Oil and gas producers in the Persian Gulf are looking for alternatives to the Strait of Hormuz - transport via oil pipelines. But Iran could attack them too.
Oil and gas exports from the Persian Gulf are facing new disruptions as the conflict between the United States and Iran intensifies. For both countries, control of the Strait of Hormuz is of key importance. In recent months, Iran has shown that it can control or at least disrupt traffic through the strait, says Guntram Wolf, professor of economics at the Free University of Brussels. "Months of bombing have not taken away Iran's ability to control the Strait of Hormuz," Wolff said.
This week, traffic in the strait came to a near standstill again after Iran attacked tankers and fired drones and missiles at military sites in Bahrain, Kuwait and Jordan. The United States has launched new strikes on Iran and resumed a naval blockade of Iranian ports. It has also revoked a sanctions waiver that allowed Iran to openly sell its oil, which has brought it much-needed cash.
What was the situation before the war?
Before the war began on February 28, the Strait of Hormuz was a toll-free international waterway and the point of departure for about 20 percent of the world's liquefied natural gas, according to the International Energy Agency. It also carries 20 percent of the world’s oil, an average of about 20 million barrels per day over the past few years, according to the U.S. Energy Information Administration.
Flows through the Strait of Hormuz fell to about 14.6 million barrels per day in the first quarter and have fallen further since the conflict escalated. A preliminary ceasefire agreement between the United States and Iran, signed on June 17, brought some relief to shipping, but it is no longer in effect. U.S. forces have struck hundreds of Iranian military targets in recent weeks.
Analysts warn that further attacks on Iran could trigger retaliatory strikes on oil and gas infrastructure in the Gulf, including refineries, ports and pipelines, making the war much more expensive for the entire region and leading to oil shortages. "The limited progress made since the June truce has already effectively collapsed", warned Greek maritime risk management company MARISKS after the escalation in the region. "The likelihood of further escalation remains very high."
The importance of pipelines
Earlier in the war, reports emerged that Iran was charging a fee of almost $2 million per ship to use the waterway. Recently, Iranian authorities demanded that ships use the northern route through Iranian waters. At the same time, the US Navy is escorting ships along a southern route that passes along the coast of Oman, on the other side of the strait. Iran, Iraq, Kuwait, Qatar and Bahrain currently rely on the Strait of Hormuz for most of their oil exports.
Sea transport is the cheapest way to transport oil, but ships are now at the center of the fight for control of the strait, which is why oil and gas producers are looking for alternatives. Some of them, such as Saudi Arabia (East-West Pipeline) and the United Arab Emirates (Abu Dhabi Crude Oil Pipeline), already have export routes that bypass the strait. However, according to the International Energy Agency, these pipelines can only handle a maximum of 8.8 million barrels of oil per day.
New routes, new risks
Since existing pipelines cannot replace the usual volumes passing through the Strait of Hormuz, expanding the capacity of new pipelines is one of the few remaining options. However, such projects take years and are expensive. Moreover, if the pipelines lead to the Red Sea, they could also prove unsafe as the conflict spreads beyond the Strait of Hormuz.
Saudi Arabia’s East-West oil pipeline connects Abqaiq on the eastern coast of the Persian Gulf to the port of Yanbu on the Red Sea. But to reach the Arabian Sea and Asian markets, tankers leaving Yanbu must pass through the Bab el-Mandeb Strait, another narrow waterway that the Yemen-based, Iran-backed Houthis could attack. In addition to creating problems for these ships, it could open a second front in the war and force other ships traveling to the Suez Canal to take a detour around the southern tip of Africa.
However, the United Arab Emirates (UAE) is stepping up its efforts to find alternatives and is reportedly looking to expand existing infrastructure and build a new port and container terminal on its east coast. Several other pipelines in Iraq, Jordan, Kuwait and Turkey are already operational or under construction. However, their capacity is modest and they cannot compensate for the severe disruption of supplies in the Strait of Hormuz.
"All or nothing" for Iran
Citing Saudi Arabia's East-West pipeline and the UAE's Abu Dhabi crude oil pipeline, MARISKS warns that a direct threat from Iran to alternative oil export infrastructure in the Persian Gulf is "perhaps the most significant development" in the current situation. "Iran's message is also clear: either all regional energy producers will be able to export, or none will."
Regardless of what happens next, Iran has shown that it is prepared to raise the economic cost of any attack against it, threatening global energy supplies by blocking key waterways or by massive retaliatory strikes on oil and gas infrastructure in the Persian Gulf.