x Abu Dhabi, UAE Thursday 20 July 2017

Saudi Arabia reopens Iraq pipeline to bypass Gulf shipping lanes

Riyadh will have scope to export more of its crude from Red Sea terminals should Iran try to block the Strait of Hormuz.

DUBAI // Saudi Arabia has reopened an old oil pipeline built by Iraq to bypass Gulf shipping lanes, giving Riyadh scope to export more of its crude from Red Sea terminals should Iran try to block the Strait of Hormuz, industry sources say.

The UAE has built its own pipeline to bypass the strait, which is due to start exporting from the Gulf of Oman next month.

The Iraqi Pipeline in Saudi Arabia (IPSA), laid across the kingdom in the 1980s after oil tankers were attacked in the Gulf by both sides during the Iran-Iraq War, has not carried Iraqi crude since Saddam Hussein invaded Kuwait in 1990.

Saudi Arabia confiscated the pipeline in 2001 to compensate for debts owed by Baghdad and has used it to transport gas to power plants in the west of the country in the last few years.

In January, Iran threatened to block the Strait of Hormuz in retaliation for US and European sanctions that have targeted its oil revenues in a bid to stop Tehran's nuclear programme.

A European Union ban on Iran's oil starts on Sunday and Israel has threatened military action against Iranian nuclear facilities if Iranian talks with western powers fail to stop uranium enrichment.

Saudi Arabia has now quietly reconditioned IPSA to carry crude, test pumping along the line over the last four to five months, according to sources.

"The testing started because Saudi Arabia wanted to secure alternative routes to export oil," said an industry source in Saudi Arabia.

Western industry sources said the tests through the 1.65-million barrel-a-day line had delivered into storage facilities at Mu'ajjiz near Yanbu on the Red Sea for at least four months.

More than a third of the world's seaborne oil exports pass through the narrow Strait of Hormuz from the oilfields of Saudi Arabia, Iran, Kuwait, Iraq, the UAE and Qatar. Qatar's liquefied natural gas exports are all shipped through Hormuz.

Worried about its reliance on Gulf shipping, Saudi Arabia in 1992 increased its capacity to pump from oilfields predominantly clustered in the east across the country to the Red Sea to about 5 million barrels a day (bpd) through two parallel pipelines known as the Petroline.

Saudi crude exports run as high as 8 million bpd but rising demand for its crude in Asia, shipped out of the Gulf, and falling demand from Europe, usually sourced from Red Sea ports, meant Petroline's pumping capacity was never fully utilised.

The smaller Petroline pipeline was converted to carry natural gas from the east to booming industrial centres in the west a few years ago, slashing Saudi Arabia's east-west crude transport capacity to Red Sea ports.

Saudi Red Sea industries are now reliant on gas fed from fields over 1,000 kilometres away and the prospect of cutting them off to export crude through Petroline during a Gulf shipping blockade is not an attractive option.

Until recently the Saudi government had considered the risk of such a disruption in the Gulf too small and its western gas needs too great to switch Petroline fully back to oil.

But as tensions over Iran's nuclear programme increased, Riyadh decided to put IPSA on standby to transport more crude west in an emergency.