On Friday, Bangladesh paid $28.03 per million British thermal units for four liquefied natural gas (LNG) cargoes – equal to $163 per barrel of oil. On the same day, Qatar attempted to send an empty tanker into the Gulf but, after a few hours, Al Ghashamiya turned around. These are signs of a sinister but largely unnoticed gas struggle.
The US military has been marking its own homework recently as outstanding, for escorting oil tankers through the Strait of Hormuz. In the face of deadly Iranian attacks, civilian sailors have shown real bravery. Gulf producers have developed a complex logistical shuttle scheme involving third-party tankers in the Gulf of Oman. More oil has certainly been escaping.
But gas is a bigger problem. A very large crude carrier costs about $130 million and holds, at current prices, $190 million of oil. An LNG tanker, by contrast, costs $240 million and carries about $114 million of gas. The risk-reward balance of sailing LNG carriers through war zones is much less favourable.
Crude tankers are surprisingly hard to damage seriously or to ignite. LNG carriers are more vulnerable. In March, a sea drone, presumably launched by Ukraine, disabled Russia’s Arctic Metagaz in the Mediterranean and the ship burnt out totally in a matter of days.
On July 7, Al Rekayyat, a Qatari LNG tanker, was hit by a projectile in the Strait of Hormuz, igniting its engine room. The Gaslog Shanghai sustained a similar strike on July 31. The two ships transferred their cargoes to other vessels in the Gulf of Oman last month.
Nevertheless, a few LNG tankers are currently queuing up to enter or leave the Gulf, as well as the abortive transit of Al Ghashamiya. Their success or otherwise will be a significant sign.
Unlike for oil, LNG cannot be transported through bypass pipelines. The major gas liquefaction plants inside the Gulf, notably at Ras Laffan in Qatar, do not have, and will never have, an alternative to the strait. Qatar’s LNG plants were, in any case, badly damaged by Iranian attacks early in the war, with 17 per cent of capacity offline for several years. The Gulf, primarily Qatar, provides a fifth of global LNG.
On August 28, QatarEnergy extended its force majeure – allowing it to suspend its contractual obligations for reasons beyond its control – on shipments of LNG to Pakistan, Bangladesh and Italy’s Edison into early November.
Crude oil prices, $96 per barrel on Friday, have not yet regained their early war peaks of $118. In contrast, East Asian spot LNG is the costliest since the shock of Russia’s cut-off of gas to Europe four years ago.
Are EU gas storage levels adequate?
By the end of last week, EU gas storage was just under 66 per cent full. This is the lowest on record over the past 165 years – the average now would be 83 per cent full. Repeated assurances that the strait would be back to normal soon kept forward prices for winter gas below those for summer, discouraging companies from storing more.
Nikos Tsafos, Deputy Energy Minister of Greece, who knows global gas markets extremely well, suggested that current European storage levels should be adequate. The EU has almost 67 billion cubic metres in storage and is filling that with another nine billion cubic metres monthly. In a cold winter, it would withdraw from 72 billion to 77 billion cubic metres.
This is not as comforting as it appears. It is already September. Depending on when winter weather manifests, withdrawals from storage begin from late October to mid-November. When stocks run low, pressure in gas storage facilities declines and the maximum withdrawal rate drops off.
Experts such as my colleague at the Columbia Centre on Global Energy Policy, Ira Joseph, correctly points out that European gas demand has fallen significantly. The required volume of storage is therefore lower. Consumption in the whole of Europe, including the UK and Ukraine, was 572 billion cubic metres in 2021, just before the Russia-Ukraine war, and plummeted to 495 billion cubic metres in 2022.
However, it only dropped a little further, to 482 billion cubic metres, last year. And, unlike before late 2021, Europe cannot call on a surge of Russian supplies in the event of a bleak midwinter. The UK, a major gas importer with falling domestic output and very limited storage capacity, is particularly exposed. Gas meets two fifths of European heating.
Winter holds the cards
Europe’s hot, dry summer has evaporated its hydroelectric reservoirs. A lot hinges on the winter weather. The strong El Nino is likely to bring relatively warm, wet conditions to the continent, as well as to Japan, South Korea and northern China, other key global gas-consuming zones.
There is, though, always the chance of sharp cold snaps, especially in January and February. Technical breakdowns, even Russian sabotage, are further risks.
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A child jumps into the sea in front of the Maiden's Tower in Istanbul, as Europe's deadly heatwave pushes eastwards. AFP -
Sheltering from the heat on a sunny day at Old Town Square in Prague, Czech Republic, where a new national temperature record of 40.9°C was set on June 27. EPA -
A child cooling off in Turin, northern Italy. EPA -
People dive from an artificial pier into the sea in Durres, western Albania. AFP -
Greenwich Park, London. PA -
Mist machines near the Colosseum in Rome. EPA -
St Stephen's Green in Dublin. PA -
The Canal Saint-Martin in Paris. Reuters -
People swim and sunbathe at Lake Piaseczno, Poland, where officials have issued extreme heat warnings for most of the country. EPA -
Dortmund-Ems Canal in Germany. AFP
Given limited storage, Europe will probably still need to import more LNG this winter than last. If Gulf exports have not revived – and there is little sign they will approach prewar levels soon – it will have to outbid Asian countries, with poorer states such as Bangladesh likely to be the losers.
The South Asian state has paid out $2.1 billion for spot LNG since April, while it would have paid only $1.2 billion for its contracted Qatari supplies. Pakistan has retendered after receiving bids in early September at almost $27 per million British thermal units, which it deemed too costly.
This dilemma will solve itself – but not by this winter. New LNG supplies are coming online, particularly from the US. A major expansion in Nigeria is due by July, and by the end of the year from Canada. 2028, 2029 and 2030 should be exceptionally strong years for new liquefaction capacity, even if Qatar is not able to advance its major expansion projects.
Europe continues to boost renewables. Two other big global LNG buyers, South Korea and Japan, are gradually restarting or expanding their nuclear power generation. Pakistan’s solar boom has eased its exposure to costly LNG.
But policymakers in Brussels and London should still worry. The US has a clear incentive to move more oil through Hormuz, to serve its victory narrative, and bring down pump prices ahead of November’s midterm elections. It has no such imperative to help get others’ LNG out – in fact, as the world’s biggest exporter of the fuel, it benefits from high prices. It provided two-thirds of European LNG imports last month. US Treasury Secretary Scott Bessent was able to comment casually last Monday that new oil pipelines meant the strait “will be a worthless piece of water”.
Washington’s dominance allows it to twist the arms of its erstwhile European allies over other issues. They, in turn, have done some things right in energy in recent years, but many things wrong. And that leaves them anxiously watching the barometer, the US political polls, and the tracks of tankers running the Hormuz gauntlet.
