War Near Key Shipping Strait Gives Gas Buyers More Power to Demand Lower Prices

Countries in Asia and Europe that buy liquefied natural gas, or LNG, are planning to push Qatar and the United Arab Emirates for lower prices and stronger guarantees. The U.S.-Iran war has made it riskier and more expensive to ship gas through a narrow waterway called the Strait of Hormuz. Because of that risk, buyers say they now have more power to ask for better deals. Traders and energy company leaders shared this information with Reuters in late July.

LNG is natural gas that has been cooled into a liquid so it can be loaded onto ships and transported around the world. Qatar and the UAE together supply about one-fifth of all the LNG sold globally. All of their gas shipments must pass through the Strait of Hormuz to reach buyers in Asia and Europe, which makes the war in the region a very big problem for them.

Before the war started, Qatar and the UAE were seen as two of the most dependable energy suppliers in the world. That strong reputation gave them a lot of power when they sat down to negotiate prices with buyers. Now, because of the war, their reputation has taken a hit and buyers feel they have the upper hand.

The war has forced Qatar's national energy company, QatarEnergy, to shut down some of its gas production facilities. The company declared what is called 'force majeure,' which is a legal term meaning that unexpected events beyond its control stopped it from delivering what it promised. Shipments to countries like Italy were cancelled from April all the way through early September.

Insurance costs are a major reason why buyers want price cuts. When ships travel through a war zone, the companies that insure those ships charge much higher fees to cover the risk of an attack. Nicola Monti, the chief executive of the Italian energy company Edison, said that anyone making new gas deals in the Gulf region will have to factor in those rising insurance costs.

Before the war, long-term LNG contracts from Qatar and the UAE were priced at about 12.6% to 12.7% of the Brent crude oil price. Brent crude is a standard way of measuring oil prices. Some deals signed after the war began have been priced closer to 12.3%, which suggests that buyers are already getting small discounts because of the added risk.

Qatar is actually one of the cheapest places in the world to produce LNG. Analysts estimate Qatar can produce LNG for as little as $0.50 per million British thermal units, compared to $3 to $5 in many other countries. That low production cost means Qatar has room to lower prices and still make money. Both Qatar and the UAE also plan to increase how much LNG they produce in the coming years, which will give buyers even more chances to bargain.

Six traders based in Asia told Reuters that future talks would focus not only on price, but also on making sure gas supplies are safer and more spread out. They spoke without giving their names because their companies still have active contracts with Qatar and the UAE. They also pointed out that growing LNG production from the United States, Canada, and Mozambique is adding more competition, which puts extra pressure on Gulf suppliers to offer better deals.

Buyers are also asking Qatar and the UAE to promise replacement shipments if the Strait of Hormuz gets blocked again. For example, Qatar has a gas export facility in the United States called Golden Pass LNG. If ships cannot travel through the strait, Qatar could potentially send gas from that terminal instead. Having backup options like this would make buyers feel much safer about signing long-term contracts.