Russia, Qatar compete in natural gas market

Russia has few simple relationships in the Middle East — or in other regions — but its relations with Qatar are especially complex.

The tension between Moscow and Doha over Syria is perhaps the most visible aspect of their relationship. Russia remains committed to Syrian President Bashar al-Assad, while Qatar is among the most assertive advocates of his ouster. This conflict reflects underlying differences in their attitudes toward Sunni Islamist ideologies — first concretely manifested during Russia’s wars in Chechnya, when Chechen separatists sought and found financial support in Qatar. As senior Russian officials routinely cited these conflicts and the terrorism they produced as their country’s top national security threat, this could have become a defining issue in their relations. Russian President Vladimir Putin’s eventual pacification of Chechnya, which he subcontracted to the brutal and corrupt Chechen President Ramzan Kadyrov, may have prevented this by sharply reducing the day-to-day violence.

Nevertheless, the two are rivals in important respects, as curious as this may seem given that Russia’s land area is over 1,400 times larger than Qatar’s and its population is nearly 70 times larger. The reason for this is of course natural gas, as Russia and Qatar are among the world’s leading producers and exporters. Accordingly, they cooperate in some respects, particularly in defending their shared interests, while competing in others. But unlike issues of national security and terrorism, the gas trade is just business. And so far, both Moscow and Doha have been prepared to take the view that business is business.

Russia’s cooperation with Qatar is increasingly visible in the Gas Exporting Countries Forum (GECF), an emerging international organization with the rather broad goal of “supporting the sovereign rights of member countries over their natural gas resources.” Moscow has been seeking to create a “gas OPEC” for some time, hoping to further enhance its energy leverage with an OPEC-like cartel that Russia could lead by virtue of its position as the world’s largest holder of natural gas reserves and, until recently, the world’s largest producer. The GECF finally took shape in 2008, after seven years of ministerial meetings, and was soon headquartered in Doha (Qatar has the third-largest gas reserves and the second-highest exports within the group, by a very wide margin) with a Russian secretary-general to lead its administrative apparatus. (The current secretary-general is Iranian.)

During the GECF’s July 2013 Moscow summit, Putin urged the group to defend long-term supply contracts and oil-based pricing formulas — key points in the “Moscow Declaration,” the GECF summit communique. This was likely not too difficult, in that most suppliers want and need long-term predictability in making the massive infrastructure investments required to produce and transport natural gas. No less important for Russia, Putin won the somewhat obliquely-phrased rhetorical support of the GECF in his battle with the European Union over its so-called “third energy package,” which mandates the separation of energy production and transportation businesses to promote competition. The summit statement announces the forum’s commitment to “enhance the global-scale coordination of actions to protect the interests of the Gas Exporting Countries in all areas including interactions with regulatory authorities of gas-consuming countries.”

Despite this, Qatar’s gas exports have been causing problems for Russia and its gas monopoly Gazprom — although the root cause lies in the United States. After developing extensive facilities to export liquefied natural gas (LNG) to the United States, Qatar’s intended customer faded away as US shale gas production soared. Qatar’s redirection of its LNG to European markets swelled the spot market for gas, putting significant downward pressure on natural gas prices and eventually contributing to conditions that forced Gazprom to refund $2.7 billion to its European customers in 2012 alone. Hence Putin’s complaints.

Qatar’s choices are significant because it exports a third of the world’s LNG, now overwhelmingly to Asia. Although the spot market for LNG is just 20% of the overall market, it nevertheless can have a significant impact on pricing and other contract terms, as it has in Europe. Russian companies have been quite slow to enter LNG markets and, as a result, Russia’s gas exports travel overwhelmingly by pipeline. Interestingly, some have argued that Moscow may have turned the tables in the recent $400 billion gas deal between Gazprom and China National Petroleum Corp., which they see as a challenge to Qatar in the mid to long term.

This competition between Russia and Qatar reflects fundamental structural tensions in the GECF that will likely limit its long-term influence. The Organization of Petroleum Exporting Countries (OPEC) has long faced its own challenges, primarily in setting and enforcing production quotas — something political scientists see as a classic problem of collective action. In OPEC, members have strong incentives to exceed their quotas and therefore secure additional revenue, though if too many do so their combined actions can drive down prices and harm everyone. Nevertheless, at least in today’s global economy, OPEC members are relatively confident that they can sell whatever oil they produce in the highly developed international oil market. This exacerbates the collective action problem, but also insulates OPEC members to some extent.

Natural gas markets are of course fundamentally different. Most gas is still delivered by pipelines with fixed starting and ending points and cannot be quickly, easily or cheaply redirected to other customers. Even the more flexible LNG exports require massive capital investments to build liquefaction and re-gasification facilities. This consideration drives exporters’ interest in long-term supply arrangements. Russia is especially concerned precisely because so much of its gas travels by pipeline. As a result, however, the competition among gas exporters is much sharper than that between oil exporters — and losing out can be very costly. Thus, while GECF members may be able to cooperate to defend their preferred contracting principles, major consumers can also find ways to divide them and set them against one another. From this perspective, Gazprom and Qatargas, among others, are directly competing.

Still, in the case of Russia and Qatar, Doha appears to have found at least one way to mitigate any tensions arising from competition for customers. The Qatar Investment Authority has committed $2 billion to the government-connected Russian Direct Investment Fund for infrastructure projects in Russia. Coming as Western governments attempt to isolate Moscow economically, it is a significant gesture that the Kremlin will notice and understand — “business is business” also means “nothing personal.” As US and European relations with Russia continue to erode, that message may matter.