LNG

Australian LNG exporters are falling short on meeting Asian demand due to a lack of capacity that partially stems from an uncertain investment environment. “The first question from buyers always is, can you do more?...

Asia-Pacific energy exporters – notably Australia – stand to benefit first if the Iran conflict prolongs disruption to Qatari LNG supply as buyers scramble for replacement cargoes, Fitch Ratings said. Buyers are turning to producers in Australia and Indonesia, which offer immediate alternatives.

Despite a 52% surge at Europe’s TTF gas trading hub, price-sensitive Asian buyers will bear the brunt of supply constraints – rather than premium markets like Europe that are willing to bid aggressively for cargoes.

High spot LNG prices and subdued demand from industry made China’s LNG import plunge by more than 20% in the first quarter of this year. Fast build-out of liquefaction capacity in the US, Canada and Qatar will ease market tightness from 2026, fostering robust demand growth in Asia’s price-sensitive markets, the International Energy Agency (IEA) forecasts.

Escalating tensions between Israel and Iran have pushed up crude oil prices to nearly $75 per barrel. The geopolitical risk premium has soared to around $8 per barrel, impacting oil-indexed natural gas contracts as well as term LNG deliveries.

The outlook hinges on Iran’s response. If the regime in Teheran keeps airstrikes focussed on Israeli military sites, as seen in past episodes, price increases may remain contained and temporary, Rystad analysts reckon. But if Iran escalates by disrupting crude oil and LNG shipments through the Strait of Hormuz, or attacks regional energy infrastructure, prices could go through the roof.

In an undisguised threat, US President Donald Trump warned the Iranian regime to stay clear on attacking American military bases in the Middle East, or face dire consequences. 

Nautical chokepoint

The Strait of Hormuz – a key nautical route between the Mediterranean and the Red Sea – is the chokepoint in this scenario. Around 12 million barrels per day of crude oil pass through the strait, over 80% of it bound for Asia. Additionally, over 3.5 billion cubic feet (bfc) of natural gas, or 18% of world shipments, travel through the strait onboard of LNG tankers.

Though there is a pipeline to bypass the Strait of Hormuz, the capacity of that pipeline is limited. Saudi Arabia’s East-West oil pipeline and the UAE’s Habshan-Fujairah oil pipeline together can handle around half of the flow. As for natural gas, the Abqaiq-Yanbu pipeline runs parallel to the East-West Petroline in Saudi Arabia, bypassing the Strait of Hormuz. Its capacity is 290,000 barrels per day, carrying primarily gas liquids.

To date, Iran never succeeded in blocking the Strait of Hormuz which is jointly controlled with Oman. Past tactics included seizing or harassing tankers by jamming their GPS signals to draw them into Iranian waters.

“If Iran were to attempt a full-scale blockade of the Strait, it would likely face strong international pushback,” Rystad head of geopolitical analysis Jorge León warns. Retaliatory actions are to be expected particularly from countries of the Gulf Cooperation Counci, comprising Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.

Even Iran’s key ally, China, would be hit hard by higher oil and LNG prices, he underlined, stressing such a move would isolate Iran politically and economically.

Beware shipping rates

Peter Sand, Xeneta chief analyst takes a similar view: “Any closure of the Strait of Hormuz would see services re-routed, with increased reliance on India West Coast ports for connecting the Far East to Indian sub-continent,” he noted. The inevitable disruption and port congestion, as well as the potential for higher oil prices, would cause a spike in ocean freight container and LNG shipping rates.

Average spot rates from Far East to North Europe are up 62% since early December 2023, just before escalation in the Red Sea, while average spot rates to US East Coast – another trade that would ordinarily transit the Suez Canal – are up a staggering 165%, analysts pointed out.

Egypt’s state energy company EGAS has reduced its LNG imports to the Ain Sokhna regas terminal, chartered from Hoegh LNG, by more than a third to 500 million cubic feet per day (mmcf/d). Situated east of Cairo, the Hoegh Gallon FSRU is on an interim charter from the Norwegian shipping company Hoegh, and had been originally destined for Australia.

If tensions between Iran and Israel escalate into a regional war scenario, it could severely impact regional oil and gas exports as well as global shipping routes. Attacks on key facilities could wipe out nearly 1.4 million bpd of Iranian production and a full-blown war would choke the Strait of Hormuz, risking up to 12 million bpd of oil, analysts warn.

Upstream activity in Iran, so far, has stayed steadfast despite fighting following Hamas’ assault on Israel in October 2023. Iran's production rose by 227,000 bpd to 3.27 million bpd in August year-on-year, while Israel’s gas output grew 15% in 2023 and is expected to rise by 5% this year, supported by the Karish field.

Some $2 billion in greenfield investment had been planned for various upstream projects in the coming years. But production at the Karish and Katlan fields could be severely reduced if regional tensions escalate, hence future production and exports are at risk.

Anticipating the future is challenging, Rystad’s Middle East research director, Aditya Saraswat noted. So far – with no direct attacks between Iran and Israel, the conflict is largely a ‘proxy war’. As of today, there have not occurred major assaults on critical oil and gas infrastructure such as pipelines, storage facilities, or refineries.

All eyes on maritime borders

If things get worse, the maritime border agreement between Israel and Lebanon, signed in October 2022, could be torn to pieces. The agreement defines each country's rights over the Karish and Qana fields, with Israel retaining full rights to Karish and Lebanon to Qana.

“Escalating tensions could lead to the nullification of this agreement, affecting Israel's production from the Karish field, which is currently used for domestic supply,” Saraswat reckons, suggesting: “This disruption may also impact Israel's gas exports to Egypt and Jordan, which saw significant growth in 2023.

“Any decline in production and exports from Karish could be offset by increased output from other major fields like Tamar and Leviathan,” he noted.

The fields hold about 88 billion cubic meters (Bcm) of cumulative proven and probable (2P) reserves. Together, they form the independent’s core area of operation – following the divestment of its Croatian, Italian, and Egyptian assets. Production from the Katlan fields (Athena and Zeus) is expected to start by 2027.

All these fields are located near the Karish field near Lebanon’s maritime border, so analyst warn that any significant unrest could delay start-up.