Middle East conflict: examining the road ahead for gas and LNG

The natural gas and LNG ecosystem globally has swiftly felt the effects of the Middle East conflict between Israel, the US and Iran. Prices rose sharply following expectations that a prolonged conflict would squeeze global LNG supplies, not least as Qatar halted LNG production after Iranian drone strikes on Ras Laffan and the Strait of Hormuz, through which about 16% of global LNG supplies pass. Robin Mills, CEO of Qamar Energy and expert columnist, examines the immediate and long-term prospects for the sector.

With the ongoing hostilities having spread beyond the US, Isreal and Iran, what’s your take on where we are right now?

A complex and unsettling situation, and I think we’re approaching a critical point here. The transit of tankers in and out of the Gulf has virtually stopped. Because of this, production is backing up in the big oil producing countries inside the Gulf, and they’re increasingly having to shut down oil and gas production.

So we’ve seen some major oil production cuts in Iraq, which we knew would be the first to be affected by this. We’ve also seen a complete shutdown of liquefied natural gas (LNG) production in Qatar. We’ve seen a few attacks on oil and gas infrastructure at Ras Tanura refinery in Saudi Arabia, some tankers in different places, and oil storage facilities at Fujairah in the UAE.

Most of those attacks are not too serious in themselves, but the shutdown of oil and gas production is obviously absolutely critical for the world oil economy.

You recently spoke about the situation in Europe after being cut off from Russian gas. What will be the impact of the current situation on Europe?

I pointed to this just before this conflict erupted… that danger and that I saw actually gas as kind of almost the more critical part of the energy sector that was under threat here, rather than oil.

The reason I said this is partly because there’s a lot of oil in storage around the world. In the big oil consuming nations there’s at least 90 days of oil in storage. In China, there’s something like 120 days.

So there is some spare capacity, but not in the gas sector. Europe’s gas storage is coming out of winter; it’s at a very low level. And, of course, Europe has been hit by the cut off of Russian gas since late 2021, and particularly 2022 onwards. Europe kind of got through that, and Europe was expecting that LNG would come to the rescue. Indeed, LNG has come to the rescue, until now.

If we lose, at the same time, Russian gas and all the gas out of the Gulf, particularly out of Qatar, there’s nobody who can make that up. There’s almost no spare LNG production capacity anywhere else in the world.

How do you see the jostling between customers in Europe and Asia for gas supply playing out?

Europe doesn’t take actually very much LNG from Qatar directly, but Qatar is, of course, a huge part of the global supply; the Gulf as a whole, and Qatar being the main one, is about 16% of global LNG.

So if the LNG supply is cut off to Asia, Asian consumers will look for whatever other flexible LNG they can buy, and will pull that away from Europe, if necessary. And, indeed, we’ve already seen West African energy – so Nigeria and so on – on its way to Europe turning around and heading off to Asia. That, of course, will then push up prices in Europe. So, ultimately, this will hit everybody. The impact may be a bit different here and there, prices may be a bit different, but all LNG consumers and buyers will suffer from this.

We also saw companies like Cheniere Energy and Venture Global LNG looking at the situation very closely?

The US LNG producers are going to be one of beneficiaries from this because they’re typically selling on either flexible deals or short-term deals, and those are linked to traded gas prices and where prices can go much higher.

The traditional long-term LNG sellers sell on prices that are linked to oil … so those companies, particularly the ones selling into Europe that has a flexible traded gas market, yes, the prices have already gone up 90% since the start of this conflict, and could go up more.

That said, I think we should say, ‘look, gas prices are still far, far lower than they were in 2022’ when they really got to insane levels. We saw gas prices in that time, that crisis, of $40 or $50 per million British thermal units. But could it get there? Yeah, if the disruption is prolonged, then absolutely.

How resilient do you think the overall gas sector is globally?

The problem is that there’s almost no spare capacity in the global LNG system, so nobody really has the ability to increase production by more than a few percent to cover any gap, which is a bit different from oil. And the gas in storage, particularly in Europe, is unfortunately very limited just after the winter period.

Pre-2022, when there was a shortage, the Russians would increase their supplies to Europe. That’s obviously not going to happen this time. However, on the resilience of the gas industry…given time, the industry will get around this.

First of all, people who can switch away from gas will do so. They will burn oil, if necessary, they will burn coal. They will, of course, instal much more renewable energy, although that takes some time. They will try and be more efficient, turn down thermostats, improve insulation, improve industrial processes. A lot of that actually already happened after 2022, particularly in Europe, but there’ll be more efforts on that regard.

And LNG developers and gas developers will step up their efforts, and more production will come. We should say, in 2026 and 2027 we are set two of the biggest years of expansion of the global energy business ever. So, in principle, there’s a huge amount of new LNG coming on the market now. A lot of that was from Qatar. Will that still happen now? Will it happen on time?

But a lot of the other new LNG is coming from, particularly, the US, also Canada, to some extent, Australia, Southern African countries. So, a lot of it is LNG that’s outside or not near the Gulf, that shouldn’t be affected. So there is hope on the horizon, but it’s a one to two-year horizon.

There’s a lot of spotlight on the new LNG projects. But overall, how do you see the situation within the framework of energy security

There’ll be certainly even more attention on energy security and, I think, a couple of things. One will be on single sourcing - companies, countries will be very wary. Europe got far too dependent on Russia up to 2022 and realised its mistake. Then people were dependent on Qatar, because what else could they do? They are now very dependent on the US, and the US has its own question marks.

So I think there’ll be a big push to say that we need to diversify wherever we can. However, there aren’t so many other big LNG producers now or in the future, but there will be some diversification and I think smaller projects in places like Canada and Latin America, in Africa, will look more interesting now as a diversification.

The other big effort, of course, will be on everything that’s not gas. Although short term this is very good for LNG producers, it’s not good for their long-term business if their product looks unreliable and expensive. So we’re going to see another big push, I’m sure, by Asian countries, European countries in particular, on boosting other sources of energy such as wind, solar power, and batteries; that’s all going to get even more attention now than it has already has over the past four years.