Much media attention has been given to Iran's ongoing threats to close the Strait of Hormuz, and a blockade's potential consequences to global oil supply. But oil is not the only commodity at stake.
"The stark reality is that global LNG supply is at much greater risk than global oil supply," analyst Pavel Molchanov of Raymond James & Associates in Houston noted in an industry brief last month.
More than 25% of the global LNG supply passes through the strait. Qatar is the world's leading LNG producer with a market share near 25% and the UAE is estimated to have a 3% share, according to the BP Statistical Review of World Energy 2011.
Researchers with Chatham House of London believe 15.5-17.5 million b/d of oil and 3.5 bcfd of LNG move through the Strait of Hormuz based upon various estimates and US Energy Information Administration statistics.
Molchanov said a Hormuz blockage would halt more than a quarter of the world's LNG supply, and a supply shock of that magnitude inevitably would trigger a price spike, he said.
"Whether the threat is credible is an open question, given the fact that Iran itself would suffer the most in the event of a blockade. But insofar as the threat has been made, we have to take it seriously," Molchanov said.
Iran's threat to block the strait comes in retaliation to tougher international sanctions against its nuclear program, which is widely believed to be developing nuclear weapons. At this writing last week, the threats remained verbal, but analysts believe trade disruptions or military confrontation, in an extreme scenario, could be possible. Iran's military reportedly staged a series of large-scale war games during the past several months.
While crude oil has the option of being rerouted via pipelines to help mitigate a Hormuz blockage, LNG has no practical bypass options, Molchanov said.
Asia imports LNG
Most LNG shipments out of the Persian Gulf go east to Asia, similar to oil, Molchanov noted. Japan, India, and South Korea are major purchasers of LNG from Qatar and UAE.
"As a result, these countries could receive a double economic hit, i.e., a disruption to oil as well as LNG imports. Japan, the world's third-largest economy and the No. 1 LNG importer, would be particularly impacted," Molchanov said. Japan also is among the few industrialized economies that still uses oil for much of its power generation.
"If oil supply were temporarily disrupted, Japan would naturally need to buy more LNG to compensate, especially given the issues with its nuclear fleet following the Fukushima disaster," he said. "If both oil and LNG supply are disrupted, Japan would face a colossal problem, possibly having to resort to energy rationing."
During January, Japan's Finance Minister Jun Azumi told US Sec. of the Treasury Timothy Geithner that Japan plans to reduce its oil dependency on Iran. "We want to take concrete steps to reduce our share in an orderly way as soon as possible. We wish to take planned steps to further reduce this share, which now stands at 10%," Azumi said. Japan already reduced Iranian oil imports by 40% in the past 5 years, he said.
Some of Qatar's LNG production goes to Europe, Molchanov said, adding the UK's LNG imports could be considerably affected by a Hormuz blockade. A shutdown would involve a few international oil companies having partnerships with Qatar's LNG giants: Qatargas and RasGas. ExxonMobil Corp. has the most exposure to Qatargas in absolute terms of any international company.
Other Qatargas partners include Total, ConocoPhillips, Shell, Marubeni, and Mitsui. ExxonMobil is the only international partner in RasGas.
Martime choke points
In its January briefing paper, Chatham House researchers note that maintaining free passage of energy products through maritime choke points is an explicit national interest of various countries.
"Europe, Japan, and the United States have traditionally been most dependent on oil imports vulnerable to disruption. This may change over time as the United States become less dependent on imports from outside the western hemisphere, and East Asia much more so," said the paper written by Charles Emmerson and Paul Stevens.
China, which became a net oil importer in 1993, already is more dependent than the US on oil supplies from the Middle East, Chatham House researchers noted.
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