Gulf countries, including Qatar, Bahrain and Kuwait, have announced curbs on gas exports since the United States-Israel war over Iran, now in its third week, and shipping through the Strait of Hormuz has been disrupted as Tehran retaliated across the region targeting US assets.
Qatar Energy was the first to halt production, halting gas liquefaction on March 2 and sending ripples through global energy markets. Kuwait Petroleum Corporation and Bahrain’s Bapco Energy followed days later, while India took urgent steps to redirect gas supplies to priority sectors.
Oil prices rose to $100 a barrel as the war intensified and uncertainty grew over the transportation of fuel through the world’s most critical maritime chokepoints.
What we know about Force Majeure and what it means for Gulf countries’ global oil and gas markets.
What is force majeure?
Force majeure, from the French meaning “higher force”, is a clause in contracts that allows a party to excuse itself from its obligations when an event beyond its control prevents performance.
This legal action allows a party to temporarily suspend, partially or fully discharge its obligations, or adjust them to reflect new circumstances.
Why are Gulf countries invoking force majeure?
Companies from Qatar, Kuwait and Bahrain have invited it after severe disruption to shipping through the Strait of Hormuz caused by US-Israeli military strikes against Iran that began on February 28.
Following the attacks, Iran’s new Supreme Leader Mojtaba Khamenei echoed Thursday that the commander of Iran’s Islamic Revolutionary Guard Corps (IRGC) had warned on March 2 that the Strait of Hormuz had been closed and that any ship attempting to pass would be attacked.
As a result, Gulf companies began to invoke force majeure to “avoid paying damages or other financial penalties under their contracts,” Elias Bantekas, a professor of international law at Hamad Bin Khalifa University in Qatar, told Al Jazeera.
“These companies will not be able to fulfill their obligations, for example, to deliver oil and gas shipments to other countries or for shippers to ship across the Arabian Gulf,” he said.
Does war qualify as force majeure?
No. For war to qualify as force majeure, it must be contractually covered or actually prevent one or both parties from performing their obligations.
Companies and states typically include force majeure clauses that define what events qualify, meaning that when force majeure is invoked, the parties rely on the provisions they previously agreed upon.
“War is always predictable, but probably not at the level it’s being waged right now,” Bantekas said, adding that under general treaty provisions, ships carrying cargo are usually expected to find another route “even if it’s more expensive for them.”
“What we could never imagine is that even if Iran attacked in the brutal way it has now, the Strait of Hormuz could be completely closed to shipping. That, on its own, I think would be enough to constitute a force majeure event,” he said.
“However, only a court would have the authority to make a definitive determination as to whether this type of war, in these particular circumstances, constitutes coercion,” he said.
Will the LNG and oil markets be affected?
Yes. Qatar Energy’s declaration of force majeure has already significantly disrupted the global LNG market, as Qatar accounts for around 20% of global supply.
Gas prices skyrocketed immediately after the country’s gas production was shut down, and global gas markets are expected to experience shortages for weeks, if not longer.
“The lack of visibility over the likely duration of force majeure and a broader military conflict is injecting severe uncertainty into global oil, gas and LNG prices,” global gas and LNG analyst Seb Kennedy told Al Jazeera.
“Until price pain triggers demand destruction in price-sensitive areas of the economy, prices will necessarily continue to rise as volumes are withheld from the market,” he noted.
Which other countries have invoked force majeure?
On Tuesday, India invoked force majeure to redirect gas supplies from non-priority sectors to major users after disruptions to liquefied natural gas transit through the Strait of Hormuz, according to a government notification.
But Kennedy said India’s actions were a “domestic demand-management response”, with its government moving its limited gas supplies internally “to protect critical sectors such as households, small businesses, power generation and city gas distribution”.
Kennedy said the move reflects the tough choices facing LNG-dependent economies, where governments may prioritize households and power generation over industrial users.
He noted that this preference for LNG for domestic consumption “highlights the tough choices facing LNG-dependent countries”.
Apart from India, Omani trading house OQ declared force majeure for Bangladeshi customers after Qatari supply was suspended.
How will this affect the US and European markets?
US LNG exporters are likely to benefit from the disruption. An analysis by Energy Flux estimates that US LNG exporters could lose about $4bn in profits in the first month of the disruption.
If the situation continues, Kennedy says, “US LNG windfall profits could reach $33bn above the pre-Iran average within four months. At eight months, that figure will rise to $108bn.”
These gains come largely at the expense of European consumers, Kennedy notes, as Europe is the main destination for US LNG and relies heavily on those supplies to replenish gas storage and ensure winter supply security.
European stock markets fell last week, but the region’s natural gas prices rose sharply again.
What does this mean for Asian markets?
Major Asian economies such as India, China and South Korea are highly dependent on imported LNG.
On the other hand, Southeast Asia alone has significant fossil fuel resources, but the region is still heavily dependent on imported oil and gas, much of which is transported through the Strait of Hormuz.
“Affluent buyers such as Japan and South Korea can often outbid others to secure goods during periods of severe shortages,” Kennedy said, adding that price-sensitive importers, particularly in South and Southeast Asia, tend to be “forced out of the market” when prices soar, “leading to demand destruction, fuel switching or industrial cutbacks”.
“In that sense, the crisis will not hit all LNG importers equally: it will be a contest of balance sheets as much as a question of physical supply.”
Can a forced major be challenged?
If a force majeure clause is written into a contract, it stands because the parties have agreed to it.
Conversely, if it is not written into the contract, any unforeseeable event is open to legal challenge, and it is a matter of convincing the courts that the event was never foreseeable and impossible for one of the parties to perform.
“However, under the current circumstances, powerful parties – those awaiting delivery of oil and gas elsewhere in the world – could be really hurt if they refuse to accept force majeure,” Bantecas said.
“Doing business with Gulf countries may become more difficult in future, and premiums may increase significantly. So, I don’t think they will take these matters to court,” he noted.
(tags to translate)Economy
