Op-ed: Hormuz blockage – A potential win for the LNG market?

The following article is an op-ed piece authored by James Hill, CEO of MCF Energy, who dives into the tension-filled landscape in the Middle East and the complexities and implications of the looming threat presented by the potential Strait of Hormuz closure on the oil, gas, liquefied natural gas (LNG), shipping markets, global trade flows, and the energy transition journey to a low-carbon and green world.

A conflict-turned opportunity is what many are calling the potential blockage of Hormuz. It is a delicate dance between investor opportunity and world crisis for the second time in two years.

The Strait of Hormuz is the world’s most important oil chokepoint. It is made up of eight major islands, seven of which are controlled by Iran. Responsible for a fifth of the world’s LNG and oil exports, in the wake of Israel’s attack on its consulate in Syria, Iran is threatening to block Hormuz.

If this passage is blocked, the global oil and gas market will immediately be restricted and supply tightened. This could very well take us back to 2022 when we experienced a pretty hard-hitting energy crisis thanks to the initial onset of Russia’s invasion of Ukraine.

In this scenario, the U.S. would be required to commit forces to reopen the strait, which could possibly widen the conflict with Iran and its surrogates and, in turn, greatly increase the risk to LNG flow.

With volatile shifts in upward prices, “gas and LNG prices may be likened to 2022,” said Lu Ming Pang, Rystad Energy Senior analyst.

The uncertainty is already being reflected in the market and the renewed threat is proving supportive for prices.

Roughly 12% of Europe’s LNG imports flow through the Strait. Between import halts, Red Sea attacks, and constant strikes from Russia against the EU’s energy infrastructure, the continent cannot catch a break.

Iran has long supported the Houthis, and now, with the ability to close the strait, Iran can block off two of the most important shipping lanes to Europe. Until a decision is made, LNG vessels will continue to operate as normal, but it will take as little as one incident to disrupt this vital energy flow.

In addition to Europe, Hormuz is a vital passage for India to import crude oil from Saudia Arabia, Iraq, and the UAE.

While alternative routes through the Red Sea exist for oil transportation, there are no alternatives for the transport of LNG. The Strait of Hormuz is the only one.

Hormuz has been at the center of geopolitical tensions for decades. While it has not been closed in recent days, it was closed between 1972 and the 1980s due to tension between Iran and Oman. In 1988, the U.S. and Iran engaged in a one-day battle around the strait.

If the strait closes once again and LNG movement is to be halted, spot LNG prices are guaranteed to sharpen with a major shift in price.

Moving trade flows through Africa’s Cape of Good Hope has already had a significant impact on CO2 emissions. The container shipping industry’s CO2 emissions increased to 230 million tons in 2023—almost one-quarter of the total of 1 billion tons for all maritime shipping, making them dangerously high and climbing, according to a report from consultancy AlixPartners released earlier this year.

An escalated conflict that blocks off this secondary passage will greatly add to rising emissions.

With the continued expansion of energy needs in Asia and Europe combined with the instability in the Gulf, the green transition using natural gas as a bridging fuel would be threatened. This would require Europe to burn more dirty coal, which would also increase emissions.

Note: The article was written by James Hill, CEO of MCF Energy, and edited by Melisa Cavcic, Senior Editor at Offshore Energy.

Hill, who specializes in exploration projects across Europe and North America, is a geologist by trade, with a Master’s of Science in Geology from California State University. He holds a P.Geo designation and is a Chartered Member of the London Geological Society.

With a strong track record in European exploration, Hill also served as the President of Professional Affairs for the American Association of Petroleum Geologists (AAPG). Prior to joining MCF Energy as President and CEO in December 2022, he was VP of Exploration for both BNK Petroleum and Bankers Petroleum.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of Offshore Energy.

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