Iran war may catalyse faster energy transition
Havoc in oil and gas markets caused by the Iran war has importing nations scrambling to cut demand and racing to accelerate their energy transitions. The reputation of gas and LNG is now badly tarnished.
High prices and supply shortages for oil and gas has already resulted in a significant decline in fossil fuel demand, particularly in Asia. But evidence is mounting that at least some of that demand loss could be permanent.
In a recent report, the IEA predicts the world will see the first contraction in oil demand since the pandemic. Asia and the Middle East have suffered first and worst, “[h]owever, demand destruction will spread as scarcity and higher prices persist,” the IEA warned. The agency also acknowledged that its demand forecast could prove to be too optimistic — a longer outage in the Persian Gulf could force a deeper slide in consumption.
The story is similar for gas. LNG imports in Asia have plunged to their lowest level in nearly six years, according to Bloomberg. Pakistan has not imported a single cargo since early March. Now, the country is planning to introduce blackouts for a period of two hours during evening hours.
China is keeping LNG imports at multi-year lows, and is instead reselling cargoes around the region. That comes on the heels of weak demand growth prior to the war. Last year, China’s LNG imports were down 11 percent. According to IEEFA, China’s LNG imports could fall by another 11 percent in 2026.
“With far higher price upside than last year, gas power utilization could get hammered further,” Rystad Energy analyst Xiong Wei told Bloomberg.
In Vietnam, one company’s plan to build a large gas-fired power plant — which would have required a steady stream of LNG deliveries — could be scrapped in favour of renewable energy.
China’s Sinopec cancelled plans to expand an LNG import terminal and is instead spending to produce gas domestically. The moves are illustrative of how the current crisis may not just be a temporary setback for LNG, but could lead to long-term and permanent demand destruction.
In Southeast Asia, as in many parts of the world, solar plus battery storage has already been highly attractive, but the competitiveness of clean tech — in addition to the security benefit of producing power at home — has been greatly enhanced in the past six weeks of war.
“We expect the Middle East conflict to incentivize economies to further prioritize security of energy supply toward more localized energy sources like solar power. This trend would be consistent with our bullish views on the structural solar surge and global power demand,” Goldman Sachs wrote in an April 9th note to clients.
The crisis can cut both ways. LNG developers outside of the Middle East are hoping to sell their vision to desperate customers looking for more stable sources of supply. ClearView Energy Partners, a Washington-based consultancy, said that U.S. LNG projects “with otherwise marginal economics” might get a “second look” given the low chokepoint risk.
But following the second war in four years, importing economies “might bring new scrutiny to seaborne energy of all kinds,” and “the recent experience of a major LNG outage could create headwinds for new sale-and-purchase agreements (SPAs),” the firm said.
Even if the crisis ends, the reputation of LNG as reliable and stable could be permanently scarred, industry executives say.
Thailand is particularly hard it, where gas supplies 66 percent of the country’s electricity. LNG prices have largely doubled since the start of the war. On top of that, currency depreciation “exacerbates affordability challenges,” according to an IEEFA report, resulting in a 125 percent increase in cost of important an LNG cargo.
Thailand could instead consider a faster shift to renewables. IEEFA estimates that for every 1 gigawatt of solar installed, Thailand could avoid USD$3 billion in avoided fuel costs over the lifetime of the panels.
The longer the Strait remains shut, the more pronounced the shortages will be, which could force governments into difficult decisions. Australian officials are pondering a curtailment of LNG exports if its fuel crisis deepens. As the third largest LNG exporter in the world, limiting LNG shipments would cause even more havoc in global gas markets, exacerbating shortages, and further tarnishing the reputation of LNG.
To make matters worse, even the cost of gas turbines has shot through the roof. Unrelated to the Strait of Hormuz, the supply bottleneck has been building for a few years, driving up turbine prices by nearly 200 percent since 2019.
The second war in four years “is likely to cast a long shadow over the outlook for gas, particularly in gas-importing developing countries where the gas industry expected to import even larger volumes of gas,” IEA executive director Fatih Birol said in an FT interview. “I think the natural gas industry will need to work hard to regain its reputation.”
Long-term policy shifts
Governments are reacting in a variety of ways, some of which are counterproductive to the energy crisis, such as scrapping fuel taxes or dishing out subsidies. But more substantial shifts to renewable energy are coming into view, which could turbocharge the energy transition.
In early April, Xi Jingping called for an acceleration in the planning and construction of a new energy system, which would include more renewables and nuclear power.
The Philippines is fast-tracking the development of renewable energy and battery storage. Nigeria is also turning to solar.
“Right now, there is chaos worldwide due to energy issues. Frankly, the situation is so serious that I cannot sleep,” South Korean President Lee Jae Myung said on March 30th. “South Korea must swiftly transition to renewable energy.”
“Relying on fossil energy is extremely dangerous for the future,” he said. “We do not produce these resources ourselves, and chasing imports has led to the current crisis.”
France announced a doubling of support to 10 billion euros for electrification of buildings and transport. That will include installing an additional 1 million heat pumps per year through 2030 and prohibiting gas boilers in new building construction beginning next year. The goal is to eliminate 85 terawatt-hours of gas, or 20 percent of the country’s annual imports, through electrification.
“Today 60% of our energy consumption comes from these imported fossil fuels, though our domestically produced power is three times cheaper,” French Prime Minister Sebastien Lecornu said in a televised address.
“As long as we depend on oil and gas, we will continue to pay the price of other people’s wars, which unfortunately will continue and will impoverish us,” he added.
In a blog post, a member of the European Central Bank said Europe’s fossil fuel dependence “poses risks to price stability.”
“If Europe were to meet its sustainable energy targets, the link between domestic energy prices and volatile global energy markets would weaken substantially,” wrote Frank Elderson, a member of the executive board of the ECB. “The most effective way to do that is by cutting reliance on imported fossil fuels and accelerating an orderly shift to home‑grown clean energy.”
The European Commission is set to release a roadmap to improve energy security on April 22nd, which, in addition to short-term options to secure gas supply, is expected to include lowering taxation on electricity and more support for renewable energy and nuclear power. “The benefits of this transition clearly outweigh its costs. Europe cannot afford to remain exposed to increasingly frequent energy shocks,” the draft proposal states, according to Reuters. “Every delayed investment in the energy transition risks greater cost for society at a later stage.”
As more durable policy changes solidify, the transition could pick up pace.
“LNG will be pushed out of power generation. It faces the same fate as oil did in the 1970s: expensive, insecure and undercut by cheaper competition,” analysts at clean energy think tank Ember wrote in a briefing. “In power, solar plus storage now costs below $60 per megawatt hour (MWh) at a global level. The variable cost of LNG-fired power in Asia, at $20 per million British thermal units (MMBtu), exceeds $160 per MWh.”
Other experts see similar trends. A new forecast from Wood Mackenzie finds that the current crisis in the Strait of Hormuz could result in permanent demand destruction and long-lasting shifts in energy markets.
By 2050, crude oil demand could be 20 percent lower than pre-war forecasts, with gas down 10 percent. The firm sees a temporary uptick in coal in the near-term, but a surge in renewables and nuclear power in the medium- and long-term.
Policies focusing on electrification and homegrown energy supplies take priority over tradeable fuels (oil and gas), and renewables in particular form “the backbone of domestic power systems” around the world, according to WoodMac.
(Writing by Nick Cunningham; editing by Sophie Davies)