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Shuttle diplomacy.

The worlds biggest gas field lies between Qatar and Iran, and the half-competitive, half-cooperative race to exploit it has taken a new turn. For both countries, this enormous resource is also a source of political power. Now, with the emirate at odds with Tehrans foe, Saudi Arabia, its tacit cooperation with Iran is gaining, even as the two are set to compete more intensely in gas markets.

In 1971, Shell first drilled into what became Qatars North Field and was disappointed to find not oil, but gas, though in vast quantities. The country was only a modest oil producer with a tiny domestic and regional energy market. Through the 1980s and 1990s, it struggled to develop a liquefied natural gas project to export to Asia, but with low global energy prices, a cost-cutting BP gave up and Mobil took over. The emir, Sheikh Hamad bin Khalifa Al Thani, who took power from his cautious father in a bloodless coup in 1995, was keen to press ahead.

Exxon might not have had the entrepreneurial mindset to create the project, but when it bought Mobil in 1998, and soon afterwards oil and gas prices began to rise, it had one of its most valuable global assets. The wily former oil minister, Abdullah bin Hamad al-Attiyah, worked with the emir to use Qatars strategic position to sell gas both east and west. Total, ConocoPhillips and Shell also built LNG plants, while the Abu Dhabi state firm Mubadala, with Total and Occidental, constructed the Dolphin pipeline to the neighboring United Arab Emirates.

When the U.S. import market disappeared because of the rise of shale gas, Qatar was nimble enough to focus on Europe and Asia, and reacted rapidly to boost supplies to Japan after the 2011 Fukushima nuclear accident. The Japanese were grateful, even if they felt they paid a stiff price as LNG prices soared to records. And in less than two decades, Qatar became the worlds wealthiest country per capita, a major global investor and an expansive political actor involved across the Middle East.

Meanwhile, despite Qatari maps showing the field conveniently ended at the border, Iran drilled its sector in 1991, and gradually established that it had about a third of the total reserves in what it called South Pars. But it was slowed by sanctions, mismanagement, and indecision and political infighting over what the gas should be used for -- reinjected in ageing oil fields to boost recovery, sold to petrochemical industries, burnt to generate power or heat homes, or exported by pipeline to neighbors or as LNG.

In 2005, Qatar imposed a moratorium on further development of the North Field, saying it needed to study the reservoir. That moratorium has only just been lifted -- but a field study does not take 12 years. There were good commercial reasons to halt -- the LNG market was becoming oversupplied and domestic construction capability was overstretched. Saudi pressure blocked new pipelines to Bahrain and Kuwait, which even made difficulties over the route of the Dolphin pipeline.

But there has also been suspicion that the Iranians warned Doha to stop new projects that they felt would start draining their gas. Since 2014, Irans production has been gaining rapidly as long-delayed phases of South Pars, awarded to domestic contractors who were hampered by sanctions and financing problems, have finally been completed. By 2020, Irans output from South Pars will exceed Qatars from the North Field.

The South Pars phases that have not begun development -- 13, 14 and 22-24 -- are at the northeastern end of the field, well away from the border. The one exception is Phase 11, which lies on the border, and has been a priority to prevent gas migrating from the Iranian to the Qatari side.

The contract that Total and China National Petroleum Corporation signed on July 3 for Phase 11 is thus a crucial part of Irans strategy, as the first deal awarded under the new Iran Petroleum Contract, designed to attract foreign investment following the lifting of nuclear-related sanctions at the start of last year. The production will initially go to the domestic market, but later could support Irans first LNG export project. It is a key public relations win for both post-sanctions Iran and for theadministration of recently re-elected President Hassan Rouhani.

This came only two months after Qatar announced the end of its moratorium, with the beginning of a new gas production project. Just a day after the signature of the South Pars Phase 11 deal, Qatar Petroleum Chief Executive Saad Sherida Al Kaabi said its new project would double in size, raising total LNG export capacity by 30 percent to 100 million metric tons per year by about 2023, maintaining it as the worlds largest, outpacing Australia and the U.S.

This was a signal to high-cost LNG competitors that Qatar would fight for its market share, and it was a sign of defiance to the Saudi-led coalition. The chief executives of ExxonMobil, Total and Shell all visited Doha recently.

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The interesting question is, what deal or understanding did Iran reach with Qatar over its expansion? If the emirate had instituted its moratorium on account of warnings against further projects by the Iranians around 2005, this could not be sustained now that their own production nearly matches Dohas, from just a third of the total reserves. The Saudi-led blockade has pushed Doha closer to its big northern neighbor, and at the same time, the Iranians, seeing a chance to divide their Arab neighbors, may be willing to make life a little easier for the Qataris. Cooperation suits both owners of this field -- for now.

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To contact the author of this story: Robin M. Mills at robin@qamarenergy.com

To contact the editor responsible for this story: Max Berley at mberley@bloomberg.net

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Qatar Warms Up to Iran on Natural Gas - Bloomberg