POLITICS

Conflict in the Middle East is affecting a key energy lifeline for Europe. How big is the risk?

Feb 6, 2024, 9:13 PM

FILE - The tanker Maria Energy, left, loaded with liquefied natural gas, is moored at the floating ...

FILE - The tanker Maria Energy, left, loaded with liquefied natural gas, is moored at the floating terminal Hoegh Esperanza, in Wilhelmshaven, Germany, Jan. 3, 2023. Attacks by Yemen's Houthi rebels are posing a new threat to the future of energy supplies to the European Union, which relies on imported oil and natural gas to power factories, generate electricity, run vehicles and more. (Sina Schuldt/dpa via AP, file)
Credit: ASSOCIATED PRESS

(Sina Schuldt/dpa via AP, file)

FRANKFURT, Germany (AP) — 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, 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 canceled.

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 Israel-bound ships to support the Hamas militant group in its war with Israel, although other ships have been targeted as well. In response, the U.S. and the U.K. 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% of LNG shipments from Qatar that were headed for Italy’s major terminal on the Adriatic Sea were canceled in January. Last year, Qatar supplied 40% of Italy’s LNG.

WHAT IS LNG AND WHY IS IT IMPORTANT?

Cooling natural gas to minus 162° C (minus 260° F) 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% 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 ($48.38) per megawatt hour before the start of the Israel-Hamas war to 28.37 euros 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 U.S. 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% 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 U.S., 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.

“There is always a ‘but,’” Tagliapietra said. “The risk is an escalation that affects the Strait of Hormuz.”

HOW IMPORTANT IS U.S. GAS TO EUROPE?

U.S. gas exports rose sharply after Russia invaded Ukraine in February 2022, and the Biden administration has celebrated deliveries to Europe and Asia as a key geopolitical weapon against Russian President Vladimir Putin.

Since then, President Joe Biden has paused approving new proposals for LNG export terminals.

The pause would allow officials to study the impact of LNG projects on climate change, the U.S economy and national security, Energy Secretary Jennifer Granholm said. The action would not affect five terminals that are already approved and under construction, she said.

Industry association Eurogas called Biden’s action “alarming” and said U.S. gas imports are “set to play a crucial role for European energy security″ in case of possible shortfalls.

Analyst Tagliapeitra said, however, that with plenty of new export capacity already approved, Biden’s decision would have “no short-term or even medium-term impact on Europe.”

U.S. LNG capacity has doubled since exports began in earnest less than a decade ago, and it’s set to double again under already-approved projects.

The wisdom of investing more money in fossil fuel infrastructure is also being debated in Europe, which aims to cut greenhouse gas emissions by 55% compared to 1990 levels by 2030.

Europe’s gas demand is expected to fall 8% over 2022-2026 as renewable energy like solar and wind power is scaled up.

“Expanding LNG infrastructure in the USA and in the EU is a high economic risk that will very likely end up as stranded assets,” said Claudia Kemfert, an economic expert at the German Institute of Economic Research and professor at Leuphana University.

___

Daly reported from Washington.

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Conflict in the Middle East is affecting a key energy lifeline for Europe. How big is the risk?