Qatar’s plans to restart full output of LNG stifled by Iranian attack on vessel

With passage through the Strait of Hormuz uncertain, Qatar must now delay its ramp-up of LNG production.

What: Qatar’s plans to ramp-up LNG production have been put on hold after a Qatari LNG tanker was struck by a missile fired by Iranian forces.

Why: Despite safe passage through the Strait of Hormuz being a focal point of the ceasefire framework agreed to by the US and Iran, the strait now appears to be unpassable for Qatari LNG tankers.

What Next: QatarEnergy’s operations will be kept at a minimum for the foreseeable future until the security situation in the Strait of Hormuz is stabilized.

QatarEnergy’s plans to return to full production of LNG at its Ras Laffan Industrial Complex have been put on hold amid an uncertain security situation in the Strait of Hormuz, Bloomberg reported on July 10.

Safe passage through the Strait of Hormuz had been a central tenet of the ceasefire framework agreed to by the US and Iran in mid-June. However, an attack by Iran’s Islamic Revolutionary Guard Corps on a Qatari LNG tanker and a Saudi-flagged crude oil tanker on July 6 have caused Doha to reconsider its LNG strategy. The attack marked the first time a Qatari vessel has been targeted by Iran.

Following the establishment of the ceasefire framework, Qatar's Prime Minister Sheikh Mohammed bin Abdulrahman Al Thani said that Qatar would return to normal LNG production within a few weeks.

QatarEnergy had begun to increase cargo loadings and also had empty vessels brought back to Ras Laffan, with 11 LNG tankers moored at the industrial complex.

However, in the wake of the attack on Qatar’s Al Rekayyat vessel, which was loaded with LNG and struck on the port side, officials at QatarEnergy held several meetings, and ultimately decided that the risk of transiting through the strait remained too high.

Consequently, Saad al-Kaabi Qatar’s Minister of Energy and President and CEO of QatarEnergy has decided that the company’s operations will remain at a minimum for the time being until security guarantees are given. QatarEnergy will also reduce the number of tankers scheduled to dock at Ras Laffan.

Even immediately after the ceasefire framework was announced, tensions persisted between the two sides over the Strait of Hormuz. The US-Iran memorandum of understanding stipulated that vessels would be free to pass through the strait for at least 60 days.

However, Tehran has insisted on charging toll fees for vessels to pass through angering Washington, which has attempted to have these fees dropped by promising to unfreeze some of Iran’s funds held abroad. Some vessels have paid as much as $2 mn to pass through the strait.

Only 22 ships sailed through the Strait of Hormuz on July 7, down from an average of 34 per day last week. A handful of vessels have also turned back, aborting attempts to transit the strait. Prior to the conflict breaking out between Israel, the US, and Iran on February 28, an average of between 125-140 vessels passed through the strait daily.

The news that the world’s second-biggest LNG producer will remain largely sidelined from the market for the foreseeable future has led to a rise in LNG prices.

An already tight market has become tighter with the world’s third largest LNG exporter, Australia, also providing reduced output amid a damaging cyclone and industrial action at plants. Global oil prices rose by 5% on July 8 after US President Donald Trump stated the interim ceasefire was over.

For now, Qatar looks far from returning to be a reliable supplier of LNG for the global market. The two liquefaction trains hit by Iran in March will take between three to five years to repair. There is no timeline on when the Strait of Hormuz will be passable again, but it does not appear it will be imminent.

The cost of shipping LNG cargoes is also likely to increase for QatarEnergy. With Tehran insisting on toll fees, sometimes as high as $2 mn per ship, QatarEnergy’s LNG cargoes are unlikely to be as appealing going forward as they were in the past not only from a reliability perspective but also from a cost angle.

QatarEnergy first declared force majeure to its buyers on March 4. Qatar had hoped that it may be able to lift its force majeure by July 16, however, those plans have now fallen through.

In early July, QatarEnergy extended force majeure notices to August on LNG cargoes for some of its Asian purchasers.

The news was worse for Italian utility Edison, which was notified of force majeure until early September. In total, 21 LNG cargoes scheduled to be delivered to Edison have been affected over the April-to-early-September delivery period. Edison has forecast that it will receive about two-thirds of its contract LNG volumes between 30 to 45 days after any peace deal is announced.