Consultancy Wood Mackenzie (WoodMac) has reported that its analysis indicates that the Middle East conflict could disrupt 200-million tonnes a year of forecast Asian liquefied natural gas (LNG) demand growth over the next decade as Qatari State-owned oil company QatarEnergy's force majeure removes 20% of global supply.

WoodMac says the disruption threatens to raise long-term structural challenges for global gas and LNG markets similar to those seen following Russia's 2022 invasion of Ukraine.

With QatarEnergy's declaration of force majeure on LNG shipments from Ras Laffan and European gas prices nearly doubling since March 2, the consultancy says the situation threatens to reshape buyer confidence, supply strategies and even energy policy worldwide.

"The consequences of the war for gas and LNG are uncertain but could rival those that followed Russia's invasion of Ukraine in 2022. Much will depend on whether the disruption is a short-lived blip or is more enduring, and whether gas and LNG infrastructure in the region suffers major damage,” says WoodMac chairperson and chief analyst Simon Flowers.

WoodMac argues that the crisis has exposed the concentration risk for those importing countries which are most dependent on Middle Eastern LNG supply.

According to WoodMac vice chairperson for energy Gavin Thompson, this will fundamentally alter how buyers approach new long-term supply contracts.

"Assuming no significant damage to existing projects in Qatar and the United Arab Emirates, the amplified risks associated with these volumes will, in time, dissipate. But the crisis will drive home the importance of supply diversification.

“The raft of US pre-financial investment decision (FID)) projects – almost 100-million tonnes a year currently – come without a single geographic point-of-failure risk,” says Thompson.

However, WoodMac says US supply is not risk-free, not least from domestic energy policy and cannot be the only solution.

WoodMac analysis indicates that pre-FID projects in Canada, Mozambique and Argentina will look to capitalise on the uncertainty, while projects that have slipped on timeline, such as Abadi, in Indonesia, and Browse, in Australia, could gain fresh impetus.

Portfolio suppliers and national oil companies, including QatarEnergy itself, are expected to seek greater diversification of their own supply sources.

ASIAN DEMAND GROWTH AT RISK

Asia represents the cornerstone of the bullish outlook for gas and LNG, with WoodMac forecasting Asian LNG demand to increase by about 200-million tonnes a year over the coming decade.

However, the consultancy says growth depends on competitive pricing and supply reliability, which are both now in question.

Asian markets could respond to the current loss of supply in several ways, according to WoodMac analysis.

It notes that coal is expected to take market share from gas and LNG in the power sector across Japan, South Korea, China, India and Southeast Asia.

It adds that Asian governments may accelerate renewables growth plans, though near-term upside will be limited.

Additional incentives for domestic gas development could be fast-tracked but will similarly offer little immediate relief, says WoodMac.

"Fundamentally, however, Asia needs more energy, while the region's rising emissions will need to be addressed. With limited alternative options, we maintain our long-held view that LNG remains central to meeting future Asian energy demand,” says Thompson.

Following Russia's invasion of Ukraine, WoodMac explains, gas and LNG's reputation as a reliable and affordable fuel was severely tested. While swift action to increase LNG availability helped rebuild confidence, the current crisis has reopened those wounds, it says.

"In the eyes of gas and LNG sceptics, war has once again highlighted how supply disruptions and volatile prices can imperil energy security and affordability," says WoodMac gas and LNG research VP Massimo Di Odoardo.

"A swift restoration of supply and lower prices will allay some concerns among importers in the short term. But beyond the immediate crisis, more work will be required to rebuild confidence."

WoodMac says Europe remains determined to reduce its dependence on gas and LNG, though the reality is that the region is already moving as fast as realistically possible on decarbonisation given budget constraints.

With Russia still engaged in war with Ukraine, the consultancy says the chances of the EU lifting its ban on Russian gas and LNG imports remains highly unlikely, leaving Europe facing towering gas prices for the second time this decade.

WoodMac analysis suggests the gas and LNG industry may need to adopt structural changes similar to the oil market to restore buyer confidence.

It argues that building spare capacity and higher levels of storage could help address concerns about reliability and volatility, though this will require significant investment, time and coordinated effort.

"Gas and LNG markets are reeling from the loss of supply. The industry has been here before and has proven it can recover.

“Gas's primary role in decarbonisation ‒ displacing coal and supporting the expansion of renewables ‒ is clear, but the industry may need to go further this time,” says Di Odoardo.

LOOKING FORWARD

For now, WoodMac says, an end to the conflict remains the priority.

Over the longer term, the consultancy says, reinforcing gas and LNG supply reliability and minimising price volatility will be required to ensure the fuels' demand trajectory remains intact.

"Gas and LNG have work to do to rebuild confidence.

“Building in spare capacity and higher levels of storage, for example, could help soothe a market anxious about reliability and volatility, just as has been done with oil. But this will be neither quick nor easy, requiring investment, time and coordinated effort,” says Flowers.