After a Saudi oil processing facility came under attack, attention turned on the immediate effect this could have on oil prices. But the worry should be more over the medium term than the short term, writes Robin Mills.
Robin Mills is the CEO of Qamar Energy and author of “The Myth of the Oil Crisis.” He contributed this op-ed for the Syndication Bureau, an opinion and analysis article syndication service that focuses exclusively on the Middle East.
As the fires still burn at Saudi Arabia’s giant Abqaiq oil processing plant, attention has turned to the immediate impact on oil prices. The missile or drone attack, blamed by the US on Iranian allies in either Yemen or more likely Iraq, has temporarily knocked out half of the kingdom’s oil processing capacity. But more important than the near-term effect is what the attack reveals about the outlook for the conflict between Saudi Arabia and Iran.
The strike is the latest in a series against Saudi and UAE petroleum assets. But the previous incidents were more in the way of calibrated warnings: slight damage to four ships at the UAE port of Fujairah, drone attacks on the Saudi east-west pipeline in May and explosions on two tankers in the Gulf of Oman in June. Missiles from Houthi forces in Yemen have struck other non-oil facilities, such as airports. But the size, sophistication and target of this attack represents a major escalation, and the first really to shock world oil markets.
Abqaiq is the largest single oil-processing facility in the world, with capacity to handle up to 7 million barrels per day – from the Abqaiq field itself, from Ghawar, the world’s largest conventional field, from Shaybah and from Qatif. (Total Saudi capacity is 12.5 million bpd.) Abqaiq is the starting point for the Petroline pipeline to Yanbu on the Red Sea coast, an alternative to the Gulf as an export route. A significant amount of Saudi gas production has also been knocked out by the strikes, which will lead the country to burn more oil – perhaps an additional 300,000 bpd – to meet electricity demand for summer air-conditioning.
Along with attacks on three of the 300,000 bpd processing trains at the Khurais field, 5.7 million bpd of production has been cut. Energy Intelligence reports that Aramco hopes to soon bring 2.3 million bpd back, and add 250,000 bpd of output from the offshore fields, of which the three largest, Safaniya, Zuluf and Manifa, have a combined capacity of 3.025 million bpd. Aramco can also supply customers for a while from its large inventories, held at home and in locations such as Egypt, Rotterdam and Okinawa.
Speculation initially raged as to the impact on oil prices – some suggesting gains of a few dollars, some $10-15 per barrel, others that prices could rise into triple digits with a lengthy outage. But if this attack had to come at all, it comes at a relatively benign moment. The OPEC+ deal means that Saudi, other Gulf and Russian spare capacity is high. US shale growth has been slipping, but the promise of higher prices would revive it. The International Energy Agency may well coordinate a release from strategic stocks held by its members, while now would be a good time for China to bring onshore some of the Iranian crude held in bonded storage. Traders have been worried more about demand and a possible recession than about supply.
This is a far cry from 2008, when markets were very tight and there was supposed to be a geopolitical “risk premium” of $10 or more in oil prices, even though the Middle East political situation was less threatening than it is today.
The worry should be more over the medium term than the short term. As the key node in the kingdom’s oil industry, Abqaiq was heavily guarded with multiple rings of defences, and with redundancy of key units and stockpiling of spares. It easily repelled an Al Qaeda vehicle attack in 2006. But this protection has proved ineffective against aerial attack. And it questions the wisdom of concentrating so much processing capacity in one place, however fortified.
Though Abqaiq is the most important, there are dozens of other critical industrial targets across the kingdom: gas-oil separation facilities, export terminals, oil tankage, refineries, petrochemical plants, power stations and desalination plants that provide half the country’s drinking water. Hundreds of offshore oil and gas platforms are even more vulnerable, exposed also to submarine drones, particularly in the case of an overt clash with Iran. The UAE, Riyadh’s partner in the war against the Houthis, has similar vulnerabilities, perhaps more so given its dependence on international business, tourism and trade. Large Saudi expenditure on armaments and internal security forces, and the beefing up of American forces in the Gulf, has proved ineffective to ward off such drone, missile and naval attacks.
This dangerous attack has been roundly condemned. Fortunately, no one was killed. But morality is one thing, realpolitik another. From the Iranian point of view, it is retaliation for US sanctions, backed by the Saudis, that have eliminated most of Tehran’s oil exports – a more severe blow than that suffered by Saudi Arabia on Saturday. The Iranians underestimated how far the US could bully unwilling allies into compliance, and how little Russia and China could and would do to help them out. But it is hard to say they miscalculated, as post the American abandonment of the JCPOA nuclear deal, they have not been presented with an offer capable of acceptance.
The US-Saudi axis, on the contrary, has clearly miscalculated, thinking they could take actions at a time and place of their choosing without the risk of response. Repeatedly, Iran has shown an ability to throw them off balance. Untethered from the global market, constraints on Tehran have been broken.
Of course, the question of why now invites speculation. Following the sacking of the US national security advisor, John Bolton, is Iran escalating again to de-escalate, or have the hardliners chosen to slam the door on diplomacy?
This does seem like a vulnerable moment in Riyadh. The new Saudi oil minister, Prince Abdulaziz bin Salman, was tasked with accelerating the share listing of Aramco, now thrown into renewed doubt. He had only last week cajoled Iraq and Nigeria into promising better compliance with OPEC production cuts. Now they, Russia and the OPEC allies of the UAE and Kuwait have an excuse to resume all-out pumping.
Retaliation will expose further Saudi vulnerabilities, and risk spiking oil prices and economic downturn ahead of the US election campaign, in a crisis many would see as Trump’s fault. Further offers of negotiation or sanctions waivers would look weak. Even if there are no further attacks for a while, the memory will linger. Riyadh’s strongest weapon, its oil industry, has been shown also to be its Sword of Damocles.