Getting the Strait of Hormuz closure straight

In this episode of the LNG Industry Podcast, Jessica Casey is joined by Lars Kjoellesdal, LNG Europe Lead at ICIS, to explore the Strait of Hormuz closure, and the knock-on effects it is having on the LNG industry.

We discuss:

• Changes in trade flows.
• Security of supply.
• Global LNG capacity.

Creators and Guests

Host

Jessica Casey

Jessica leads the editorial teams at LNG Industry, commissioning articles and features, and representing the magazine at industry events.

Guest

Lars Kjoellesdal

LNG Europe Lead at ICIS

What is LNG Industry Podcast?

The LNG Industry Podcast: a podcast series for professionals in the natural gas and LNG industries.

Jessica Casey: 00:01

Jessica Hello, welcome to our brand new LNG Industry Podcast. I'm Jessica Casey, editor of LNG Industry, and I look forward to bringing you conversations and insights with experts from across the LNG industry. For this episode, I am pleased to welcome Lars Kjoellesdal, LNG Europe Lead at ICIS. Lars is the LNG Europe Lead at ICIS based in London. He is covering the global LNG market with a particular focus on Europe, while leading the team s African LNG coverage.

Jessica Casey: 00:27

His current responsibilities include providing daily and weekly coverage and analysis of LNG, as well as delivering external presentations and webinars. Previously Lars covered maritime shipping in Oslo for various Norwegian outlets. He also holds a Master's degree in Economic History. In this normal episode, we're going to be talking about something that is being widely talked about at the moment: the Strait Of Hormuz closure.

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LNG Industry serves as the go to hub for all those following the latest developments in the LNG sector. Providing spotlight interviews, in-depth articles and regional reports, LNG Industry covers the global marketplace. Register to receive a print or digital copy at lngindustry.com.

Jessica Casey: 01:14

Hello, Lars, and welcome to the podcast. Thank you for joining me today.

Lars Kjoellesdal: 01:18

Thanks for having me.

Jessica Casey: 01:19

So let's start off with the basics. For anyone perhaps unfamiliar, why is the Strait Hormuz so important?

Lars Kjoellesdal: 01:25

Well, so the Strait Hormuz is it's quite often referred to as a critical choke point and a vital shipping lane in the media, and that's really because it is. It's a very accurate description. And this is really because 20% of global LNG volumes and 25% of seaborne oil trade transit to Strait as it really is the only way for to ship these volumes from the energy rich Persian Gulf to to the rest of the world. So really a vital part of the global economy.

Jessica Casey: 01:52

Okay. So following on from that then, what kind of impact is the closure having on the LNG and wider midstream industry?

Lars Kjoellesdal: 01:58

So the closure of the Strait really means we've lost LNG production and exports from Qatar and The UAE, which is a significant amount of global LNG supply. So a prolonged closure will is systematically significant for global gas markets and perhaps a little bit of a boring answer, but the key variable here, it will ultimately depend on the duration of the Qatar production halts and or the Strait transit disruption and also, obviously, weather will play out later in the year. LNG have lost supply, so including key long term customers in mainly in Asia, such as India, Pakistan, Japan, China, and South Korea. Qatar also has some long term contracts with European buyers, such as Italy, Belgium, Poland, which really means that some of these buyers will have had to aggressively bid for spot cargoes due to bridge the Qatari LNG shortfall, which has also then subsequently drive the gas prices. And shipping conflict and closure of Strait have raised the risk and cost profile, triggering some rerouting, higher insurance costs.

Lars Kjoellesdal: 03:04

And the conflict is also slowing construction in Qatar's like major Northfield expansion projects, which is set to increase its nameplate capacity from 77,000,000 tons per year to 142,000,000 tons per year. Pretty significant volumes here, but we know this is gonna be delayed and any further delay to this Qatar LNG ramp up will reduce the expected LNG global LNG oversupply later this decade, which then in turn implies tighter utilization of existing infrastructure, shipping and regasification assets for longer, potential also stronger incentives for non Qatari LNG projects such as we find in The US and Africa to progress.

Jessica Casey: 03:48

Okay. And how is this closure being reflected by changes in LNG trade flows? You mentioned Asia. Are they who are most affected by this?

Lars Kjoellesdal: 03:56

Yeah. We've seen some some distortions from or some LNG trade flows distortion from the Hormuz disruption and Heaviesburg, as you say, it's like really falls on Asian buyers. They rely on Qatar and UAE LNG. With Europe affected more indirectly via higher competition for flexible cargoes, especially from The US, because before the crisis, about, say, 80% of Qatar LNG exports went to Asian markets. Europe was already taking a smaller share.

Lars Kjoellesdal: 04:27

I think, give or take, 89% of US gas supply was covered by Qatar LNG in 2025. And Europe was also already relying more on US LNG. But also, as I mentioned earlier, even though or Europe's impact is more indirect, it doesn't mean the impact is not significant because we've seen much, much higher competition and also higher gas prices as in Europe to reflect the shortfall. I really like The US LNG, as I mentioned, has also become, with its destination free nature, is really the key swing supplier and the main flexible source. So East station LNG spot prices were really needs to maintain a spot price gas premium over Europe to to pull enough cargoes.

Lars Kjoellesdal: 05:10

So we have seen some rerouting of US LNG going to Asia, Europe's expense so far, but we haven't really seen this Asian gas price premium have been like consistently strong enough to support a more widespread diversion or rerouting of VSLNG to Asia. But this can obviously this can change towards summer when Asian cooling demand really picks up. And while Europe has been seemed content to forego some cargoes in the short term on, like, falling seasonal demand and pretty mild weather so far this year. Europe's need for a storage injection ahead of winter will just mean that European gas prices will need to stay close to East Asian LNG prices as well to remain sufficiently competitive. And at some point, as the Middle East conflict drags on, other Asian buyers will need to step into the market to to cover the summer demand as well.

Jessica Casey: 06:03

So what kind of demand responses do you anticipate from European and Asian countries? Might they look to diversify a bit more, either by changing where they import their oil and gas from, or look for different energy sources altogether?

Lars Kjoellesdal: 06:15

Yeah. So we have seen quite a demand response in Europe and Asia, maybe way more so in Asia just because how more fundamentally exposed they are to Middle East LNG. European power sector has been really quick to respond to pricing gas prices by switching fuels, and we've seen, for instance, Germany that higher gas prices linked to Middle East risk have encouraged gas to call switching. At the same time and more long term, like more volatile gas prices coupled with security of supply concerns is really an underlying drive for more investment in renewables and perhaps also Europe will look to increase its reliance on US LNG as well. Although there are some discussions here about not being too reliant on one, just one single source.

Lars Kjoellesdal: 07:00

But in Asia, which is more directly impacted by the Qatar LNG shortfall, the picture is quite mixed. We've seen clear signs of demand destruction, especially the case in South Asia, with buyers already cutting consumption and the users pivoting to coal where possible. We've seen utilities across Vietnam and Thailand encouraging lower air condition use. Philippines' four week workweek in India's industrial curbs are also registering a downstream power burn. Thailand has also seen a structural shift toward coal fired generation due to higher LNG prices and concerns over households, electricity tariffs.

Lars Kjoellesdal: 07:39

So this demand restructuring is quite evident and we also see this in places such as Pakistan and Bangladesh that have been forced to enter the spot market and procure LNG at much much higher prices than what they're usually used to. But when we're looking at Northeast Asia demand response, LNG demand response has been quite limited for now. Buyers from or buyers in Japan and South Korea have really held back from spot market with seasonal demand softness and prospects of further prices easing, encouraging this sort of wait and see approach. So buyers in Japan, South Korea have been more relying on optimization, optimizing flows and cargo swaps. But then in China, spot appetite is quite limited.

Lars Kjoellesdal: 08:22

And that's also the case even before the Middle East war, with much lower LNG imports being a trend in China for quite some time already. And this is really because downstream end user demand really continued to resist higher prices and a lot more gas pipeline flows from Russia and also higher domestic production. So really the lack of demand from the three world's largest LNG importers in China, Sakura and Japan have really helped lessen the competition for US LNG cargo, providing Europe with some breathing room for the time being.

Jessica Casey: 08:54

So how do you see this situation playing out? Could you perhaps provide some insights on the status and outlook for Qatari energy production and the reopening of the Strait Hormuz?

Lars Kjoellesdal: 09:02

Yeah, so this is really the key question in the market. We see new headlines every single day, conflicting rhetoric from The US side and the Iran Iranian side. When it comes to reopening of the Strait Of Rimuz, it doesn't really seem like this is something that can happen anytime soon. We've US has announced it was open at some point, and then it was closed. Iran said it was open at some point and then it was closed again.

Lars Kjoellesdal: 09:24

The fact is that the Strait Of Remus effectively remains closed. No LNG vessels have transited the Strait since the war broke out. We have seen one exception, but this was an empty tanker going to Oman LNG. So there's still significant uncertainty and ship owners are very cautious still, and there are questions related to the reported mine laying in the strait and raining conditions, possible practical implementation. And these issues must really be clarified before departure can be considered and once it is really considered safe to do so.

Lars Kjoellesdal: 09:58

When it comes to the status and outlook for Qatar LNG production, we know Qatar's LNG facilities were subject to an Iranian missile attack in mid March. We know this took out two LNG trains, two production facilities or two production assets in Res Lafayne. And really just to provide a little bit of a context here, Res Lafayne LNG, Qatar's major LNG facility consists of the North Side and the South side. Each site consists of seven LNG production assets each. We know two of these assets have been damaged in the South Side.

Lars Kjoellesdal: 10:30

So we do think it's certainly possible for Qatar to quickly ramp up production at the North Side if allowed. We know where we have we do understand there have been talks or Qatar is looking to or have restarted some production or operations at the North Side already, although not confirmed. So we do think the North Side could fairly quickly ramp up production again if if allowed. When it comes to the South Side, having two trains being damaged, and we know these are gonna be out for three to five years, the restart profile could take much longer compared to the North side that was undamaged. Qatar Energy said it will take three to four months to sort of fully ramp up production and exports.

Lars Kjoellesdal: 11:14

We certainly think this applies to the damaged South side, but the North side could perhaps, yeah, quickly ramp up production again. So when this is safe to do so, that I don't know. That one no one really knows. But there just seems to be, like, a lasting peace deal probably has to be in place for for Qatar to even consider a proper restart.

Jessica Casey: 11:34

Obviously, the huge loss of LNG capacity and production from The Middle East, and as you mentioned specifically, Qatar could play a major role in the overall global LNG supply. Do you think that this will affect the supply demand ratio very much, or is there enough alternative LNG export capacity out there to bridge the gap?

Lars Kjoellesdal: 11:51

This is a good question. We, as I said before, cast The Strait from use closure to cut 19% of global supply from March through July, assuming The Strait is closed for five months, which is our base case scenario currently. And despite prices coming down in April, they remain well above their pre crisis levels and continue to display quite a lot of volatility. So this, like, tightness in the market is still reflected in prices. And the loss of LNG from Qatar and UAE have has partly been offset by the ramp up of new LNG supply, primarily from The US, some in Canada, Africa as well.

Lars Kjoellesdal: 12:28

And really without this new supply additions to global gas market, we'd we'd probably be in a much more difficult and vulnerable position today. We know The US Golden Pass LNG project just loaded its first cargo as well, which is a project majority owned by Qatar Energy, which they've said actually will be used to backfill some of these contractual obligations with some further additions from other US projects such as Corpus Christi. So really much due to the continued strong and rising US LNG production, US LNG exports reach a new high in March, including some demand destruction as well that will still be still be there even after a reopening of the strait and restart of the production. So we do expect the global LNG balance to move to surplus during the latter part of this year already and all of 2027. But this is, of course, if you assume a five month long closure, the wave of LNG that everyone's talking about will for sure be delayed.

Lars Kjoellesdal: 13:30

And the market is likely to still experience volatility as it still will be finally balanced. And so we see these more substantial volumes coming online later this decade. But again, we're lasting beyond five months, which is our base case scenario for how long the strait will be closed and Qatari production will be down. Any delays here beyond five months will obviously push to oversupply for a route. As, yeah, really the duration of the war remains the key factor here.

Lars Kjoellesdal: 13:56

So I think it's clear that European gas and Asian spot prices are likely to remain elevated compared to last year's levels as the global LNG market looks to rebalance.

Jessica Casey: 14:06

Okay. Great. Thank you so much for joining me, I'm providing some insight into the effects of the Strait Of Hormuz closure on the LNG industry. It's much appreciated.

Lars Kjoellesdal: 14:14

Thank you, Lars.

Jessica Casey: 14:16

Thanks for joining us as we discuss the impact the closure of the Strait Of Hormuz is having on LNG supply chains and trade flows with some insight into what might happen with the industry in the near future. Thanks for listening to the LNG Industry Podcast. The podcast is available on all platforms, so subscribe for free wherever you prefer to listen. If you have enjoyed this episode, please rate and review and forward to a colleague or friend. And if you want to stay on top of what's happening in the LNG sector, make sure you sign up for a free subscription to LNG Industry Magazine.

Jessica Casey: 14:43

Just head to lngindustry.com/magazine. Until next time.

Advert: 14:49

LNG Industry serves as the go to hub for all those following the latest developments in the LNG sector. Providing spotlight interviews, in-depth articles and regional report, LNG Industry covers the global marketplace. Register to receive a print or digital copy at lngindustry.com