LNG “demand destruction” necessary after Ras Laffan attack
The sudden LNG supply crisis following the Ras Laffan attack is driving up prices and will force painful demand reduction across the globe. Analysts say the reputation of LNG as a reliable fuel is also irreparably damaged.
Iranian attacks on Qatar’s Ras Laffan industrial complex knocked out 17 percent of Qatar’s LNG export capacity for three to five years, QatarEnergy’s CEO told Reuters on Thursday, further plunging global gas markets into crisis.
The attack came in response to an Israeli bombing of South Pars, the Iranian side of the world’s largest gas field.
In an instant, the damage likely wiped out 12.8 million tonnes of LNG export capacity for the rest of the decade.
While analysts have been focused on the short-term havoc to energy markets from the blockage of the Strait of Hormuz, the tit-for-tat bombing campaigns on vital LNG infrastructure ensure that the damage and disruption to gas markets will stretch on for years.
Some analysts have called the military strike against Ras Laffan the “Armageddon scenario” for gas markets. European gas prices shot up more than 35 percent after the news.
QatarEnergy will declare force majeure on long-term LNG contracts with destinations including Italy, Belgium, South Korea, and China.
“I mean, these are long-term contracts that we have to declare force majeure. We already declared, but that was a shorter term. Now it’s whatever the period is,” QatarEnergy CEO and state minister of energy affairs Saad al-Kaabi told Reuters, referring to a previous force majeure declaration that covered its entire Ras Lannaf production issued in early March due to the blockage of the Strait of Hormuz.
The catastrophic war in the Middle East has flipped the LNG market from one of ballooning surplus into a deficit, nearly overnight.
“Even if the war is over, even if the shooting dies down, there is a longer-term impact on LNG supply. A month ago, we were talking about where all the surplus was going to go,” Jason Feer, head of business intelligence at Poten & Partners, a shipping and commodity brokerage, said on a March 19th webinar.
“The industry was really just coming around to the view that there was a problem — that demand growth was slower than expected,” and that there was a supply surge coming, he said, characterising the thinking from top industry executives before the war. “The industry had almost sort of capitulated to this view. And now I think the takeaway is that we’ve had serious damage to a couple of trains,” and significant disruption will be longer-term, he said.
On March 18th, Trump said in a social media post that if Iran attacks Qatar again, then the U.S. “will massively blow up the entirety of the South Pars Gas Field.” Various pricing benchmarks for both oil and gas spiked. But by March 19th, both the U.S. and Israeli governments were at pains to smooth talk the market, seemingly panicked in the face of the extreme market volatility.
There is still no resolution to the war and the Strait of Hormuz remains blocked, which means the physical shortages continue to accumulate in the supply chain. Unless oil and gas flows are restored through the Strait in the very near future, most experts expect an abrupt and painful price correction upwards.
Demand destruction
Ras Lannaf is the largest LNG export terminal in the world. The partial destruction of the site is another bad stain on the LNG market as a whole. Gas executives have consistently promoted LNG as advantageous on three criteria – reliable, affordable, and clean. The last two of those have always been dubious, but the perception of “reliability” has held up, allowing for the rapid growth of LNG in recent years.
That image is now shattered. “For emerging nations — vital growth markets for LNG — a second gas calamity in four years is already destroying industrial demand, perhaps irreparably,” Bloomberg reported.
“What matters now is not only the volume lost, but the precedent set — once critical Gulf energy infrastructure is seen as vulnerable, buyers will price that risk for longer than the initial outage itself,” said Jan-Eric Fahnrich, a senior gas and LNG analyst at Rystad Energy.
The question, at least in the short-term, is what happens next and how gas-consuming nations will respond. In emerging markets, force majeure and missed cargoes are already locked in. Deeper physical shortages are in the offing. Price caps and subsidies are on the table, but draconian rationing is likely.
For instance, Pakistan depends on Qatar for 99 percent of its LNG imports. Pakistan responded to the 2022 LNG price spike, which resulted in disrupted shipments, by rapidly building out solar, avoiding US$12 billion in import costs. But it still imports LNG and is now facing the prospect of blackouts in April.
South Asia will once again bear the brunt of the crisis, but a faster and broader shift to renewables in the medium-term is likely.
For wealthier nations, they will be in a bidding war for available LNG cargoes. Asia and Europe will be competing for shipments, driving up the price for everyone.
As of March 19th, LNG prices for May delivery in northeast Asia shot up 10.8 percent to $22.35/MMBtu, according to Poten’s LNG Monitor. LNG delivered to Europe (TTF) for April soared 12.9 percent to $20.72/MMBtu.
“If you’re a South Korean company, a Chinese company, with a lot of Qatari volumes, you may not be getting that volume, and you better start to hustle to start to figure out where those supplies are coming from,” Feer said. “Because they are not going to be here. They are not coming quickly after the shooting stops.”
“The short answer is the market is going to have to balance through demand destruction. There is no trove of unused LNG capacity just sort of waiting for something like this to happen, to come online and save the day,” he said. “So, the calvary is not coming. You’re going to have to ration by price and we are already seeing that.”
In Europe, dependence on LNG was already a growing concern, particularly since so much of EU supply comes from an increasingly hostile United States.
Some European countries are more exposed than others. Italy is particularly dependent on gas, and will face much higher energy costs going forward compared to European countries such as Spain, where a high concentration of renewables has insulated it from gas volatility. Italy will also see direct disruptions to their LNG supply — it has contracted for cargos from the trains at Qatar’s Ras Lannuf that are now out of commission.
There is also little scope to switch to other backup fuels, such as coal.
“I don’t think the switching capacity is there. I think Europe’s going to have to rely more on renewables,” said Steven Swindells, a senior LNG analyst at Poten.
He said there is now greater momentum and determination in Europe to speed up the energy transition. “I think the dynamic really changed after the Israeli attack on South Pars.”
(Writing by Nick Cunningham; editing by Sophie Davies)