Supply disruptions linked to the U.S.-Israeli war on Iran could delay construction of liquefied natural gas projects slated for development in the U.S., Freeport LNG CEO Michael Smith said on Wednesday at the CERAWeek energy conference in Houston.
The U.S. is the world’s largest LNG exporter and has more new capacity under construction than any other country.
Smith said the conflict’s impact could extend beyond oil and gas supply chains, affecting key materials such as steel and components used in manufacturing equipment needed to build LNG plants.
American LNG developers were already facing inflationary pressures before the disruptions, driven in part by labor shortages and rising construction costs, Smith added.
The Middle East conflict has shuttered about 20% of global LNG supply after Iran effectively closed the Strait of Hormuz to export traffic.
With costs escalating, Smith said Freeport LNG would not proceed with its proposed fourth liquefaction train unless it can secure liquefaction fees of $3 per million British thermal units (mmBtu). Liquefaction fees are charged by LNG developers to convert natural gas into a liquid for export.
Smith suggested that European buyers should temporarily withdraw from the spot market to allow more cargoes to flow to Asia and reduce upward price pressure there. He said June and July LNG prices could climb above $17/mmBtu if the conflict drags on, as Europe competes for supply to refill storage ahead of its winter season.
Benchmark European gas traded near $17/mmBtu at the Dutch Title Transfer Facility (TTF) on Wednesday, while the Japan-Korea Marker (JKM) in Asia was around $21/mmBtu as prices remained high in response to the war.
Before the Iran conflict, prices were averaging closer to $10 per mmBtu.
At such price levels, demand destruction is likely in lower-income Southeast Asian countries, many of which may switch back to coal for electricity generation, Mark Abbotsford, chief commercial officer at Woodside Energy, said on a separate CERAWeek panel.
Abbotsford said it would be hard to ship U.S. LNG to Asia below $10/mmBtu due to distance and the cost of plant construction. He said some buyers cannot afford this price.
On top of shut-in production, LNG cargoes stuck near the Strait of Hormuz are losing value as evaporation reduces volumes over time, Suryan Wirya-Simunovic, managing executive officer at Mitsui O.S.K. Lines, said on the same panel with Woodside’s Abbotsford.
(Reporting by Curtis Williams in Houston; Writing by Liz Hampton; Editing by David Gregorio)