The Saudi oil pipeline the world didn’t know it needed

DUBAI – Saudi Arabia had prepared and planned for the worst-case scenario for decades. So within hours of the first US and Israeli strikes on Iran, which resulted in the effective closure of the crucial Strait of Hormuz waterway, the world’s biggest crude exporter rolled out a contingency plan – one that had waited 45 years to come to fruition – to keep its oil flowing.

The cornerstone of that plan is a 1,200km pipeline, built in the 1980s, which has become a pivotal character in Running the breadth of the Arabian Peninsula from Saudi Arabia’s massive oil fields in the east of the country, the East-West pipeline empties out at the port of Yanbu on the Red Sea – a modern industrial city where a huge flotilla of oil tankers is massing to load Saudi crude, with more vessels arriving every day.

State-owned oil giant Saudi Aramco now faces the test of how quickly and sustainably it can ramp up flows through the new route. Crude exports from Yanbu hit a five-day rolling average of 3.66 million barrels on March 20, according to ship-tracking data compiled by Bloomberg, around half of Saudi Arabia’s pre-war total. On March 18, loadings were briefly halted following an Iranian attack, a reminder that flows can be uneven in such a volatile environment.

The pipeline route offers a vital release valve to the pressure building on global oil supplies. About 20 million barrels, one-fifth of global consumption, normally flow through Hormuz on a daily basis. With no outlet for their barrels, producers have had to reduce output. However, Saudi Arabia, which has long framed itself as a stabilising force in the market, has a substantial workaround.

“The East-West pipeline is looking like a strategic masterstroke right now,” said Dr Jim Krane, the Wallace S. Wilson Fellow for Energy Studies at Houston’s Rice University. “The entire global economy is better off with the line in operation.”

Dr Krane added: “Were it not for this seamless Hormuz bypass, there’d be even more desperation in Donald Trump’s calls for allied help.”

On March 21, the US President issued Iran a 48-hour ultimatum to unblock Hormuz or face attacks on its power plants. Tehran responded with a threat to strike US and Israeli infrastructure – including energy assets – in the region.

A by-product of an earlier conflict – the Iran-Iraq war in the 1980s – the pipeline has come into its own since the start of March. Aramco, which prides itself on high-tech drilling, complex processing and a logistical machine spanning the globe, is now reliant on something a little more low-tech to keep its business running. The East-West pipeline has fed a surge in crude exports from the port of Yanbu, which have risen more than fourfold from pre-war levels of below 800,000 barrels a day, as Aramco rushes oil to market.

Aramco began contacting customers as soon as war broke out, asking if they would divert their vessels to Yanbu with Hormuz now impassable. Saudi tanker giant Bahri began making similar requests of shipowners. By March 4, Aramco confirmed that it had begun ramping up operations on the pipeline. Within days, a major Indian refiner snapped up cargoes from Yanbu, the first sign that the workaround was gaining traction.

By March 10, a flotilla of at least 25 supertankers was heading to Yanbu. It is not a cheap operation – people active in shipping markets said Bahri was paying rates of US$450,000 (S$578,000) a day and more to amass enough vessels to service the Red Sea port. Yet each day, the number of ships pointing at Yanbu continued to climb, a sign the kingdom was flexing its logistical might. At times last week, the port was loading more than four million barrels of oil a day as the number of waiting tankers continued to grow.

“The mere existence of an alternative route helps calm markets by reassuring buyers that not all the region’s exports are trapped,” said Dr Carole Nakhle, chief executive of energy consultant Crystol Energy. “That said, it’s not a risk-free alternative. If Yanbu and the East-West system were to come under sustained pressure, that would mark a serious escalation.”

Iran’s strike on the Samref refinery in Yanbu – a joint venture between Aramco and US oil major Exxon Mobil – on March 18 highlighted the threat. It came a day after Israel struck Iran’s biggest natural gas production and processing infrastructure, which prompted Tehran to attack energy sites across the Gulf in retaliation.

Saudi Arabia’s Red Sea option is not without danger, especially for voyages to Asia. Some vessels sailing to and from Yanbu will still have to navigate the Bab el-Mandeb Strait, where Houthi militants only recently paused missile, drone and small arms attacks that had plagued shipping for about two years. The shipping lane is a vital link on the trade route between the Mediterranean and Asia.

“The Houthis now have a veto on Saudi oil exports via the Bab el-Mandeb,” Rice University’s Dr Krane said. “If they decide to back Iran by shutting another critical choke point, oil markets will gyrate even more wildly.” BLOOMBERG