The Strait of Hormuz is a well-known chokepoint in oil markets—much has been written over the years about its key role in oil markets and the severe effects a suspension of shipments would have on oil prices. But the strait is also a chokepoint for liquefied natural gas (LNG) shipments—and the implications of disruption are less widely understood.
First, a few facts (all data from this report). Qatar is surrendering its title as the top liquefied natural gas (LNG) exporter in the world, but it was still the world’s number one exporter in 2018, accounting for 25 percent of global LNG supplies. Abu Dhabi, the first Middle Eastern LNG supplier, still exports a small amount too—5.5 million tons in 2018. Some of this trade stays within the Gulf with LNG going from Qatar to Kuwait (and, in previous years, the United Arab Emirates too). But mostly, these two countries send their LNG through the strait. There is also some incoming traffic: Kuwait and Dubai import LNG, Bahrain will start imports soon as well, and Sharjah might import LNG by 2020.
The impact of any disruption will depend on several factors: will the disruption take place in the summer or winter, and how extreme will temperatures be; how strong is demand generally at the time; how much gas exists in storage; are shipping markets tight or not; how prolonged is the disruption; and so on. The specifics will matter greatly—and will determine how the system will adjust.
But a few broad statements are safe to make. If LNG flows through the Strait of Hormuz is disrupted, three adjustments will likely take place more or less simultaneously. First, the world’s remaining LNG will be redirected to markets that can pay the most for it—subject to contractual and other limitations. Second, countries that have access to other gas, be it domestic production, storage, or piped gas, will try to take in more of that gas—again subject to constraints. Third, consumers that can switch fuels or curtail consumption will do so.
How these adjustments play out in different countries is hard to forecast in the abstract. Japan, for instance, depends almost entirely on LNG imports and has limited gas storage but has high ability to pay and retains some fuel switching capacity (although switching to oil might be hard in a market where oil supplies through the Straits would be disrupted too). Bangladesh, to take another example, imported 100 percent of its LNG in 2018 from Qatar, but LNG formed just 3 percent of its gas needs in 2018; then again, the economy depends on gas for over two-thirds of its energy needs. In each country, the pain and adjustment will vary.
Even so, some macro observations are worth making. In simple terms, the LNG market could adjust by shifting LNG from those countries that have alternative gas supplies to those that do not. In practice, this means LNG moving from Europe toward Asia, which is precisely what happened after the Fukushima Daiichi disaster in 2011; in a smaller scale, it will also involve some adjustments away from the Americas and the Middle East.
But disrupting flows through Hormuz is volumetrically greater than the shock in 2011 when Japan’s LNG imports jumped by 18 million tons after Fukushima (from 2010 to 2014). LNG exports through the Strait were 83 million tons in 2018; Europe’s total LNG imports were 50 million in 2018, including 17 million tons that came through the Strait. If all remaining European LNG imports went to zero, that could help offset the lost LNG for Japan, Korea, and Taiwan (34 million tons in 2018). To meet most of the LNG demand in the rest of Asia, every other region in the world would have to take zero LNG—which is commercially and logistically impractical; but shows the immense disruption that would entail from a Strait closure.
An adjustment scenario that depends heavily on Europe has its own downsides too. LNGaccounted for just 13 percent of Europe’s gas consumption in 2018, which is not high but still significant. More importantly, Europe has increasingly defined resilience by measuring access to LNG facilities—which is fine as long as LNG is available and affordable. If LNG became scarce, most of Europe’s contingency plans are rendered moot, although, obviously some European customers could outbid competitors and secure supply (and contractual commitments would entitle them to some supply anyway). Supply security via LNG alone only goes so far.
The problem is that Europe’s spare pipeline capacity is now limited; Norway and North Africa have little serious upside, and flows through Ukraine are near their recent highs, with even less spare capacity available during seasonal peaks. Without additional pipelines, like Turk Stream and Nord Stream 2, it is hard to imagine Europe being able to secure sufficient gas in a world where LNG supplies through the Strait of Hormuz were disrupted for a while. If anything, this is a reminder that global gas security is still a nascent idea thatrequires much analytical and governance work. The tensions in the strait are as good a reason as any to undertake that work—and fast.
Nikos Tsafos is a senior fellow with the Energy and National Security Program at the Center for Strategic and International Studies in Washington, D.C.
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