Abu Dhabi, UAEThursday 22 March 2018

Robin Mills: Oil pipeline plan can relieve pressure in Saudi-Iran row

Suggestions have been made to expand the capacity of the Saudi oil pipeline to the Red Sea, or to build a new export route to the developing port at Duqm on Oman’s south east coast.

In the space of 36 hours, eight ships were hit in the Arabian Gulf. A Japanese tanker containing oil from the UAE was attacked by Iranian gunboats, and two ships were struck by Iraqi air attack.

In response to the escalation, war risk insurance premiums jumped 50 per cent, France sent three minesweepers to the Gulf of Oman, and the US president was asked if he would invoke the War Powers Act last used in 1941 weeks after the Japanese attack on Pearl Harbour, after which the US entered the Second World War.

This upsurge in fighting in the Gulf came in 1987, during the Tanker War phase of the Iran-Iraq conflict. Now the latest Saudi-Iranian rift has raised concerns that the proxy conflicts in Iraq, Syria and Yemen might spill over into direct fighting or threats to energy infrastructure. Analysts have pointed to the perennial Iranian threats to close the Strait of Hormuz, which carries a third of seaborne oil trade.

The oil markets seem oddly unimpressed by the situation. Prices have actually fallen, to 2004-level lows, partly on Chinese economic wobbles, partly on calculations that the diplomatic fracas eliminates even the slim chance that Tehran and Riyadh would agree on Opec production cuts, and partly on the prospect of Iran’s oil returning now that sanctions are being lifted.

High production and ample worldwide stocks cushion any disruption, but usable spare capacity is unusually thin, and all concentrated in the Gulf countries. The theory – a nice one, needing practical demonstration – is that higher prices would encourage US shale output to rebound.

The practical threat to Hormuz is clearly overstated. Iran could not physically block the 21-mile wide channel. Military experts suggest mines and missiles could obstruct shipping for at most a few weeks, and would trigger a devastating GCC and US counter-response. All of Iran’s oil shipments must pass through Hormuz, while Saudi Arabia and the UAE can send much of their exports via bypass pipelines.

But escalation in this confrontation, by either side, may come in subtler form than firing missiles at tankers – stepped-up inspection of ships, a cyberattack, a deniable act of sabotage, blockade of a port by a local community. Tempting Tehran into a rash retaliation that would halt its nuclear cooperation would remove a major source of this year’s expected gain in oil exports.

Kuwait, Qatar and Iraq (excluding its Kurdish region) depend entirely on the Gulf route for their oil exports, as does Qatar for its liquefied natural gas. This makes them susceptible to individual pressure.

Suggestions have been made to expand the capacity of the Saudi oil pipeline to the Red Sea, or to build a new export route to the developing port at Duqm on Oman’s south east coast. Either of these could be linked to other GCC countries. Iran, too, has repeatedly talked of constructing a pipeline to its Arabian Sea port of Jask, with little action.

Strategic storage of some oil in tanks outside the Gulf ensures that sellers can continue to meet their customers’ needs during a short disruption. Better road and rail links can also be used for vital imports into the Gulf of food and other items.

Such projects are inexpensive compared to the costs the oil-exporting countries, and their customers, would suffer in the event of even a limited stoppage. However, with budgets currently squeezed, there may be limited appetite for Gulf governments to finance them. Outside funding – most obviously from China’s One Belt, One Road initiative – may be an answer.

Such projects are not simply about laying steel. They need regulations and institutions – who can use these pipelines, who would share the costs, and what emergency would trigger their use? GCC cooperation has already proved elusive in matters such as a common gas network.

Concrete plans for such contingencies avoid panic, and discourage moves by hotheads. That can give time for cool diplomacy to work, the best remedy to unlikely but devastating threats to the region’s energy security.

Robin Mills is head of consulting at Manaar Energy, and author of The Myth of the Oil Crisis.


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