The war in Iran has driven oil prices to their highest levels in years. Now, a wave of attacks over the past 24 hours against energy production facilities across the Middle East has put the spotlight on another crucial fossil fuel: liquefied natural gas, or LNG.
On Wednesday (19), QatarEnergy reported that its Ras Laffan facility, the largest facility of its kind in the world, suffered “extensive damage” after being hit by Iranian missiles twice in 12 hours. QatarEnergy’s exports, responsible for almost a fifth of global LNG supplies, were already blocked by the , and production had been halted on March 2 following an earlier attack.
But the latest attacks on Ras Laffan “fundamentally” alter the outlook for the global natural gas market, according to Wood Mackenzie, a data and analytics company. In a note released on Thursday (20), the company stated that the interruption in the global supply of natural gas will likely last more than two months.
The attacks on Ras Laffan were in retaliation for those against South Pars, part of the world’s largest natural gas field. South Pars is not only critical to Iran’s domestic electricity supply, but also supplies Turkey via a gas pipeline.
Even before the latest attacks, countries in Asia and Europe, which depend on natural gas imports, were rushing to react to rising LNG prices, which have increased the costs of electricity generation, home heating and fertilizer production. The European Union was evaluating the possibility of capping natural gas prices to contain rising electricity costs.
Benchmark natural gas prices in Asia and Europe had already risen by about 60% to 70% since the start of the war on February 28, based on calculations of price changes in futures contracts. By Thursday, Dutch natural gas futures, the European benchmark, had doubled in price.
Speaking on the sidelines of an EU summit on Thursday, Belgian Prime Minister Bart De Wever said EU officials were “very concerned about the energy crisis”. Even before the war, energy prices were already “very high” and have now risen even higher, he noted. “If this becomes structural, we will be in serious trouble.”
Race for supplies
The increase in LNG prices and an even greater reduction in supply could cause serious impacts on the Asian and European economies. (The United States, as the world’s largest LNG exporter, is largely protected.)
Almost 90% of LNG from Qatar and the United Arab Emirates was delivered to Asia last year, with Bangladesh, India and Pakistan the countries most dependent on these shipments, according to the International Energy Agency.
Last week, India began rationing natural gas supplies to manufacturers, with fertilizer plants receiving a maximum of 70% of their demand, according to the country’s Ministry of Petroleum and Natural Gas. Meanwhile, sales of electric induction cookers in India have soared, and in the large city of Pune, gas crematoriums have temporarily closed, CNN affiliate News18 reported.
Neighboring Pakistan closed schools for two weeks, implemented a four-day work week for civil servants and told officials to work from home. According to the IEA, natural gas is responsible for almost a quarter of the electricity supply in the country, which also relies heavily on oil from the Middle East.
Bangladesh may be even more vulnerable as natural gas power generation accounts for half of its electricity supply, according to the IEA. “The supply shock has led to widespread gas rationing across the economy,” says Wood Mackenzie, with clothing manufacturers facing “a significant reduction in production.”
The race by Asian economies to secure LNG supplies is putting upward pressure on European prices and increasing competition for cargoes from producers outside the Middle East, including the United States, Europe’s biggest supplier.
Eleven tankers originally destined for Europe have been redirected to Asia since the start of the war, according to Gillian Boccara, senior director of gas and energy at Kpler, a company specializing in commodities intelligence.
Competition may also arise from Türkiye following the attack on South Pars. If Turkey’s supply is compromised, the country could try to buy LNG from elsewhere, which could put even more upward pressure on prices around the world, Boccara said.
There are no easy answers
For Europe, the LNG crisis comes at an inopportune time. A particularly harsh winter depleted much of the region’s gas reserves. And unlike oil, there are no strategic reserves that can be used to alleviate a supply shortage and help contain prices.
“There is no immediate solution to this crisis in the gas sector,” said Anne-Sophie Corbeau, a researcher at Columbia University’s Center for Global Energy Policy.
Existing LNG plants around the world are operating at or near full capacity, and new LNG supplies expected this year, including from the United States, Canada and Australia, may not arrive in time to help with the current shock, according to Corbeau. It also won’t be enough to replace Qatar’s lost volumes, she told CNN.
Furthermore, once fighting in the Middle East ceases, it could take several weeks for Qatar’s LNG production to return to previous levels. “It’s not like you flip the switch and everything starts working again,” Corbeau said.
Before the latest attacks, Wood Mackenzie predicted it would take four to six weeks for Qatar’s LNG production to return to full capacity.
Corbeau suggested that European policymakers encourage businesses and households to save energy and reduce demand now. “We are wasting an opportunity because if we start doing this in April or May, it will be too late,” she said.
Return to Russia?
The current crisis has led to some calls for the European Union to reconsider a total ban on natural gas imports from Russia, which is expected to come into force next year. However, such a measure seems unlikely. The bloc has already rebuked Washington’s decision to lift sanctions on Russian oil, and European Commission President Ursula von der Leyen said last week that a return to Russian fossil fuels would be a “strategic mistake.”
Increasing gas transported via pipelines from Russia is, according to Corbeau, “politically unacceptable at the moment.”
Still, with the war now in its third week, the Strait of Hormuz is unlikely to reopen in the near future. Even a “relatively short disruption” across the strait, lasting four weeks, could keep natural gas prices in Europe about 20% above pre-war levels for months, according to Independent Commodity Intelligence Services, a data analytics firm.
A prolonged outage, lasting about three months, would cause prices to rise by approximately 165% from pre-war levels, reaching around €85 ($98) per megawatt-hour (MWh), ICIS said in a recent report.
If the blockage of the Strait of Hormuz lasts a full year, the impact on natural gas prices in Europe could be “as big or bigger than in 2022,” when Russia launched a full-scale invasion of Ukraine, Kpler’s Boccara said. At that time, natural gas benchmark prices peaked at around €340/MWh ($392/MWh). They are currently trading at around €63/MWh ($75), indicating that markets are not expecting the worst.
At least for now, nuclear power and renewables are helping to ease the impact for Europe, Boccara said. She warned, however, that higher energy prices could still harm large consumers, such as industries. This would harm their ability to compete, just as they begin to recover from the previous energy crisis.
“There was an expectation that prices would actually fall this year,” she said.
