Middle East conflict affecting key energy lifeline for Europe

MISSILES AND drones are flying in the Red Sea, disrupting one of the world’s key trade arteries and a chokepoint for energy shipments headed for Europe.

Attacks by Yemen’s Houthi rebels over Israel’s war with Hamas are posing a new threat to the future of energy supplies to the 27-country European Union (EU), which relies on imported natural gas to power factories, generate electricity and heat homes.

Tankers carrying liquefied natural gas – which is supercooled to travel by ship instead of pipeline – routinely pass through the Red Sea, and several shipments to Italy already have been cancelled.

It’s causing anxiety, especially as Europe still is grappling with the fallout from an energy crisis after Russia largely cut off natural gas to the continent over the invasion of Ukraine.

Here are key things to know about the threat to Europe’s energy supplies from conflict in the Middle East:

WHAT IS GOING ON WITH RED SEA SHIPPING?

The Iranian-backed Houthis have been firing drones and missiles at ships that pass by territory they control near the narrow Bab al-Mandab Strait at the southern end of the Red Sea.

The Houthis say they are striking Israelbound ships to support the Hamas militant group in its war with Israel, although other ships have been targeted as well. In response, the United States (US) and the United Kingdom have been attacking Houthi launch sites in Yemen since mid-January.

Security concerns have led shipping and some energy companies to reroute vessels around the southern tip of Africa instead of through the Suez Canal at the northern end of the Red Sea. That is lengthening the journey to Europe from suppliers in the Middle East, like Qatar, by a week or more and raising costs.

Around 70 per cent of LNG shipments from Qatar that were headed for Italy’s major terminal on the Adriatic Sea were cancelled in January. Last year, Qatar supplied 40 per cent of Italy’s LNG.

WHAT IS LNG AND WHY IS IT IMPORTANT?

Cooling natural gas to minus 162 degrees Celsius (minus 260 degrees Fahrenheit) changes it into a liquid and reduces its volume by 600 times so it can be stored and shipped aboard specially designed vessels.

Upon arrival, it’s reheated into gas and transported by pipeline to distribution companies, industrial consumers and power plants.

Europe relied for decades on gas transported through pipelines from Russia. That came to an abrupt end after Russia invaded Ukraine and cut off most of its supply. LNG became a lifeline, with the German government, for example, hastily lining up floating import terminals on its northern coast.

Last year, 12.9 per cent of Europe’s LNG went through the Red Sea from suppliers in the Middle East, mainly Qatar. That means “an extended shut-in of the Red Sea route from the Middle East poses a supply risk to Europe”, said Kaushal Ramesh, vice president at Rystad Energy.

WHAT’S THE IMPACT ON SUPPLIES AND PRICES?

So far, there’s been little to no impact on natural gas prices. In fact, spot prices for natural gas have fallen since the Houthi attacks began, from around 45 euros (US$48.38) per megawatt hour before the start of the Israel-Hamas war to 28.37 euros on Tuesday.

Europe is getting a break because demand for natural gas is weak amid a sluggish economy. Slow growth in China also has reduced competition. And LNG shipments from the US don’t have to go through the Red Sea.

Meanwhile, 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 per cent full with most of the heating season over.

That means “the price impact will be delayed until Europe’s gas storage has been drawn down sufficiently”, Rystad’s Ramesh said.

Things were different in 2022 when the war in Ukraine began. Russia’s cutoff sent gas prices rising sharply, surging inflation to record highs and helping drive a cost-of-living crisis. European governments and companies raced to secure alternatives.

But now, Europe’s gas market is “well supplied”, said Simone Tagliapietra, an energy analyst at the Bruegel think tank in Brussels. Abundant storage means “a very good buffer” against any interruptions or delays in gas shipments.

WHAT COULD GO WRONG?

There are fears the Israel-Hamas war could spread to other countries in the region, particularly Iran, and lead to disruption of shipping through the Strait of Hormuz at the end of the Persian Gulf.

That’s a key route not just for LNG but for oil, too. So far, Iran and the US, Israel’s key ally, have indicated they want to avoid a wider war. But the invasion of Ukraine has shown that in the unsettled state of the world, unexpected things can happen.