The talk is of oil, but gas is most at risk in the Iran-Israel conflict

Leaders must wake up to the threat to global gas supply

October 15, 2024, 4:52 PM

A construction worker at South Pars. The world's largest gas field is shared by Iran and Qatar

As the governments of Israel and Iran and various affiliated militias trade threats, the risk to oil supplies from the Gulf has been most in focus.

But objectively, gas is more at risk on both sides of the conflict. The warring parties, regional neighbours and Europe are all imperilled – and it’s time to stop playing with fire.

The main dangers are threefold. First, that Iranian gas production or exports could be curbed by Israeli attacks – whether air, drone, cyber, sabotage or something else.

The Netanyahu government appears to have given some assurances that it will strike only military targets, as reported in the Financial Times, but several Israeli leaders have publicly threatened Iranian energy facilities.

Second, that Iran might respond to an attack on its energy or nuclear sites by disrupting gas production or transit from its neighbours.

The Houthi campaign in the southern Red Sea has shown how relatively simple drones and missiles can shut down most marine traffic in a narrow waterway, with few actual hits and even less major damage to ships.

Gulf production facilities could be vulnerable, as in the September 2019 strike on Saudi Arabia’s crucial Abqaiq gas-oil separation plant.

Third, that Israel’s own gas facilities could come under attack, from Iran directly or from Hezbollah or one of its other allies.

Even if oil and gas assets stay out of the firing line this time, the risk will not go away

Iran’s gas production might seem a tempting target but interruption or curtailment would have relatively little direct impact on the outside world, since Iran’s huge output is nearly all consumed domestically.

If Iran’s domestic gas were disrupted, it would likely first cut off exports to its two main gas customers, Turkey and Iraq. Turkey, which needs gas mostly in winter, gets about 15 percent of its needs from its eastern neighbour.

Infrastructure permitting, Turkey would try to meet the shortfall by importing more liquefied natural gas (LNG) or stepping up purchases of gas sent by pipeline from Russia.

Iranian supplies of gas and gas-generated electricity to Iraq are not very reliable but meet up to 40 percent of Iraqi consumption. Unlike Turkey, Iraq has few other options, although a winter shut-off would not be the worst timing.

From the point of view of wider Gulf gas exports, Iran has relatively good relations with Qatar, with whom it shares the world’s largest gas field (North Field in Qatar, South Pars in Iran).

Tehran’s foreign minister Abbas Araghchi met his GCC counterparts in Doha on October 3 and Saudi Crown Prince Mohammed bin Salman on October 9, as the Gulf states seek to lower their risk of being caught up in any escalation.

If production or shipping were affected, this would hit the 21 percent of global LNG that is exported from the Gulf. Although this is less than the third of world seaborne oil exports that the Gulf commands, there is very little spare capacity in gas, unlike for oil. The high-demand period of the northern hemisphere winter approaches.

The remnant of Russian pipeline gas supplies to Europe will probably terminate at the end of the year, as the contract for transit through Ukraine expires.

The progressive shut-off of nearly all Russian gas to Europe from late 2021 means Europe depends mostly on LNG to cover its gas imports. The Red Sea hostilities have already closed off most LNG traffic direct from the Middle East to Europe, forcing lengthy detours around the Cape.

European gas storage is 94 percent full ahead of winter, but it is not designed to cover for a cut-off of supplies on its own.

A threat to Israel’s gas facilities has repercussions for the country and its neighbours. Major offshore gas finds since 2009 have led the Israeli economy to become increasingly gasified, with the retirement of coal power stations.

The shift from coal to gas depends on three large fields, one of which, Karish, is very close to the Lebanese maritime boundary.

Whether because of Israeli security measures, deliberate avoidance or disruption of capability, neither Hamas nor Hezbollah has yet seriously targeted the fields or other gas infrastructure with missiles or drones. That could change if violence escalates further.

Israel’s floating LNG import vessel at Hadera, midway between Tel Aviv and the Lebanese border, departed in 2022; it might scramble to secure a replacement at short notice.

Interruptions in Israeli gas output also imply immediate export cuts to Egypt and Jordan. Flows to Egypt have been halted several times by precautionary closures of the fields during the current conflict, forcing Cairo to pay through the nose for LNG or fuel oil imports.

As Egypt’s own gas production has dwindled, Israeli gas has become essential. Cairo has already suffered electricity shortages, had to halt its LNG exports and return to importing. A prolonged gas outage would be disastrous for its economy.

Even if oil and gas assets stay out of the firing line this time, the risk will not go away. Israel has steadily upped the ante since the Hamas-led assault on October 7 last year. Neither measured Iranian retaliation, nor insipid admonitions from the US, have restrained it so far.

On the current path, there will be further cycles of attacks and retaliation. Eventually, as in the Ukraine-Russia war, the temptation to attack critical gas and power systems will be irresistible.

Such worries underpin a steady rise in Asian LNG and European gas prices. Another European gas and power crisis would be bad news for the continent, which is struggling with a weak economy and deindustrialisation.

It would also put the united front against Russia under further strain, in the run-up to the US presidential election. Kremlin-curious Hungary and Slovakia are already seeking ways to import Russian gas under various guises.

Complacency over oil supplies is somewhat justified; this isn’t true of gas where the market is much tighter. It’s time for major outside players – the US, Europe and China – to join the region’s peace-minded states, make it clear that energy infrastructure is off the table and back this up with stringent consequences for violators.

Robin M Mills is CEO of Qamar Energy and author of The Myth of the Oil Crisis