The idea of researching and writing on this topic came to me on a trip I made after speaking at an international energy conference in Ras Al-Khaimah (UAE) in early October. Instead of joining an optional technical visit, I decided to cross into Oman’s Musandam Peninsula where pods of dolphins make regular appearances offshore Khasab. However, to avoid disappointment, I lowered my expectations of spotting any large marine species. The odds were that the 30-nation, US-led joint international mine-sweeping drills that took place in the Strait a week before might have scared them away.
The drills were a response to repeated warnings by Iran that it would consider further tightening of economic sanctions or an attack on its nuclear facilities as a casus belli justifying the disruption of maritime traffic through Hormuz. Punctuated with missile tests and naval maneuvers, such threats have unsettled global oil markets and sparked speculation regarding the likelihood and potential consequences of them being carried out.
The Strait of Hormuz is a vital waterway for the world’s supply of oil as well as liquefied natural gas (LNG). It is a narrow channel – 21 nautical miles (39 km) at its choke point – between Oman and Iran. Ships use two lanes, one in each direction. Within the Strait proper, in Omani waters, each lane is two miles wide and both lanes are separated by a two mile buffer. As the lanes progress into the Gulf and cut through Iranian waters they become wider with a larger buffer.
Data on major trade movements from the BP Statistical Review of World Energy (June 2012) suggest that the volume of crude oil and oil products that transited through the Strait in 2011 was close to 17mn b/d, accounting for 31% of global oil trade. Much less sizable, but equally important proportionally, LNG volumes amounted to the oil equivalent of 2mn b/d representing 33% of world LNG trade.
As far as oil is concerned, existing alternatives to Hormuz via pipelines involve Saudi Arabia, Iraq and the UAE. This leaves Iran, Kuwait, Qatar and Bahrain without any other option. Likewise, Qatar and the UAE have no substitute routes for LNG exports.
Saudi Arabia has long been operating the Trans-Arabian Petroline system running east-west to the Red Sea. The system, which consists of the Abqaiq-Yanbu’ twin-pipeline and storage facilities, has been upgraded several times to its current capacity of 5.1mn b/d of crude oil. Assuming throughput at about half of capacity, an unused 2.5mn b/d is probably being kept as reserve capacity. Also on standby is the 1.65mn b/d IPSA (Iraqi Pipeline Trans Saudi Arabia), which has recently been reconditioned to carry crude oil again. IPSA was laid across the kingdom in the 1980s during the Iraq-Iran war. Later, it changed ownership to the Saudis who converted it to transport natural gas.
Less significant for the moment is Iraq’s export route to the Mediterranean through the Kirkuk-Ceyhan system. While the nominal capacity of the twin pipeline is 1.6mn b/d, currently the smaller line is operated at a throughput of about half its 0.6mn b/d capacity. The major 1mn b/d line cannot be filled unless repairs are made, and the same applies to the reversible strategic north-south pipeline.
Finally, the UAE has just put in operation the long-delayed 1.5mn b/d Abu Dhabi Crude Oil Pipeline (ADCOP). ADCOP links Abu Dhabi’s onshore oil facilities in Habshan to Fujairah’s new oil terminal on the Gulf of Oman.
Therefore, while the combined operating capacity of the alternative routes is some 8.85mn b/d, spare capacity – taking into consideration both unused capacity and capacity additions made in 2012 – is just a little more than a third of the volumes that transited the Strait in 2011. The amount of oil being pumped through the pipelines can be raised by using drag-reducing agents or so-called ‘flow improvers.’ Even so, it is hard to argue that currently available alternatives are enough to alleviate the impact of a crisis in the Strait.
In the event of such a crisis, Saudi Arabia’s spare production capacity would obviously be useless. Therefore the International Energy Agency (IEA) would have to shoulder the burden of dealing with the aftermath alone. Balancing the market would be even more challenging as 85% of the oil and 50% of the LNG being shipped though Hormuz is bound eastward, where key non-IEA members such as China, India, Indonesia and Thailand may not have built up sufficient strategic petroleum stocks. In a statement early this year, the IEA did reaffirm its preparedness to respond to any major oil supply disruption. It remains to be seen what this response would entail and what affect it would have in a market gripped by panic. ¶
*Mr Ali Aissaoui is Senior Consultant at APICORP. This article is published concurrently in APICORP’s Economic Commentary dated November 2012. The views are those of the author only. Comments and feedback may be sent to: [email protected].
