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New crisis and old

Subdued oil prices and intractable wars cast a shadow over the year

The backdrop to the Middle East and North Africa stage in 2017 illustrated the two key themes of the previous 12 months: low global oil prices; and continuing violence in Iraq, Syria, Libya and Yemen. But other crises emerged. On 5 June, Saudi Arabia, with the backing of Bahrain, the UAE and Egypt, took the world by surprise by imposing an economic blockade on Qatar. The country was being punished, Saudi Arabia and its backers said, for failing to honour previous pledges to change domestic and regional policies towards political Islam and Iran.

Qatar rejected what it called attempts to infringe upon its sovereignty. It circumvented the blockade by increasing imports of food and goods from Iran and Turkey, while its oil and gas exports continued as normal—including the supply of natural gas via the Dolphin pipeline to the UAE and Oman.

To underline its self-confidence, Qatar in July announced ambitious plans for expanded natural gas production from its offshore North Field, where a self-imposed moratorium on new development had been in place for more than a decade. The new output will feed a 30% expansion of Qatar's liquefied natural gas export capacity, bringing the total to 100m tonnes a year by the mid-2020s.

One casualty of the Qatar spat was the reputation of the Gulf Cooperation Council. This never-particularly-effective body remained silent as three members turned on a fourth. It also raised doubts about their cooperation within Opec.

The Qatar crisis also shed further light on the leadership style of the Gulf 's new generation of princes—energetic and impulsive. In June, King Salman named his young son, Mohammed, as crown prince, removing Mohammed bin Naif from the post. With his promotion, Mohammed bin Salman acquired control of all key state institutions. He reinforced this with a purge of rivals and businessmen in November. Prince Mohammed bin Zaid, the effective leader of the UAE, enjoys similar powers. These two young princes showed, in Qatar as previously in Yemen, that they'll deal decisively to protect their interests—even if it causes instability in the region.

Saudi Arabia and the UAE, meanwhile, watched with alarm as Iranian-backed Shia militias expanded their control over areas of Iraq. Saudi Arabia, in response, sought to build bridges with Iraqi Shia leaders who don't welcome Iran's looming presence.

In Iraq itself, the liberation of Mosul and the gradual eradication of the Islamic State presence elsewhere brought into focus areas captured by Iraqi Kurds—in particular, the disputed city of Kirkuk, the source of most of the Kurdish Regional Government's (KRG) oil exports. Tension rose in September when, in a referendum, Iraqi Kurds voted overwhelmingly in favour of independence, ignoring international pleas to cancel the poll. It got much worse for the KRG in mid-October, when Iraqi security forces captured all the areas—including oil-producing ones—in the disputed territories along the border with Iraqi Kurdistan. This rolled back all the territorial gains made by the KRG, including Kirkuk. The referendum gambit had backfired dramatically: some wondered if the KRG would even survive as an entity. Its dreams of economic and political autonomy certainly looked moribund. Violence in northern Iraq and the Saudi crackdown lifted oil prices a bit in Q4. But for most of the year they traded in a $50-55-a-barrel. The low oil price has forced spending cuts and the lifting of fuel subsidies in the Gulf states. It was a relentless headwind for the region's producers and their increasingly fragile economies.

Oil prices also largely shrugged off the see-sawing of Libyan output, as energy facilities became pawns in violent clashes between rival eastern and western groups. Remarkably, while the fighting continued, oil output towards the end of the year appeared to be settling at around 1m barrels a day. Another strongman, Khalifa Hafter, and his army seemed inexorably to tighten their territorial grip on the country.

The other big geopolitical turn affected Iran. In mid-October, president Donald Trump ended US support for the nuclear deal with Tehran and he seemed closer to contemplating military action. Saudi Arabia added fuel to the tinderbox, accusing Iran and Hezbollah of attacking it from Yemen, while also orchestrating the resignation of Lebanon's prime minister.

On the positive side, Egypt pressed ahead with the development of the mega-giant Zohr offshore gasfield, heralding the return to gas self-sufficiency, while the start of production from Oman's Khazzan gasfield in September gave a boost to the sultanate's economy, also suffering from weaker oil prices. Those were minor shafts of light, though, in a region that seemed trapped, for yet another year, in a vortex of conflict, dysfunction and disintegration.

This article is part of Outlook 2018, our annual book looking at energy market trends for the year ahead. To purchase a copy, click here

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