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Gulf war must end to avert deeper energy crisis
Global energy markets face severe disruption. The Strait of Hormuz closure and attacks on oil and gas facilities have halted vital supplies. LNG prices have more than doubled. Crude oil prices are soaring. Reserves offer limited relief. This situation threatens a major oil price shock. An undersea pipeline offers a potential long-term solution.
Global oil and LNG supplies are disrupted following the closure of the Strait of Hormuz, which carries nearly 20% of the world’s crude oil and the same proportion of LNG supplies. The risk to LNG supplies is greater. In the case of crude oil, Saudi Arabia and the UAE have pipelines to skirt the Hormuz, though their capacity is limited. LNG transport at scale has to be by sea.
The shipping problem is compounded by damage to oil and gas installations. Saudi Aramco’s largest refinery at Ras Tanura was hit. Qatar stopped LNG production after an attack on its Ras Laffan plant. This removed 20% of global LNG supply from the international market and led to more than doubling of spot prices for Asian LNG. The effect is reinforced by the fact that LNG supplied by Qatar and the UAE is linked to the price of oil.
There is no other source that can compensate for the loss of oil and gas supplies on this scale. The Indian crude oil basket has reached $127.22 per barrel. The release of 400 million barrels of crude from reserves by IEA, and 172 million barrels by the US, has not moderated the price hike. These reserves will take weeks or months to reach the market, while the loss of Persian Gulf supplies is immediate. We may be witnessing the beginning of the third oil price shock.
How long the disruption will continue depends on how long the war lasts. US President Donald Trump on March 9 said it will end “pretty quickly.” However, the US defence secretary announced an intensification of the bombing campaign, and a spokesman of Iran’s IRGC said it will not allow “a litre of oil” to pass through Hormuz and that the price of oil will hit $200 per barrel. Iran’s new supreme leader Mojtaba Khamenei has also said the strait will remain closed.
The US bombing of Iran’s Kharg oil terminal is a dangerous escalation. IRGC has stepped up retaliation. 70% of India’s oil supplies come from routes outside the Hormuz Strait. In the case of LNG, out of India’s total gas consumption of about 189 mmscmd, 47.4 mmscmd or 25% has been affected. Supply of gas to industries has been cut; priority is being given to the city gas distribution and fertiliser sectors. If the Hormuz Strait remains closed, the pressure on limited supplies will increase. Unlike oil, LNG or gas storage facility is extremely limited.
The closure of the strait is not simply a result of Iranian attacks but is also linked to the withdrawal of insurance cover. Seven out of the 12 largest companies providing reinsurance have stopped giving war risk coverage in the Persian Gulf. This situation is qualitatively different from the crisis in the Red Sea following Houthi attacks on shipping a couple of years ago. At the time, insurance rates went up, but the war risk coverage was available. It will take time before insurance companies resume operations in the Persian Gulf area, and further time lag before the rates are normalised. In the Red Sea area, this has still not happened.
Surface transport is always exposed to geopolitical risks. An undersea pipeline from West Asia to India can avoid the complications caused by the Strait of Hormuz closure. There is a proposal for an undersea, Middle East to India Deepwater Pipeline (MEIDP), which can carry 31 mmscmd per day of gas from Oman or the UAE to Gujarat. Technical and financial feasibility have been certified by reputed companies. The project will cost around $ 5-6 billion. This will not replace LNG but provide a useful supplement in case such a crisis recurs.
According to financial feasibility report by SBI Cap, the tariff will be around $2 per mmbtu cheaper than LNG. LNG requires converting gas to liquid at the shipment point and re-gasification at the destination. Double conversion results in energy loss and increased costs. Transnational pipelines would require government support.
While two India-bound LPG carriers have been allowed to sail through Hormuz, the situation will remain volatile. In case of LNG, it is not simply a question of safe passage, but production itself has been affected. There is an urgent need to bring the war in the Gulf to an end, followed by negotiations on anuclear deal. The progress achieved in the Geneva talks between the US and Iran may be a starting point. But given the distrust, negotiations this time will have to be in a multilateral framework.
(The writer is former ambassador to Iran)
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Source: EconomicTimes
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