Monday, 18 November 2019 | 03:38
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Saudi Plan B to Avoid Hormuz Danger Isn’t Much Safer

Tuesday, 30 July 2019 | 12:00

After all of the incidents in the Strait of Hormuz in recent months, Saudi Arabia is understandably nervous about its dependence on using the chokepoint to ship its oil to vital overseas markets. But its plan to pump more of its crude all the way across the country and export it through the Red Sea instead may not bring it as much security as it hopes.

Two separate attacks on oil tankers in May and June just outside Hormuz – a narrow neck of water that links the Persian Gulf to the high seas – have caused costs and insurance rates to skyrocket. British-flagged vessels have shunned the strait after one was seized by Iran’s Revolutionary Guard in retaliation for the arrest of the supertanker Grace 1 off Gibraltar earlier this month.

It’s perfectly understandable that producers are weighing up their options. But unlike most of the others in the region, Saudi Arabia actually does have some. It and the United Arab Emirates are the only countries in the Persian Gulf that have a coastline on another sea. In Saudi Arabia’s case it’s the Red Sea, which forms the country’s western boundary.

There is already a big oil pipeline that carries Saudi crude from its oil fields in the east to that western coast. With a capacity to move five million barrels of oil a day, it is one of the largest in the world. It was already due to grow, but the Hormuz tensions mean it’s now going to get much bigger, much faster.

The kingdom now plans to complete the expansion of the line to carry 7 million barrels a day by September. But as recently as April, the prospectus for the first international bond sale by state-owned oil company Saudi Aramco showed the completion date for the expansion was four years away and the planned capacity was half a million barrels smaller.

Aramco has also boosted its export capacity on the Red Sea coast, rehabilitating the Muajjiz, or Yanbu South, oil terminal with a capacity of 3 million barrels a day. This was originally the terminus of the IPSA pipeline, which had carried Iraqi oil to the Red Sea until Saddam Hussein’s invasion of Kuwait in 1990. The line was mothballed and eventually confiscated by the Saudis in lieu of reparations payments owed by Iraq. Given that it has a nameplate capacity of 1.65 million barrels a day and runs parallel to the East-West line across the kingdom, it may form the basis of the capacity expansion.

But will all this work make Saudi oil exports any safer? Perhaps not.

The East-West pipeline itself came under attack from drones in May. Iranian-backed Houthi rebels in Yemen claimed responsibility, though U.S. officials subsequently judged the incursion to have originated in Iraq, where the Saudi border is less well defended. Further such incidents cannot be ruled out if tensions with Iran rise further.

The line has plenty of unused capacity, even now. Last year it carried just 2.1 million barrels a day to the west coast, much of it destined for refineries at Yanbu. And there is no sign from Bloomberg tanker tracking data that exports via the Red Sea have increased as tensions around Hormuz have escalated in recent months. The share of total Saudi crude exports shipped through the Red Sea dropped below 10% in 2Q from 12% in 1Q.

Shipping crude out through the Red Sea may avoid the Strait of Hormuz, but it also has its own bottleneck to negotiate – the Bab el-Mandab, or Gate of Tears, a narrow sea passage between Yemen and Djibouti that links it to the Indian Ocean and the sea routes to Asia. And that may prove no less fraught than sailing through Hormuz.

Twice last year Saudi tankers were attacked in the Bab el-Mandab, causing the kingdom to halt shipments through the strait.

Diverting more of Saudi Arabia’s crude exports through the Red Sea could, perversely, complicate the task of protecting oil tankers, requiring navies to patrol not one, but two chokepoints over which Iran, or militias it backs, have a degree of control.

Iran has shown how easily it can harass tankers in the Strait of Hormuz and jeopardize oil shipments there. Its proxies in Yemen may soon try demonstrating their capabilities in the Bab el-Mandab, and if so, global oil flows there may be no less vulnerable.
Source: Bloomberg

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