Red Sea conflict poses a new threat to energy supplies as shipments stall
The Middle East conflict is posing a threat to Europe's key energy supply line.
Missiles and drones are disrupting the Red Sea, a major trade route and crucial point for energy shipments heading to Europe. Yemen's Houthi rebels' attacks over Israel's war with Hamas are creating a new risk to the energy supplies.
Europe relies heavily on imported natural gas to power factories, generate electricity and heat homes. Ships carrying liquefied natural gas, which is supercooled to travel by ship instead of pipeline, regularly pass through the Red Sea. However, several shipments to Italy have already been cancelled due to the conflict.
This situation is causing worry, particularly as Europe is still dealing with the aftermath of an energy crisis. This crisis occurred after Russia largely cut off natural gas to the continent following the invasion of Ukraine.
The Iranian-backed Houthis have been launching drones and missiles at ships passing by territory they control near the narrow Bab al-Mandab Strait at the southern end of the Red Sea. The Houthis claim they are attacking ships heading to Israel in support of the Hamas group, but other vessels have also been targeted. As a result, the US and UK have been striking Houthi launch sites in Yemen since mid-January.
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Worries about safety have caused shipping and some energy firms to redirect their vessels around Africa's southern tip, instead of through the Suez Canal. This has extended the journey to Europe from Middle East suppliers like Qatar by over a week, increasing costs. In January, about 70% of LNG shipments from Qatar destined for Italy's main terminal on the Adriatic Sea were cancelled. Last year, Qatar provided 40% of Italy's LNG.
When natural gas is cooled to minus 162 C (minus 260 F), it turns into a liquid and its volume shrinks by 600 times. This allows it to be stored and transported on specially designed ships.
Once it arrives, it's warmed back into gas and sent via pipeline to distribution companies, industrial users and power plants. For many years, Europe depended on gas transported through pipelines from Russia. However, this abruptly stopped when Russia invaded Ukraine and cut off most of its supply. LNG became a vital resource, with the German government quickly arranging floating import terminals on its northern coast.
Last year, 12.9% of Europe's LNG passed through the Red Sea from Middle Eastern suppliers, mainly Qatar. "an extended shut-in of the Red Sea route from the Middle East poses a supply risk to Europe," warned Kaushal Ramesh, vice president at Rystad Energy.
So far, natural gas prices have seen little to no impact. In fact, spot prices for natural gas have dropped since the Houthi attacks began. Europe is getting a break due to weak demand for natural gas amid a sluggish economy. Slow growth in China has also reduced competition. Plus, LNG shipments from the U.S. don't have to pass through the Red Sea.
Pipeline gas is still flowing from Norway and Azerbaijan, and Europe is buying some LNG from Russia despite sanctions. A key factor has been Europe's efforts to fill underground storage with gas ahead of winter: Storage is over 70% full with most of the heating season over. "The price impact will be delayed until Europe's gas storage has been drawn down sufficiently," said Rystad's Ramesh.
Things were different in 2022 when the war in Ukraine began. Russia's cutoff sent gas prices soaring, causing inflation to hit record highs and contributing to a cost-of-living crisis. European governments and companies raced to secure alternatives. Simone Tagliapietra, an energy analyst at the Bruegel think tank in Brussels, has said that Europe's gas market is "well supplied".
He added that abundant storage provides "a very good buffer" against any interruptions or delays in gas shipments. There are concerns that the conflict between Israel and Hamas could spread to other countries in the region, particularly Iran. This could disrupt shipping through the Strait of Hormuz at the end of the Persian Gulf, a key route for both LNG and oil.
Despite indications from Iran and the U.S., Israel's key ally, that they want to avoid a wider war, the recent invasion of Ukraine has shown that unexpected things can happen. "There is always a 'but,'" Tagliapietra warned. "The risk is an escalation that affects the Strait of Hormuz."
U.S. gas exports saw a significant increase after Russia invaded Ukraine in February 2022. The Biden administration has hailed these deliveries to Europe and Asia as a crucial geopolitical weapon against Russian President Vladimir Putin. However, President Joe Biden has since paused approval of new proposals for LNG export terminals.
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Energy Secretary Jennifer Granholm explained that this pause would allow officials to study the impact of LNG projects on climate change, the U.S economy, and national security. She clarified that this action would not affect five terminals that have already been approved and are under construction.
Eurogas, an industry association, has labelled Biden's action as "alarming". They believe that U.S. gas imports are crucial for European energy security in case of possible shortfalls. However, analyst Tagliapeitra disagrees, stating that Biden's decision will have "no short-term or even medium-term impact on Europe."
U.S. LNG capacity has doubled since exports began less than ten years ago, and it's set to double again under already-approved projects. The idea of investing more money in fossil fuel infrastructure is also being debated in Europe, which aims to cut greenhouse gas emissions by 55% compared to 1990 levels by 2030.
Europe's gas demand is expected to fall 8% over 2022-2026 as renewable energy like solar and wind power is scaled up. Claudia Kemfert, an economic expert at the German Institute of Economic Research and professor at Leuphana University, said: "Expanding LNG infrastructure in the USA and in the EU is a high economic risk that will very likely end up as stranded assets."
* An AI tool was used to add an extra layer to the editing process for this story. You can report any errors to [email protected]
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