The attack on Saudi oil infrastructure

The war that has sharpened the rivalry between Saudi Arabia and Iran

Shahid Javed Burki September 23, 2019
The writer is a former caretaker finance minister and has served as vice-president of the World Bank

Although for Pakistan the Yemen conflict does not have any direct consequences other than the tension it has created in the region, developments related to the brewing — possibly escalating — conflict need to be watched carefully by Islamabad. The war has sharpened the rivalry between Saudi Arabia and Iran. It might also draw the Americans into the conflict, something that became a real possibility after the September 14, 2019 attack on the Saudi oil-processing field. If the war in Yemen causes a major disruption in the supply of oil, the price of this vital commodity could go up. Pakistan, dependent on imported oil and struggling to close the large balance payments deficit, would be badly hurt.

To date, the conflict in Yemen has involved four countries — Saudi Arabia, the UAE, Iran and the United States — that are critical for Pakistan’s relations with the outside world. The Saudis once made an attempt to enlist Pakistan on its side of the conflict. The Kingdom had relied on the Pakistani Army to help it in some earlier crises and Pakistan had a large armed forces contingent stationed in Saudi Arabia. The Pakistani troop deployment was in response to the seizure of the Holy Mosque in Mecca. This time around with power in Islamabad in the hands of civilian politicians, the National Assembly passed a resolution instructing the government and the military to stay out of the conflict in Yemen. Although the Saudis and their closest ally, the UAE, came to Pakistan’s help when Prime Minister Imran Khan took the reins of power, he and his government has also maintained good working relations with its immediate neighbour Iran. It will take some skill to walk this tight rope.

The early morning September 14 attack on the districts of Khurais and Abqaiq caused major damage. Khurais is one of Saudi Arabia’s largest oil fields and is estimated to produce 1.5 million barrels per day. This was the most devastating strike into the Saudi territory claimed by the Iranian-aided Houthis in more than four years of war in Yemen. Abqaiq is the site of the Kingdom’s largest oil processing facility operated by the oil giant, Saudi Aramco. Experts have called Abqaiq a crown jewel of the Saudi oil economy. It not only controls five per cent of the global oil supply but also handles nearly all of its spare production capacity. According to an Aramco statement, production of 5.7 million barrels of crude oil was suspended as a result of the attacks. That represents six per cent of the global supply — a shortfall that could send oil prices sharply higher.

According to a Washington Post report, the blasts struck facilities that are “more than 500 miles from the Houthi-controlled zones in Yemen — raising critical questions about Saudi Arabia’s ability to defend its territory from Houthi missiles and drone attacks with apparent expanding range”.

According to Robert McNally, a former national security aid on energy matters for President George W Bush, the repair time — and the price fluctuations on the oil market — will depend on whether “unique, tailor-made components and support systems were severely damaged. Such a scenario would mean months of work ahead and oil prices possibly spiking toward $100 a barrel”. If that happens, it would be economically disastrous for oil-importing developing nations such as Pakistan. For them, this would be a repeat of the 1970s when a number of oil-importing countries had to borrow heavily to pay for their sharply higher import bill. The international community responded by creating a large facility in the International Monetary Fund to help the indebted countries. Such an action this time around does not seem possible with Donald Trump’s contempt for multilateral institutions.

Saudi Arabia could ease any short-term shortage in the oil market by ramping up production of light, low sulfur crude oil that requires less processing. The Kingdom has about 188 million barrels available in storage, enough to cover Abqaiq’s estimated supply disruption of 5 million barrels a day for 37 days. The United States has also indicated that it is prepared to release supplies from the Strategic Petroleum Reserves in an attempt to calm oil markets. It has 713 million barrels available in this store. These reserves were established after the oil embargoes of the 1970s. They were drawn down during the First Persian Gulf War in 1991, the hit by Hurricane Katrina in 2005 and during the Arab Spring in 2011 when Libyan exports were halted. The world is now better prepared to deal with supply shocks. Only a decade ago, an attack such as this would have sent oil prices soaring. But the oil market has changed significantly. American oil production climbed with the frenzy in shale drilling. The United States now produces 12.1 million barrels a day, a double of that produced in 2012. It imports only 630,000 barrels of oil from Saudi Arabia. Several pipelines to the American Gulf Coast are nearing completion that could result in major export increases.

One indirect consequence of this attack is the planned initial public offering of the kingdom’s national oil company, Saudi Aramco, could be hurt if international investors develop doubts about Saudi Arabia’s ability to defend its vital energy infrastructure. Putting Aramco on the market is a vital part of the Crown Prince Mohammad Bin Salman’s programme to diversify his country’s economy.

The Houthis took responsibility for sending a fleet of ten drones that struck the oil facilities. Washington was also assessing to what extent Iran was involved in the attack. President Trump had an exchange on the telephone with the Saudi Crown Prince in which he “expressed his country’s readiness to cooperate with the Kingdom in supporting its security and stability, stressing the negative impact of the recent terrorist attacks against Aramco facilities on the American economy as well as the global economy,” according to a Saudi readout of the telephone call. The Crown Prince told Trump that Saudi Arabia is “willing and able to confront and deal with this terrorist aggression”. Secretary of State Mike Pompeo called the attack an “act of war”. As he headed to New York to attend the United Nations General Assembly meeting, the American President indicated that he would impose more sanctions on Iran. President Trump seems to leave the ultimate decision in the hands of the Kingdom pointing out that if it was decided to use American assets in response to the attacks, the Saudis would be prepared to compensate Washington. Most commentators found this a surrender of American sovereignty to another country.

Published in The Express Tribune, September 23rd, 2019.

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