The war in the Middle East has hurt the global LNG industry and promoted a supply chain crisis that will leave global scars. The warning comes from the head of the International Gas Union and points to extended disruption in the supply of the most flexible form of natural gas.
Just a year ago, even a few months ago, there were warnings of an LNG glut that was going to pressure prices around the world, especially as U.S. energy companies rushed to build new export capacity. Then the U.S. and Israel bombed Iran’s energy infrastructure, and Iran responded with strikes on the energy infrastructure of Gulf states, notably Qatar. Qatar declared force majeure on LNG exports, and suddenly the world flipped from a glut to a potential shortage.
The price of LNG on global markets has surged by 80% since February 28, when the war started, Reuters reported this week. This is despite the fact that supply overall is abundant, the International Gas Union’s Menelaos Ydreos told the publication.
“This was not a supply crisis. This was a supply chain crisis,” the executive said, adding that “Where you have choke points and you have geopolitical events that occur, it impacts security of supply.” This could have implications for energy importers’ long-term plans, Ydreos explained, as Asian countries suffer their second supply crisis in four years with little financial resources to handle it. Related: US Oil, Gas Drillers Take the Foot Off the Gas As Prices Climb
QatarEnergy in late March declared force majeure on LNG contracts with buyers in Italy, China, Belgium, and South Korea, among others. The declaration followed Iranian retaliatory strikes on Qatar’s part of the South Pars/North Field gas deposit and its liquefaction facilities. The damage that resulted would take several years to fix, per QatarEnergy, which accounts for over 15% of global LNG capacity.
Later reports about dozens of Qatari LNG carriers sitting empty in the Persian Gulf contributed to a perception of a supply squeeze with no clear end in sight, regardless of the warring parties’ potential negotiations and attempts at a ceasefire. All this, in turn, has damaged Qatar’s reputation as a reliable supplier of liquefied gas.
“The reputation of a reliable area for energy in the world, whether it’s oil or gas or petrochemicals or fertilizers, all of a sudden gives some concern,” the IGU’s Ydreos said, noting that “Over 30 years, Qatar had an incredible record of on-time delivery of cargoes…second to none, but now there are questions.”
These questions seem to be casting a doubt about the future of natural gas as a so-called bridge fuel, although per the latest predictions from the International Energy Agency, the bridge leads nowhere and gas will continue to be in demand well into the future.
In the latest edition of the IEA’s World Energy Outlook, out last November, the IEA dropped its peak oil and gas predictions and admitted that the coming years and decades will see a consistent increase in demand for energy across industry, households and, notably, information technology. Investments in data centers could reach $580 billion for 2025, the IEA’s secretary-general said, which would exceed the expected $540 billion in oil and gas industry investment.
That was before the war in the Middle East. Now, more money would need to be spent on repairing damaged energy infrastructure, and this will take time—years, according to QatarEnergy. No wonder, then, that imports of liquefied natural gas into Asian countries fell last month by the sharpest rate since 2020, when pandemic lockdowns decimated energy demand. The total for the month stood at 20.6 million tons, according to Bloomberg, which represented an annual drop of 8.6%. It was the sharpest demand drop since December 2020.
Demand destruction will probably continue as prices remain high due to the supply disruption, raising questions about the economics of additional export capacity as the U.S. administration’s energy dominance agenda runs into the reality of limited financial resources and the abundance of coal. Indeed, Asian countries are already switching from gas to coal, up to and including Japan, which is certainly not among the poorest Asian nations.
Perhaps even more peculiarly, Japan’s JERA canceled a long-term LNG supply deal with U.S. Commonwealth LNG earlier this month. Neither of the companies gave reasons for the cancellation, which is quite counterintuitive in the current geopolitical context. However, one official from the Japanese Ministry of Industry made an interesting remark in March: “There is increasing uncertainty about future LNG procurement. We believe that it is necessary to increase the operation of coal-fired power plants and save LNG fuel,” he said.
Of course, the official was referring to Middle Eastern LNG supply, yet the fact that Japan would rather ramp up coal generation than simply start buying even more LNG from the United States suggests there is a pain threshold when it comes to LNG prices—a fact that would likely inform short- to medium-term LNG buying decisions around the world.
By Irina Slav for Oilprice.com
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