Saudi Pipeline Attack Highlights Risk to Middle East Oil Exports

(Bloomberg) -- The Yemeni rebel drone attack that forced Saudi Arabia to temporarily shut its main cross-country oil link highlights risks to crude exports from the Persian Gulf as U.S. efforts to eliminate Iran’s oil exports inflame regional tensions.

Why does the attack matter?

State oil giant Saudi Aramco is the world’s largest crude exporter, and Saudi Arabia sees its role in global oil markets as helping to balance supply and demand and cushioning against price spikes. Most of the country’s roughly 7 million barrels of daily crude sales are shipped from ports on the Persian Gulf and onward through the narrow Strait of Hormuz.

Hormuz is one of the world’s most important waterways for oil shipments, providing passage for some 17.5 million barrels a day. That’s nearly one-fifth of daily oil production and about 40 percent of all crude traded each day.

Since an apparent sabotage attack on Saudi oil tankers on Sunday, both of the kingdom’s main export routes have come under threat, pushing oil prices higher and stoking geopolitical uncertainty. Saudi rival Iran has threatened to block the Strait if the U.S. stops it from exporting oil.

Why is the East-West pipeline important?

Saudi Arabia’s main oil fields are in the country’s east, buried under the country’s Empty Quarter desert and waters of the Persian Gulf. The East-West pipeline carries crude from these deposits to refineries and the port of Yanbu on the Red Sea coast to the west. Built in the 1980s and expanded since then, it’s the country’s most important link.

The pipeline provides an alternative route for crude exports, should the Strait of Hormuz ever be blocked. While it can’t meet all of Aramco’s current export requirements, it could keep some oil flowing to markets.

Storage tanks at Yanbu may help the Saudis maintain supplies to the market for now, but a prolonged shutdown would test that ability. Once the Jazan refinery, also on the Red Sea coast, is completed later this year, that could provide another target, even closer to Yemen.

How much oil can it carry?

The 1,200 kilometer (746 mile) pipeline can transport 5 million barrels of crude a day, and Aramco plans to expand that to 6.5 million by 2023. Aramco transported 2.1 million barrels of crude each day via the link last year.

The state company uses less than half the pipeline’s full capacity because it relies heavily on its Gulf terminals for tanker exports. Most of the oil shipped through the pipeline went to refineries that make products like gasoline and diesel for sale at home and abroad. Aramco exported about 750,000 barrels of crude a day from Yanbu in the first four months of the year, less than a tenth of total Saudi shipments abroad.

What’s the regional context?

Tuesday’s drone strike followed the attack on Sunday against several ships, including two Saudi crude tankers, in waters off the neighboring United Arab Emirates. No one claimed responsibility for the maritime attack, and neither the Saudis nor the U.A.E. assigned direct blame. However, the kingdom's Energy Minister Khalid Al-Falih on Tuesday pointed at Iran as a sponsor of terrorism. “These attacks prove again that it is important for us to face terrorist entities, including the Houthi militias in Yemen that are backed by Iran,” he said.

--With assistance from Verity Ratcliffe.

To contact the reporter on this story: Anthony DiPaola in Dubai at adipaola@bloomberg.net

To contact the editors responsible for this story: Nayla Razzouk at nrazzouk2@bloomberg.net, Bruce Stanley, James Herron

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