Market Update: What strikes on the world’s largest natural gas sites could do to the global economy – Full Analysis

London
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The Iran war has driven oil prices to their highest levels in years. Now, a wave of attacks in the past 24 hours on energy production sites across the Middle East has turned the spotlight on another crucial fossil fuel: liquefied natural gas, or LNG.

On Wednesday, QatarEnergy said its Ras Laffan LNG hub, the world’s largest such facility, had sustained “extensive damage” after being struck by Iranian missiles twice in 12 hours. QatarEnergy’s exports, accounting for almost a fifth of global LNG supply, were already trapped by the Strait of Hormuz blockade and production had been halted on March 2 after an earlier attack.

But the latest strikes on Ras Laffan “fundamentally” alter the global natural gas market outlook, according to Wood Mackenzie, a data and analytics company. In a note Thursday, it said disruption to global natural gas supply was now likely to last longer than two months.

The attacks on Ras Laffan were a retaliation for Israeli attacks this week on South Pars, part of the world’s largest natural gas field. South Pars is not only critical to Iran’s domestic electricity supply, it also supplies Turkey via pipeline.

Even before the latest strikes, countries in Asia and Europe, which depend on natural gas imports, were scrambling to respond as LNG prices have surged, driving up the costs of generating electricity, heating homes and making fertilizer. The European Union was weighing capping natural gas prices to curb a jump in electricity costs.

Benchmark natural gas prices in Asia and Europe had already surged some 60%-70% since the war began on February 28, based on calculations of price moves in futures contracts. As of Thursday, Dutch natural gas futures, the European benchmark, have doubled.

Speaking on the sidelines of an EU summit Thursday, Belgian Prime Minister Bart De Wever said EU officials were “very worried about the energy crisis.” Even before the war, energy prices were “too high” and have now spiked further, he noted. “If that becomes structural, we’re in deep trouble.”

The surge in LNG prices and a further reduction in supply could lead to severe impacts for Asian and European economies. (The United States, as the world’s largest LNG exporter, is largely insulated.)

Almost 90% of LNG from Qatar and the United Arab Emirates was delivered to Asia last year, with Bangladesh, India and Pakistan most reliant on these shipments, according to the International Energy Agency.

Last week, India started rationing natural gas supplies for manufacturers, with fertilizer plants due to receive a maximum of 70% of their demand, according to the country’s ministry of petroleum and natural gas. Meanwhile, sales of electric induction stoves in India have soared, and in the major city of Pune, gas-based crematoriums have temporarily closed, CNN affiliate News18 reported.

Neighboring Pakistan has shut schools for two weeks, implemented a four-day work week for government employees and told officials to work from home. According to the IEA, natural gas accounts for nearly a quarter of electricity supply in the country, which also relies heavily on Middle East oil.

Bangladesh may be even more vulnerable, with natural gas-fired generation accounting for half of electricity supply, according to the IEA. “The supply shock has triggered widespread gas rationing across the economy,” according to Wood Mackenzie, with clothing manufacturers facing “significant production curtailment.”

The scramble 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 largest supplier.

Eleven tankers originally bound for Europe have rerouted to Asia since the war began, according to Gillian Boccara, senior director of gas and power at commodities intelligence provider Kpler.

There could also be competition incoming from Turkey, following the South Pars attack. If Turkey’s supply is compromised, the country might try to buy LNG from elsewhere, potentially putting further upward pressure on prices around the world, Boccara said.

For Europe, the LNG crisis is poorly timed. A particularly cold winter used up much of the region’s store of gas. And, unlike oil, there are no strategic reserves that can be tapped to alleviate a supply crunch and help to put a cap on prices.

“There is no immediate answer to this crisis on the gas side,” said Anne-Sophie Corbeau, a researcher at the Center on Global Energy Policy at Columbia University.

Existing LNG plants globally are running at or near capacity, and new LNG supply that is expected this year, including from the United States, Canada and Australia, may not come in time to help with the current shock, according to Corbeau. It also won’t be sufficient to replace lost Qatari volumes, she told CNN.

What’s more, when fighting in the Middle East stops, it could take several weeks before Qatar’s LNG production ramps back up. It’s “not like you switch the light button and everything comes back online,” Corbeau said.

Before the latest attacks, Wood Mackenzie forecast that four to six weeks would be needed to ramp up Qatari LNG production to full capacity.

Corbeau suggested that European policymakers encourage businesses and households to conserve energy and reduce demand now. “We are wasting an opportunity, because if we start doing that in April or May, it’s going to be too late,” she said.

The current crisis has prompted some calls for the European Union to reconsider a total ban on natural gas imports piped from Russia, due to take effect next year. Such a move looks unlikely, however. The bloc has already rebuked Washington’s decision to lift sanctions on Russian oil, and European Commission President Ursula von der Leyen last week said a return to Russian fossil fuels would be a “strategic blunder.”

Increasing pipeline gas from Russia is, according to Corbeau, “politically unacceptable for the moment.”

Still, with the war now in its third week, the Strait of Hormuz probably won’t reopen in the immediate future. Even a “relatively short disruption” to the strait lasting four weeks could leave European natural gas prices about 20% higher than pre-war levels for months, according to Independent Commodity Intelligence Services, a data analytics firm.

A prolonged disruption, lasting around three months, would cause prices to surge in the region of 165% from levels before the war to around €85 ($98) per megawatt hour (MWh), ICIS said in a recent report.

If the Strait of Hormuz blockade lasts a whole year, the impact on European natural gas prices could be “as big or bigger than in 2022,” when Russia launched a full-scale invasion of Ukraine, Kpler’s Boccara said. Back then, benchmark natural gas prices peaked at around €340/MWh ($392/MWh). They are currently trading around €63/MWh ($75), indicating that markets are not expecting the worst.

At least for now, nuclear and renewable power are helping cushion the blow for Europe, Boccara said. She cautioned, however, that higher energy prices could still hurt big power users like manufacturers. That would hamstring their ability to compete just as they emerge from the previous energy crunch.

“There was an expectation that prices were going to really come down this year,” she said.