x Abu Dhabi, UAEWednesday 17 January 2018

Oil consumers to pay the price for piracy

The escalation of Somali piracy to include attacks on oil tankers will significantly raise the cost of most crude shipments.

The Sirius Star, a Saudi-owned supertanker seen here off the coast of Holland, was hijacked this week as it passed through Somali waters.
The Sirius Star, a Saudi-owned supertanker seen here off the coast of Holland, was hijacked this week as it passed through Somali waters.

The escalation of Somali piracy to include attacks on oil tankers will significantly raise the cost of most crude shipments to Europe and North America, analysts say.. But as far as this country is concerned, the threat to oil exports is negligible. "Somali pirates have rocked the global energy shipping industry and raised its costs," said Samuel Ciszuk, the Middle East energy analyst at the consulting firm IHS Global Insight. "Increasingly investments will be channelled to on-board security measures by ship owners, while rising transport costs will filter down to energy customers in the West."

The hijacking in the Indian Ocean on Saturday of the Sirius Star, a Liberian-registered, Saudi-owned supertanker operated by the kingdom's national oil company Saudi Aramco, was "the most brazen on the international shipping lanes to date, more than doubling the pirates' reach compared with previous attacks", he said. Ominously for international trade, it has greatly extended the area off the Horn of Africa that insurers deem insecure to shipping to include the entire Gulf of Aden, large areas of the Arabian Sea, and a 200-nautical-mile strip of Indian Ocean coastal waters off southern Somalia and north-west Kenya.

"The successful targeting of the ship therefore heralds new tangible threats to one of the world economy's lifelines, bringing virtually all crude shipping from the Gulf to the West in range of possible attacks," Mr Ciszuk said. "As a result, shipping insurance premiums are likely to rise significantly and immediately, while tankers will be rerouted further from the East African shores, increasing their journey time."

The cost of insurance represented a significant portion of the cost of transporting crude, or liquefied natural gas, by ship, Mr Ciszuk said. Increased premiums would immediately filter through to freight rates, and ultimately to commodity prices. But compared with the alarm bells set off by Iranian threats this summer to Gulf oil shipments through the Strait of Hormuz, the market's immediate response to the seizure of the Sirius Star and its 2-million-barrel oil cargo was muted. Oil prices in New York rose by less than $3 from $56 (Dh205) a barrel in the hour immediately after the news was released on Tuesday, only to fall below $55 later in the trading session.

Part of the reason for that, said Manouchehr Takin, a senior analyst with the Centre for Global Energy Studies in London, was that up to 18 million barrels per day (bpd) of oil are shipped through the Strait of Hormuz, accounting for more than 85 per cent of Middle-Eastern oil exports, while only about 3 million bpd or 13 per cent of the region's exports pass through the Gulf of Aden en route to the Mediterranean Sea via the Red Sea and the Suez Canal.

Nearly all oil shipments through the Suez Canal are destined for Europe. The Middle East exports another 2.3 million bpd of crude to North America, with most of that oil coming from Saudi Arabia. Of the UAE's 2.3 million bpd of total oil exports last year, less than 20,000 bpd or 1 per cent were shipped to Europe and the US, according to Opec. The Asia-Pacific region received 97 per cent of the country's oil exports, with Japan being by far its biggest customer.

Still, some analysts feel the international community may not yet have fully grasped the scope of the threat posed by Somali piracy and by lawlessness and the lack of an functioning government or judiciary in the country. "Piracy off the coast of Somalia is growing at an alarming rate and threatens to drastically disrupt international trade," said Roger Middleton, a researcher at Chatham House, an international affairs think tank based in London.

In addition to oil, piracy threatens the flow of Asian goods to Europe at a time of unprecedented economic uncertainty. With oil tankers now a target, it also posed a severe regional environmental threat. Links between pirates and militant networks were a third concern, Mr Middleton said in a report last month. "The danger that international shipping will avoid the Gulf of Aden and that the subsequent increased costs will be passed on to consumers should be of grave concern during a time of economic uncertainty," he said. "The potential environmental damage from a botched attack could be catastrophic and long-lasting. And if the nightmare scenario occurs and Somali pirates become tools of international terrorism, failure to act now will seem very reckless."

Until Saturday's incident, the vast majority of pirate attacks this year had occurred in the Gulf of Aden ? through which about 16,000 vessels pass annually. As a result of the increased frequency of such attacks, insurance premiums for shipping in the waters may already have risen 10-fold in the past year, the Chatham House report said. Ransoms extorted by the pirates have also been rising, and probably lie in the range of $18 million to $30m, Mr Middleton estimated.