Key Saudi Oil Pipeline Damaged in Drone Attack

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Written by Daniel Graeber for IIR News Intelligence (Sugar Land, Texas)

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Summary

Industry analysts have for months touted pipeline routes that avoid the Strait of Hormuz as a way to insulate the market from conflict. One of those pipelines may be shuttered for weeks because of drone attacks.

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Is Saudi Oil Locked In?

Pumping stations along the Saudi East-West crude oil pipeline that can be used to bypass the Strait of Hormuz could be out of service from recent drone attacks and leave the route largely out of commission for weeks, according to a news wire report, sending further shockwaves through the global commodity sector.

Data from Industrial Info Resources show the East-West pipeline traverses the Saudi peninsula with a terminal on the Red Sea coast in the port city of Yanbu. It has a peak design capacity of around 7 million barrels per day (bpd) of crude oil, or around 35% of what would normally flow through the Strait of Hormuz, data show.

Touted as a safety valve amid ongoing shipping disruptions in the Strait of Hormuz, the pipeline was targeted by multiple drones fired by Iranian-backed militias in Iraq last week. Despite multiple media outlets showing fires along the pipeline route, the Saudi Energy Ministry said the pipeline was closed only as a precaution.

On Monday, the Associated Press, citing sources familiar with the matter, reported that repairs could take as long as five weeks to complete, though the pipeline might be able to run still at a limited capacity.

The incident nevertheless highlights the growing risk for regional producers. With the Iranian-backed Houthi rebel group in tacit control over the southern mouth of the Red Sea, and with ongoing tensions in the Persian Gulf, crude oil is essentially locked in.

The United Arab Emirates is also pressing for a new crude oil pipeline, dubbed West-East. The emirates can already ship about 1.5 million bpd through the Habshan - Fujairah Crude Oil Pipeline (ADCOP), though Abu Dhabi Crown Prince Khaled bin Mohamed bin Zayed al-Nahyan said he wanted the Abu Dhabi National Oil Company (ADNOC) to accelerate development of the new project.

But pipelines may prove to be easy targets. The European market during the early stages of the conflict in Ukraine was left scrambling for natural gas supplies after the twin Nord Stream network in the Baltic Sea was sidelined by an act of sabotage. That in turn prompted a shift toward shipments of liquefied natural gas (LNG), which are less prone to geopolitical risk.

Meanwhile, a very large crude carrier (VLCC), responsible for most of the world's oil shipments, can carry around 2 million barrels. An adversary would have to successfully disable three VLCCs to do what drones did to a single pipeline on Friday.

"The Saudi cheat of Hormuz, in which the kingdom shifted greater volumes of crude to its western shore of the Red Sea via Yanbu to service its contracts with the likes of China and other Asian destinations, looks to be a busted flush," John Evans, an analyst for London oil broker PVM, wrote in a Monday newsletter.

State-run Saudi Aramco was forced to shut down its Jazan refinery briefly in July. Attacks also occurred at Saudi Arabia's Yanbu and Abqaiq industrial complexes.

It remains difficult to assess maritime traffic in and around the Persian Gulf, though traffic is nowhere near pre-war levels. A vessel was last attacked in the Strait of Hormuz on Thursday, based on data from the United Kingdom Maritime Trade Operations Center.

War Taking an Economic Toll

Ongoing tensions, which began with joint U.S.-Israeli airstrikes on Iran in February, are taking a toll on the global economy. The energy index of the U.S. Consumer Price Index is up 16.3% over the 12-month period to August as diesel and retail gasoline prices continue to climb.

The U.S. Labor Day weekend, the unofficial end to the summer travel season, was the most expensive on record in terms of retail gasoline prices, and the spike in diesel could trickle down to impact the price of consumer goods as well based on its prevalence in shipping.

Crude oil prices too are accelerating. West Texas Intermediate, the U.S. benchmark for the price of crude oil, was trading at around $104 per barrel on Monday, up 21% so far in September.

By the Numbers

• 7 million bpd possible through Saudi crude oil pipeline
• 21% spike in U.S. crude oil prices so far in September

Key Takeaways

• Saudi crude oil has nowhere to go.
• Pipelines look like sitting ducks during war time

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About Industrial Info Resources
Industrial Info Resources (IIR) is the leading provider of industrial market intelligence. Since 1983, IIR has provided comprehensive research, news and analysis on the industrial process, manufacturing and energy related industries. IIR's Global Market Intelligence (GMI) helps companies identify and pursue trends across multiple markets with access to real, qualified and validated plant and project opportunities. Across the world, Industrial Info Resources is tracking over 250,000 current and future projects worth $30.2 Trillion (USD).