Iran's Strike on Ras Laffan Could Raise LNG Prices for Years
[By Dr. Adi Imsirovic]
On March 19, Ras Laffan, the largest liquified natural gas (LNG) terminal in the world, supplying one-fifth of the world’s super-chilled fuel, was hit by Iranian missiles and drones. The Qatari terminal suffered substantial damage in the strikes – fires were raging across the gas-to-liquids facility within the complex, which covers 295 square kilometres – the size of a large city.
Investments worth tens if not hundreds of millions of dollars disappeared into thin air. Damage was estimated to be so extensive that QatarEnergy’s CEO, Saad Sherida al-Kaabi, said the company may have to declare a “force majeure” (non-fulfilment of orders due to circumstances outside their control) on long-term contracts. He said this could affect LNG supplies to Italy, Belgium, Korea and China “for up to five years”.
Similar to oil, gas exports from the Persian Gulf supplied about 20% of world demand. But gas (mostly methane) is a very different fuel from crude oil. To move it in liquified form, methane must be chilled to below -162°C.
But at these temperatures steel becomes brittle and shatters. So storing and transporting LNG in ships is expensive and very energy-intensive. Liquefaction and transportation of methane can easily consume 15% of the initial natural gas extracted.
It also means that the infrastructure that enables a highly flammable and explosive fuel to be handled at these extreme conditions has to be complex and consequently very expensive. Ras Laffan, for example, was built over decades and in several phases, costing tens of billions of dollars.
No quick fix
Interestingly, Qatar’s North Field and Iran’s South Pars gas field are part of the same massive geological structure, separated only by a maritime border in the Persian Gulf. Together, they form the world’s largest natural gas field.
So, Iran and Qatar are essentially exploiting the same gas reservoir the same way two people would use straws to drink from the same bottle. The US president, Donald Trump, now appears to have retreated from his threats to blow up “the entirety” of the Iranian gas field – but this geological fact had always made his comments quite ridiculous. While Qatar exports most of its production, Iran uses the bulk of its gas domestically (although some exports go via pipeline to Turkey and Iraq).
But the damage to the complex has been done, and it affects some 17% of the country’s LNG infrastructure. Repairing it will take a long time, precisely because of the complexity of LNG projects.
The plant must be warmed up slowly before repairs and cooled down slowly after. Rapid temperature changes can cause pipes to bend or even snap. And parts of the plant are bulky and hard to transport. The main heat exchangers can be more than 50 meters long, and compressors, turbines and liquefaction trains can easily weigh 5,000 metric tonnes. Storage tanks must be built of special alloys with double walls and customized insulation.
In other words, gas is very different to oil. Recent events have shown just how vulnerable the LNG supplies from the Gulf region are. They are going to affect Asia most, as about three-quarters of Qatar’s LNG ends up there – particularly China, India, Taiwan, South Korea and Pakistan, as well as others.
Most of the rest ends up in Europe – Italy, Belgium, Poland and a small amount to the UK (the UK imported only about 1% of its supply from Qatar last year). The majority of the UK’s imports come from its own UK production in the North Sea and imports from Norway and the US.
However, LNG is a part of the global energy market and the shortfall in production will result in higher prices globally. Gas will end up with the highest bidder, while some nations will probably go back to using coal. This may especially be the case with India, Pakistan, Bangladesh and a few other Asian countries that are very sensitive to high fuel prices.
Some European countries may even see coal as a cheaper option. Following the events in the Gulf, this “spark spread” (the profit margin from gas-fired electricity generation) has fallen, narrowing the gap in Europe with the “dark spread” (profit from generating power using coal).
The benchmark for European gas prices, the Dutch Title Transfer Facility, has more than doubled since mid-January. Coal prices have picked up due to higher demand, but not as much. Unlike oil, the LNG shortage has turned from a logistical problem – the closure of the strait of Hormuz – into a structural one. The damage to the Qatari production facility may take several years to repair. This means that gas prices – already high – are likely to remain elevated for some time.
Dr Adi Imsirovic is a guest lecturer on the MSc Energy Systems in the Department of Engineering Science, University of Oxford. Adi has a PhD in economics and a master’s degree in energy economics.
Top image: Loading terminal at Ras Laffan (Matthew Smith / CC BY 2.0)
This article appears courtesy of The Conversation and may be found in its original form here.
Securing the Strait: The Need to Reclaim the Disputed Islands
Predictably, given that their control over the Strait of Hormuz is their strongest negotiating card, the Iranian regime has ignored President Donald Trump's demand that they reopen the waterway to international traffic. President Trump says that constructive talks are now underway with Iran, something that Iran denies, although President Trump has followed up by suspending his threat to destroy Iran's power infrastructure. Any such attempt would no doubt in turn bring an Iranian response in kind, albeit with the power and desalination infrastructure of the Gulf states targeted and suffering the damage, rather than the United States.
The United States does, however, have a number of ways it could respond to Iranian intransigence.
Iranian crude oil and LNG traffic is still passing through the Strait, with Iran enjoying huge increases in the price of these cargoes created as a consequence of their closure to traffic carrying the crude and LNG produced by GCC states, and Kuwait, Qatar, and the UAE in particular. The United States has the wherewithal to shut down this Iranian traffic immediately, thereby starving the Iranian regime of the funds to keep the repressive internal security apparatus of the IRGC motivated, and for the subsidies on basic essentials, which dampen the ardor of ordinary Iranians to rise up against the regime.
A similar effect could be delivered by closing down loadings of crude oil from Kharg Island, which could be achieved simply and efficiently either by imposing a no-sail zone around Kharg Island, enforced remotely by air and sea power, or at huge cost in casualties with boots on the ground by seizing and then holding on to Kharg Island with U.S. Marines.
Otherwise, Admiral Brad Cooper, Commander CENTCOM, may have to resort to a complex military operation to clear the Strait. This would entail a continuation of the current program of attacks on Iranian naval and missile infrastructure used to keep the Strait closed, followed by a mine clearance operation, expulsion of any Iranian vessel, large or small, from the Hormuz area, and finally convoy operations through the Strait with a heavy aerial overwatch in place over areas from which any convoy might be threatened. With the Iranian side of the Strait stretching to about 250 miles of coastline, this would be an operation fraught with risks and ample opportunities for things to go wrong. Even when the first convoy was ready to set sail, risks for merchant traffic would have been reduced - but not eliminated.
There is a further complication, not widely appreciated outside maritime circles. Once through the Strait, traffic in the Gulf remains under the guns of the Iranians. Indeed, whereas both inward and outward channels of the TSS within the narrows of the Strait are actually within Omani territorial waters, once inside the Gulf, the TSS channels then switch into Iranian waters. Indeed, the TSS channels pass either side of the Greater and Lesser Tunb islands, which, along with Abu Musa island that dominates the southern Gulf, are islands seized by Iran from the British on November 30, 1971, hours before they should have been handed over to the newly-independent United Arab Emirates.
There can be no security for international maritime traffic if Iran remains hostile and in charge of these three Disputed Islands, armed with drones and missiles which can dominate the surrounding waters; as such, they are a more worthwhile (and safer) target for occupation than Kharg Island. Hence, there is a strong argument that the Disputed Islands should be returned to their rightful owners, and that the United Kingdom has a residual responsibility under international law for completing the handover of what should have formed an integral part of the United Arab Emirates on December 2, 1971.
The opinions expressed herein are the author's and not necessarily those of The Maritime Executive.
Saudi Arabia Loses Patience as Red Sea Terminal and Refinery are Targeted
Saudi Arabia’s Foreign Ministry spoke out on Thursday, March 19, saying that any “trust with Tehran has been shattered” after reporting that the capital of Riyadh, along with the critical Yanbu oil terminal on the Red Sea and the neighboring refinery, had all been targeted. The state-owned oil company Aramco has been rushing to increase exports from Yanbu to offset its lost capacity on the Persian Gulf.
The Ministry of Defense confirmed that a drone “crashed in the SAMREF refinery.” It said that a damage assessment was underway, while images circulating online showed a large plume of smoke rising from the facility. Reuters is quoting sources, however, saying that there was “minimal impact” on the refinery. A joint project between Aramco and ExxonMobil, it is located adjacent to the Yanbu port and is served by a 750-mile pipeline stretching across the Saudi desert from the main oil fields at Abqaiq.
Security consultants had warned last week that the port could be targeted either by Iran or its proxies, the Houthis. The Ministry of Defense blamed a drone for the damage at the SAMREF while saying they had also intercepted and destroyed a ballistic missile launched toward the Yanbu port.
It is the first confirmed attack on the facilities. Reuters reported that the port was briefly evacuated but that operations were quickly resumed.
Attacks on the Eastern Region have become a daily occurrence for Saudi Arabia, with reports saying there have been hundreds of missile and drone attacks. Saudi Arabia claims to have destroyed most of the attacks, but today, the air raid alerts were triggered in Riyadh for the first time.
Saudi Foreign Minister Prince ?Faisal bin Farhan reportedly told the media at the conference, “We reserve the right to take military actions if deemed necessary." He called the attacks from Iran “premeditated hostile actions.” He said the trust had been shattered, but so far, Saudi Arabia and neighboring countries have only mounted defensive actions despite having well-equipped military capabilities.
The targeting of Yanbu and SAMREF came after Donald Trump lashed out at Iran after it attacked the Qatar gas infrastructure. Trump demanded that Iran stop these attacks or threatened that the United States would finish what he said Israel started and destroy Iran’s South Pars gas operations. Last week, Trump threatened to return to Kharg Island and destroy the oil infrastructure after saying the U.S. had strategically limited its strikes to the military operations on Kharg Island.
Saudi Arabia has reportedly more than doubled oil shipments at Yanbu since the start of March. The terminal typically handled between 1 and 1.5 million barrels a day, with the International Energy Agency reporting that by March 9, volume was approaching 5.9 million barrels a day moving through the pipeline. Aramco has said around 5 million barrels would be for export, and the remainder of the volume would go to SAMREF for processing. The pipeline is believed to be able to move as much as 7 million barrels a day at maximum capacity.
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