Nikolay Kozhanov is a research associate professor at the Gulf Studies Center of Qatar University. He is also a consulting fellow in the Russia and Eurasia Program of Chatham House. His research interests are focused on the geopolitics of Gulf hydrocarbons, Russian foreign policy in the Middle East, as well as Iran’s economy and international relations. Kozhanov received his Ph.D. in economics from St. Petersburg State University in Russia (2010). He holds an M.A. degree in Oriental Studies (2006, St. Petersburg State University) and an M.A. degree in Middle Eastern Studies (2012, University of Exeter). Diwan interviewed Kozhanov in late March to get his perspective on how the conflict in Ukraine might affect the oil and gas market in the Middle East.
Michael Young: How do you anticipate that the cutoff of ties between Western oil companies and their Russian counterparts will affect the Middle East, particularly with regard to supplying Europe with gas?
Nikolay Kozhanov: The growing determination of the European Union countries to move away from dependence on imports of Russian oil and gas indeed provides an opportunity for Middle Eastern producers of hydrocarbons. However, taking advantage of this opportunity will be somewhat more difficult than it may appear. Thus, in the short run, the Gulf Cooperation Council countries that can theoretically play an important role in the diversification of European supply sources are unlikely to be able to significantly increase the exports of their hydrocarbons to the EU. However, the trend of a growing Middle Eastern presence in the European oil and gas market has been set, and within the next five to seven years it might lead to a decrease in the Russian share of the regional market.
In this sense, the experience and behavior of Qatar is very indicative. On the one hand, the emirate is obviously interested in exploiting existing opportunities, and is strengthening its position in eastern and southern Europe as well as asserting itself more in western European countries. In late autumn-early winter 2021–2022, Doha had already demonstrated its readiness to come to the aid of Western countries when, in order to meet the demand for natural gas in the United Kingdom, it reoriented four liquified natural gas (LNG) cargoes from Asia to Europe. Consequently, the British authorities even talked about the possibility of turning Qatar into a “last resort supplier,” which would be ready to come to the aid of the U.K. in case of emergencies.
At the same time, there are physical limitations on Qatari export volumes for the European market. The lion’s share of Qatari gas is sold under term contract. The increase in supplies to Europe would mean cancelling or revising some of these, which Doha will not do. In addition, the European market is secondary for Qatar. In the long run, the priority is given to Asia. The emirate is used to diverting additional volumes of LNG from the Asian market in order to avoid overheating, or to earn extra money as when the cost of LNG in spot markets exceeds the cost of LNG in Asia, which is what happened last winter. To motivate Qatar to shift to the European market, the EU would have to change a number of its own rules and make them less stringent for suppliers.
There is another obstacle to Qatari gas for Europe, which has an exclusively political character. Doha is not interested in using its economic resources as a means of political influence or coercion. This could damage its principle of remaining a neutral power, ready to mediate in international conflicts, but not to create coalitions against anyone. In such a situation, a readiness to replace Russia in the European gas market would only harm Qatar and give an unpleasant political aftertaste to its economic activities. As a result, the build-up of its presence in Europe would be gradual and portrayed as being economically driven. Moreover, taking into account Qatar’s plans to increase its LNG production, it may receive additional volumes to help the EU diversify its import sources only within a few years. It is necessary, however, to bear in mind that even these extra volumes will still not be enough to ensure Europe’s complete independence from Russia.
MY: How will Russia’s isolation affect dynamics in the OPEC+ group?
NK: The Persian Gulf countries, which theoretically could increase production to replace a significant portion of Russian oil, are in no hurry to do so. In recent weeks, high-ranking representatives of the United States, the United Kingdom, and Germany have been actively trying to convince their Middle Eastern allies—Saudi Arabia and the United Arab Emirates (UAE)—to come to the rescue and increase hydrocarbon supplies. However, the answer, with varying degrees of courtesy, was always negative. And the Arab monarchies and emirates have several reasons for this.
First of all, as members of OPEC+, they try to avoid using each other’s political and economic problems to expand their own production volumes. This behavior is explained by an unwillingness to undermine the internal discipline of OPEC+, which is already far from perfect. On the other hand, the cartel should always be prepared for the fact that some of its members, especially Iran, will increase their production as a result of changes in political or economic realities that previously prevented them from doing so. Under these conditions, it is always better to have a certain level of under-production, and not vice versa, to avoid destabilizing the market due to overproduction of oil in excess of the total production quota.
However, in the long term, the picture may be different. The current crisis in Ukraine significantly changes the behavior of European oil consumers, who are trying to reduce their dependence on Russia at any cost. It won’t happen right away. Nevertheless, this trend has already been set and accelerated by the war in Ukraine. It provides the Gulf countries with openings to gradually increase their presence in the European oil market, at a pace that avoids tense relations with Moscow. At least since 2017, Saudi Arabia has been steadily increasing its presence in the Polish oil market. However, the Americans are also not going to back down, and negotiations with the Gulf states are continuing. Perhaps Washington will be able to convince its Arab partners to reconsider their position. Also, not everyone among the Gulf states considers it necessary to support production restrictions.
Earlier in March, there were conflicting signals from UAE officials about their country’s readiness to raise production. It is also necessary to take into account Saudi Arabia’s plans to increase production by 2027, as well as the fact that the current sanctions against Russia will significantly weaken its ability to keep its own oil production from falling in the long term. Down the road, this will make Russia less important for OPEC+.
MY: Recently, the United States made it known that it no longer supported the East Mediterranean pipeline project that brought together Israel, Cyprus, and Greece, and that would have sent gas to Europe. This appeared to favor an alternative plan to bring gas to Europe through Turkey. How does Russia’s isolation affect the pipeline situation when it comes to supplying Europe, and do you anticipate that Israel would be willing to cooperate with Turkey to send its gas to the continent through a Turkish pipeline?
NK: From an economic point of view, the East Mediterranean pipeline was always a stillborn project and the situation in and around Ukraine will not help to revive it. By the beginning of 2022, both the Europeans and the United States buried the project. First, the growing popularity of energy transition made the EU turn away from supporting large oil and gas infrastructure projects. Following their example, the United States also considered the Eastern Mediterranean pipeline unpromising. In a message sent to the governments of Greece, Cyprus and Israel, the Biden administration expressed its doubts about the economic and environmental viability of the project. In addition to giving greater priority to projects related to renewable energy, the West began to give preference to programs that would focus not on the supply of hydrocarbons, but on the unification of Europe’s energy systems with neighboring regions. Thus, the EuroAfrica project, focused on connecting Egyptian, Cypriot, and Greek power grids, as well as the Euroasia project, connecting the power systems of Israel, Cyprus, and Greece in the future, suddenly became an alternative to pipeline gas supplies.
In recent years, political considerations also helped to undermine the Eastern Mediterranean pipeline. The pipeline caused Turkey to complain that it was excluded from the project. President Recep Tayyip Erdoğan was quite clear when he said that if Israeli gas was supplied to Europe, this could only be done through Turkey. Despite the fact that these statements sounded overambitious, and Turkey’s relations with Israel are far from friendly, ties between the two countries have improved in recent months. In this context, a powerful and economically unjustified irritant as the Eastern Mediterranean pipeline can be canceled, and the project of exporting Israeli gas through Turkey, on the contrary, becomes more interesting However, there is still a long road to go before this can be achieved.
MY: If a deal is reached in Vienna over reviving the nuclear deal with Iran, do you anticipate that down the road Iran could potentially fill part of the gap left by Russian gas, through its Chalous gas field in the Caspian?
NK: Under certain conditions, Iran could play a role in partially replacing Russian oil. However, the situation with gas is somewhat different. In the short run, it is hard to talk about any significant increase in natural gas exports from Iran to the EU. On the one hand, the development of the Chalous gas field will require significant financial input, as well as a resolution to the logistical problem of supplying natural gas from this field to Europe. Given that Chalous is a deep-water field, Tehran will need to find a contractor with the appropriate production technologies as well. All this will take time and resources. Moreover, it was assumed that the solution to both problems in the Chalous field would be handled by Russia, in cooperation with China. On the other hand, Iran’s ever-growing domestic needs for natural gas should also be taken into account. Assuming a decline in production at Iran’s largest South Pars field, the Chalous resources will definitely be diverted to meet the country’s domestic needs first.