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Qatar crisis presents both threat and opportunity for Japan

Escalation of terrorism row masks high-stakes proxy battle

| Japan

In early June, Saudi Arabia and its allies -- the United Arab Emirates, Bahrain and Egypt -- sent ripples through financial markets and global diplomatic circles by blacklisting Qatar, accusing the state of sponsoring and nurturing ties with terrorists.

Another five countries in the Middle-East and North Africa have also severed diplomatic ties with Doha, sparking a wider regional crisis and prompting concerns that the tiny gas-rich state is being used as a proxy in a wider battle for regional dominance between Saudi Arabia and Iran.

The crisis is being watched anxiously around the world -- not least because of the region's position as a key global supplier of oil and gas exports. Qatar is also an important military outpost for the United States in the region, and was Washington's partner in a recent multibillion dollar defense deal.

One of the countries most exposed to the crisis is Japan, which faces significant potential costs. The most obvious is Tokyo's significant dependence on members of the Gulf Cooperation Council -- which includes Qatar, Saudi Arabia, the UAE, Bahrain, Kuwait and Oman -- as the primary source for its energy imports. According to the U.S. Energy Information Administration, Japan imports more than 75% of its crude oil from the GCC, with Saudi Arabia and the UAE together supplying 60%. Qatar provided 8% of Japan's crude oil imports in 2015.

Japan also relies on Qatar as its top Middle East source of liquefied natural gas -- Doha provided 18% of Japan's supplies in 2016, the largest proportion after Australia and Malaysia, which together supplied 45%. LNG has become increasingly important to Japan in the years since the Fukushima nuclear accident in 2011, which led to a shift away from nuclear energy. It is now the second largest source of energy consumed in Japan after crude oil, accounting for 23% in 2015.

As yet, there have been no efforts by the Saudis or their allies to sever energy supply lines from Qatar, which would signify a deepening of the crisis. Indeed, many countries in the region -- especially the UAE -- remain highly dependent on supplies of LNG from Qatar for their domestic energy needs. But if tensions continue to increase, and if Qatar decides to tilt more openly toward Iran -- Riyadh's archrival in the region -- more punitive measures may be levied on Qatar's energy exports.

Therefore, in energy security terms, the growing rift between Doha and its neighbors in the Gulf should raise alarm bells in Tokyo and further push forward moves to diversify its energy supply sources. At this point the direct damage to Japan's interests appears to be minimal, but that could change as the situation escalates. For example, several large Japanese multinational corporations have offices and significant investments in Qatar, and are anxiously watching to see how the rift is handled diplomatically.

The issue is complicated further by the fact that Dubai, one of seven UAE emirates, is the largest regional hub for Japanese businesses and expatriates. Several large Japanese companies, including Marubeni and JX Nippon Oil and Gas, also have offices in Doha, and their employees often rely on transiting through Qatar to conduct business throughout the region. As part of the restrictions levied on Qatar, the Saudi-led bloc has closed its land borders with Qatar and banned flights in and out of the country. This has greatly complicated access to Qatar and travel around the Gulf region.

Potential opportunities

How should Japan respond to this devolving situation in the Gulf? First, Tokyo must remain engaged, but also aware of the limits of its influence in the region and the costs and benefits of becoming too entangled. In this sense, it makes sense that Japan's initial response to the situation was to "wait and see," with the foreign ministry releasing a statement calling for "peace and stability" in the region and "unity of the Gulf Cooperation Council." While there are dangers in being on the sidelines, there are also deep risks for Japan in becoming entangled in a dispute pitting one of its largest LNG suppliers against a Saudi-led faction on which it relies for most of its energy needs.

That said, there are ways for Japan to mitigate the risks to its interests and to seize potential opportunities from the crisis. One of these is in seeking greater spot trading of LNG in place of the current system of supplier-friendly, long-term deals that lock in prices. Japan's largest utility providers -- Tokyo Electric and Chubu Electric -- are negotiating to renew a multibillion-dollar contract with Qatar's state-run petroleum company, which expires in 2021. The political uncertainty and regional pressure facing Qatar puts the Japanese companies in a stronger position to demand greater flexibility in future contracts and a larger role for spot trading.

In this sense, the Qatar crisis has hastened an opening in the LNG supply market and could lead to greater diversity in supplier markets, including the U.S. While Tokyo should look to manage this situation diplomatically, and be cautious about balancing its business negotiations with its diplomatic relationship with Qatar, it would be myopic not to seize the chance to secure more favorable prices and shape the market.

Additionally, the unfolding drama in the Gulf should be a stark reminder to Tokyo of the need to diversify its LNG supplies to ensure reliability. Japan should continue to work hard with counterparts in the U.S. and Canada to push forward opportunities for LNG trade. Moreover, Japan should look at redoubling its efforts to secure sources closer to home -- in Southeast Asia and the Pacific -- by building on its existing LNG trade with the region. This would help to insulate Japan from troubles in the Gulf while furthering Tokyo's influence in Southeast Asia.

Finally, while Japan should not look to play a mediation role in the dispute, Tokyo can address the concerns of the Saudi-led bloc by raising awareness in its meetings with Qatar of the importance of countering violent extremism and denying harbor and nesting places for terrorists or extremist ideologies. The lack of clarity and purpose in Washington since the election of President Donald Trump also provides a strengthened argument for a principled and active Japanese role.

Jonathan Berkshire Miller is a senior fellow specializing in East Asia at the EastWest Institute, an organization focused on conflict resolution, in New York.

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