Don't just focus on crude oil! The "Hormuz Crisis" has a greater impact on this energy source...

Caixin News, March 10 (Editor: Huang Junzhi)

Earlier Monday, due to the near halt of shipping through the Strait of Hormuz, international oil prices surged sharply. However, some analysts point out that the long-term impact of closing the strait on the liquefied natural gas (LNG) market could be even more severe, partly because LNG is more difficult to transport than crude oil and its production is more concentrated.

It is understood that about 20% of the world’s liquefied natural gas is transported via the Strait of Hormuz, mostly from Qatar. Data shows that Qatar alone accounts for nearly 20% of global LNG exports.

Last week, following an Iranian drone attack, QatarEnergy, the global giant in LNG exports, issued a shocking announcement: its largest LNG export facility located in Ras Laffan Industrial City was forced to cease operations due to a military attack. The company also declared that LNG deliveries faced “force majeure.”

Following this news, global natural gas prices soared: European natural gas prices jumped 63% last week, marking the largest weekly increase since the outbreak of the Russia-Ukraine conflict in March 2022. Asian natural gas prices were even higher, opening Monday at $23.40 per million British thermal units. Countries across Asia are working to compensate for lost shipments, and as the gap between European and Asian natural gas prices widens, some LNG carriers originally headed to Europe are now turning toward Asia.

The tragedy of no alternative routes

Oil transportation still has alternatives—some crude oil from Saudi Arabia and the UAE is transported via pipelines over land, but natural gas transportation lacks similar pipeline infrastructure. In other words, long-distance natural gas transport almost entirely depends on specialized LNG ships.

Alex Munton, head of global natural gas and liquefied natural gas research at Rapidan Energy, pointed out that the more critical issue is that, although the Middle East has multiple oil-producing countries, oil fields, and refineries, natural gas production is concentrated in Ras Laffan Industrial City in Qatar. This makes the global LNG market more vulnerable than the oil market.

Rebuilding production is more difficult

Munton also noted that the real risk is that once the Strait of Hormuz traffic resumes, restarting Qatar’s LNG production will be significantly more challenging than oil. He explained that natural gas liquefaction is a highly industrialized, technically demanding cooling process, unlike oil production, which is relatively easier to restart. Once halted, recovery takes longer and cannot be adjusted as flexibly as oil production based on market conditions.

He further predicted that LNG exports in the region will only restart once it is 100% certain that ships can pass safely through the Strait of Hormuz. Insurance is a factor—an LNG carrier can cost up to $250 million. More importantly, the entire LNG production and transportation chain is too complex to be adjusted based on expectations of escalation or de-escalation of the situation.

Munton also stated that a full restart would take weeks rather than days, adding that the entire plant has never previously shut down.

“I believe that in the first few days of this conflict—it’s only been a week—people haven’t yet realized how long Qatar will be offline and what impact this will have on global supply and markets,” he added.

No alternative supplies

The U.S. is the world’s largest LNG exporter, but its capacity has already reached its limit. Other regions globally lack sufficient new supply to quickly fill the gap, so demand suppression may ultimately be used to balance the market. For example, some users might switch to cheaper coal as a substitute for natural gas.

However, Munton said that escalating hostilities, including further attacks on Qatar’s LNG infrastructure, could have even greater long-term effects. The company considers the previous attack by Iran on Ras Laffan as merely a “warning, not a real action.”

“It’s like a lamb waiting to be slaughtered,” Munton said about the industrial park. “If Iran wants to cause significant damage to Qatar’s LNG capacity, it can do so… If Iran is determined to destroy this plant, Qatar has no way to fully resist Iran’s attack.”

He emphasized that Middle Eastern oil production is dispersed across multiple countries, fields, and facilities, making it difficult to destroy the entire regional oil supply through a single point of attack. But LNG is different. Although Ras Laffan is enormous, it is ultimately a single facility. This high concentration makes it a critical vulnerability in the global energy system.