroleum Exporting Countries

 

Topic: Why Qatar has left OPEC, and how the decision will impact oil prices, India

 

OPEC

Topic in Syllabus: GS Paper 2: International Affairs

Context:

Qatar said recently, it was quitting Opec from January to focus on its gas ambitions, taking a swipe at the group’s de facto leader Saudi Arabia and marring efforts to show unity before this week’s meeting of exporters to tackle an oil price slide.

 

More about on news:

  • Qatar said its decision was not driven by politics but in an apparent swipe at Riyadh, 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 organisation managed by a country.”
  • Doha would focus on its gas potential because it was not practical for Qatar “to put efforts and resources and time in an organisation that we are a very small player in and I don’t have a say in what happens.
  • Qatar’s Opec exit marks the growing dominance over policy making in the oil market of Saudi Arabia, Russia and the US, the top world’s three oil producers which together account for almost a third of global output.
  • It could signal a historic turning point of the organisation towards Russia, Saudi Arabia and the United States.
  • Qatar — among the world’s smallest countries by area and the richest in terms of per capita gross national income ($128,000 or Rs 90 lakh, according to World Bank figures).

 

About OPEC:

  • OPEC was initially founded in 1960 by Saudi Arabia, Iraq, Iran, Kuwait, and Venezuela. Qatar joined in 1961.
  • OPEC is now a group of 15 countries that produce about 45% of the world’s oil and contain over 80% of its “proven” reserves.
  • OPEC has a very big influence on global oil prices.
  • It plays a crucial role in determining the economic health of many countries, including India.
  • It operates on the principle of unanimity, and one member, one vote
  • OPEC sets production targets for its member nations and generally, when OPEC production targets are reduced, oil prices increase
  • As of 2015, the 14 countries accounted for 43 percent of global oil production and 73 percent of the world’s “proven” oil reserves, giving OPEC a major influence on global oil prices.
  • OPEC decisions have come to play a prominent role in the global oil market and international relations.

 

Organization of the Petroleum Exporting Countries

 

Background of the decision:

  • In the 1970s, Qatar discovered vast quantities of natural gas in the offshore North Field, which straddles the maritime border between Qatar and Iran, with the largest part of the field in Qatari waters.
  • The North Field remains the largest non-associated gas field ever found, with more than 130 years of reserves at current production rates of 77 million tons a year.
  • Since the early 1990s, Qatar has invested heavily in creating the infrastructure to export gas both through pipelines and as liquefied natural gas.
  • By 2007, Qatar was the largest exporter of LNG in the world, with production plateauing in 2010 at 77 million tons a year. In contrast, its average oil production of 607,000 barrels per day in 2017 is less than 2 percent of OPEC’s total output.
  • In April 2017, Qatar Petroleum lifted a 12-year moratorium on the further development of its natural gas resources that it had imposed in 2005 to allow time to study the impact of such a rapid rise in production on the condition and sustainable management of the North Field.

 

Why Is Qatar Leaving OPEC?

  • Qatar’s decision to move away from a regionwide consensus among the Gulf’s OPEC members is a reminder of the regional tensions arising from the assertiveness of Saudi Arabia
  • This display of autonomy spilled over into the six-nation Gulf Cooperation Council to which Qatar and three of its detractors belong and which held its annual summit.
  • The Gulf Cooperation summit did not discuss the blockade of Qatar and the rift in the gulf remains unresolved and, perhaps, unresolvable, as positions have hardened and neither Qatar nor the Saudi Arabia-led quartet wants to be seen to blink first.
  • By becoming the first of the energy-rich Gulf States to withdraw from OPEC, Qatar has signaled its disapproval with an organization perceived to be subject to increasing Saudi interference.
  • Saudi interference was starkly illustrated during an April 2016 meeting in Doha, the capital of Qatar, when Prince Mohammed, then the deputy crown prince, intervened to thwart an output agreement between OPEC and non-OPEC states.
  • Qatar’s decision to withdraw from OPEC builds on two decisions taken before and after Saudi Arabia and its allies cut ties with Qatar and imposed a blockade last June.
  • In April 2017, it decided to significantly expand its production of natural gas to increase its natural gas capacity by 43 percent to 110 million tons annually.
  • The Qatari leadership also responded to the attempt to isolate Qatar by forging a slew of new longer-term natural gas agreements with partners worldwide, including China, Japan and Britain, to demonstrate that Qatar remained open for business.
  • Qatar has long showed an independent mind in foreign policy.
  • This includes having a close economic and diplomatic relationship with Shia Iran, Sunni Saudi’s great regional rival.
  • This stance does not always align with the priorities of its regional Arab neighbours.
  • All of these countries shut their airspace to Qatari aircraft, and told foreign airlines to seek permission if flying to and from Qatar.

 

What is Saudi’s problem with Qatar?

  • Qatar has long showed an independent mind in foreign policy that does not always align with the priorities of its regional Arab neighbours.
  • This includes having a close economic and diplomatic relationship with Shia Iran, Sunni Saudi’s great regional rival.
  • On June 5, 2017, Saudi Arabia, UAE, and Bahrain cut ties with Qatar, directed Qatari citizens to leave within 14 days, and forbade their citizens from going to or staying in Qatar.
  • Egypt too severed diplomatic contact with Doha, and all of them shut their airspace to Qatari aircraft, and told foreign airlines to seek permission if flying to and from Qatar.
  • Saudi sealed Qatar’s only land border, and closed its ports to Qatari-flagged ships.
  • Qatar said the demands amounted to “surrendering our sovereignty”, which it would “never” do.
  • Doha has backed the Muslim Brotherhood and Hamas, but it is also part of the US-led war on the Islamic State, and has assisted the rebels fighting Bashar al-Assad’s regime in Syria.
  • Also, for Saudi to accuse another country of supporting terrorism is a severe case of the kettle calling the pot black, many analysts thought — and interpreted Riyadh’s action as typical of its impetuous Crown Prince Mohammed bin Salman.
  • Over the last year and a half, hopes of reconciliation have dimmed, and Doha has only deepened its cooperation with Iran and Turkey, and with political Islamist organizations.
  • Qatar had refused to end ties with “terrorists”, after Doha declined to fulfil 13 demands that were presented to it, including
  1. cutting diplomatic relations with Tehran and military ties with Turkey,
  2. shutting down the TV station Al Jazeera,
  3. Aligning with other Arab countries “militarily, politically, socially and economically”.

 

How will Qatar’s decision impact global oil prices?

  • Qatar is a tiny player that pumped only 2% of OPEC’s total output of 32.9 million barrels per day.
  • It has limited influence on OPEC’s pricing decisions and so the exit would not make a much impact in terms of global oil prices.
  • However, over the last many decades, it has played a role mediating internal rivalries in OPEC.
  • It helped strike production-cut deals with producers like Russia.
  • So in these areas, Qatar’s absence may hurt OPEC slightly.
  • India – Qatar’s position as the world’s top LNG exporter and an influential player in the global LNG market is important for India.
  • Qatar is one of India’s oldest LNG suppliers, with Petronet LNG among the companies that have contracted to buy LNG from Qatar.
  • But LNG pricing is not in OPEC’s domain, so Qatar’s decision is unlikely to impact these trends.

 

Sample Question:

Critically examine the Qatar’s recent withdrawn decision from OPEC and discuss how this decision will impact on global economy?