News of more mysterious tanker attacks, this time in the Gulf of Oman, is having its predictable effect on oil prices. But there is another fuel at risk: liquefied natural gas. What might conflict, or the threat of it, mean for this fast-growing segment of the energy business?

The Middle East produces 29 percent of global LNG exports. The producers are mainly Qatar, Oman and the United Arab Emirates.

Exports from Qatar and the UAE must transit the Strait of Hormuz, the chokepoint near where the two tankers were hit. Oman’s LNG facilities are farther south, close to where the Gulf of Oman opens into the Arabian Sea, so they are less exposed to attack. Exports from a fourth nation, Yemen, have already been targeted.

In theory, an extended conflict similar to the so-called tanker war of the 1980s could have a serious impact on the LNG trade. Just over 26 percent of all LNG cargo passed through the Strait of Hormuz in 2018, according to data from BP PLC, close to the roughly 30 percent of the oil flows estimated by the U.S. Energy Information Administration. Qatar accounts for the vast majority and a large proportion of the imports received by a number of countries outside the region.

The presumably similar impact on oil tankers would also drive up LNG prices, as many supply contracts are indexed to oil.

Outside of a broader war, Iran has little to gain from launching an all-out tanker war that would disrupt what is left of its sanctions-hit energy trade and put it at war with the U.S. Even so, the threat of conflict or more sporadic attacks could still affect the LNG market.

Roughly 40 percent of global growth in gas production through 2040 will involve flows moving between regions, according to BP’s projections. Of that, LNG is expected to account for over two-thirds. China, India and the rest of Asia dominate.

For China, increasing LNG imports offers a way to curb reliance on coal and thus pollution. Strategically, however, it also represents another leg of its rising dependence on energy imports. China already relies on imports to meet more than 70 percent of its oil demand — a higher proportion than the U.S. even at its peak dependency in 2005. China also used imports to satisfy about 44 percent of its gas demand in 2018, a trend that looks certain to rise.

According to a recent report written for the Oxford Institute of Energy Studies, China’s dependency on oil imports is mitigated by the fact that oil is a more mutually interchangeable product and that Beijing has already stocked a large strategic reserve of it. The biggest contrast with gas, however, is timing.

The difference between rising oil import dependency and rising gas import dependency may relate, above all, to a contrast between the global political environment when China’s oil imports were initially rising strongly 10 years ago and the current political environment, where the same has been true of gas.

LNG has already been caught up in U.S.-China trade war, with Beijing having imposed a tariff on American LNG exports. This effectively closed off an important way of diversifying its LNG imports — the primary means of managing a rise in dependency.

This changing environment could reduce China’s appetite for LNG and reshape the energy outlook in multiple ways.

If Qatari and U.S. LNG is deemed less desirable, other suppliers will benefit. Apart from those in the region, such as Australia and Malaysia, development projects in eastern Africa could benefit, as would long-stalled plans on Canada’s Pacific coast. Argentina could also benefit through its shale-gas sector, with Scotland-based consultancy Wood Mackenzie pointing out that peak potential LNG production in the summer would coincide with strong winter demand from utilities in Asia.

Bringing in more piped gas from Russia and Central Asia, as well as Russian LNG, is another potential option. The Power of Siberia pipeline is due to start deliveries to China soon, and strategic considerations could conceivably lead to a second pipeline. Chinese buyers have agreed to take a 20 percent stake in Novatek PJSC’s LNG project on Russia’s Arctic coast — a deal announced only a couple of months ago after the tariff war with the U.S. began.

But China could well decide to deal with its exposure to potentially unreliable LNG deliveries by dialing back reliance on gas in general. That could lead to several changes.

Renewable energy is one obvious potential beneficiary. Tempering such hopes, however, is the fact that, despite a jump in Chinese renewable-energy production last year, China also accounted for 30 percent of the growth in global consumption of coal, which it has in abundance. India, another fast-growing market reliant on Qatar for LNG, is in the same boat.

Geopolitics might cause spikes in energy-trading prices in the near term but tends to depress consumption over the longer term. A scenario BP released earlier this year surmised a roll-back in globalization would actually hit growth in gas demand harder than one involving a more rapid transition to lower carbon energy sources. So even a simmering conflict can pose risks to the energy trade.

That scenario is starting to play out. The trade war and America’s shift toward a more openly mercantile stance under the rubric of “energy dominance” represent a fundamental break with the past.

On Wednesday, President Donald Trump threatened sanctions against Germany over the long-delayed Nord Stream 2 pipeline, which he and a sizable contingent in Congress believe would leave this nominal ally overly dependent on Russian gas. At the same time, Washington’s standoff with Tehran is threatening an important LNG source that mitigates Moscow’s power in Europe’s energy market.

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