Weeks of War Are Reshaping the Global Gas Market for Years to Come

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Pakistan relies on Qatar for 99% of its LNG imports and the South Asian nation’s officials have now warned there may not be enough gas to meet power requirements from mid-April. Textiles, Pakistan’s biggest export, face a double whammy, as gas is used for power generation on site at factories, and also for heat during processing, according to Aamir Sheikh, an owner of a fabrics business in Punjab.

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“Production will decrease, reducing exports. The viability of remaining exports will also be reduced due to increases in cost,” he said. “The bottom line is that industry is very worried.”

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The same scenario is playing out across developing Asia, where LNG is typically used for industrial processes, from fertilizer plants to glass factories.

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It’s a price shock that will almost certainly force price-sensitive emerging economies to reconsider ambitious LNG expansion plans. A single shipment heading to Asia costs around $80 million a pop — more than double the going rate before the Iran war started. Vietnam and the Philippines have effectively paused additional purchases until prices ease, while Indian firms have been pushed into some of their costliest purchases in years. Pakistan — already scarred by a 2022 spike that brought severe blackouts — is accelerating efforts to cut back.

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In theory, this could be a green boon. In reality, given the nature of LNG consumption in the region, it is more often resulting in higher dependence on coal, the most polluting fossil fuel. Philippine officials are in talks with Indonesia to secure more of the black stuff, while India expects to burn a record amount this year to meet peak summer power demand.

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“Instead of looking at how high gas prices can go, we are looking at the price point at which South Asian buyers drop out of the spot market entirely,” said Evan Tan, an LNG analyst at intelligence firm ICIS. 

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But a prolonged closure in Qatar — assuming repairs to fix damaged equipment, plus a slow restart to exports and shipments through Hormuz — is not just a problem for the poorest nations. A six-month outage means developed countries in Europe and Asia would also face pressure to cut back if gas prices test the highs seen in 2022, according to research group Rystad Energy, especially going into the time of year when they restock for the winter.

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Gas buyers did take lessons from the last crisis, which saw widespread industrial demand destruction in economies like Germany. The European Union at least became all too aware of the need not to rely on one source of supply — Russia provided about 40% of its gas needs in 2021, the year before its tanks rolled into Ukraine — and sought to diversify, building LNG import terminals and storage targets. China’s focus on diversification only intensified.

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But that was insufficient protection against a shock as historic as the effective closure of Hormuz, which connects Persian Gulf producers to the wider world, and an outage in Qatar, which made its name as the industry’s most reliable supplier.

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The heart of the issue is that the LNG, the fastest-growing fossil fuel market, still operates largely on decades-spanning contracts that provide just-in-time deliveries. And the reason is simple enough — the super-chilled gas slowly evaporates, storage is expensive and takes time to build. Everything is hyper specialized, down to the ships and import terminals, and unlike in oil, there is no global cluster of strategic reserves.

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When the system works, such costs appear unnecessary. When it doesn’t, it’s already too late.

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Yukio Kani, an executive with over three decades in the  industry, describes this crisis as akin to 2022, or the 2011 Fukushima disaster, which forced Japan to shut its nuclear plants almost overnight and dramatically increased LNG consumption.

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“It has only just started, so we don’t yet know whether it will surpass those events or not,” Kani, the chief executive officer of Jera Co., Japan’s largest LNG importer, said on the sidelines of a conference in Tokyo last weekend. Gas prices have surged, but even after the repeated hits on Ras Laffan had yet to hit the peak seen four years ago.