What happens if Israel intensifies attacks on Iranian energy infrastructure

Countries such as China, reliant on Iranian oil, will probably be affected from such a move, analysts say

Flames rise from an oil storage site after it appeared to have been struck by an Israeli missile in Tehran, Iran. AP

An escalation of attacks on Iran's energy infrastructure could result in a further rise in oil prices, potential supply disruptions and hit countries reliant on Iranian oil, such as China, analysts said.

In the first apparent attack to hit energy infrastructure, Iran partially suspended production at South Pars, the world's biggest gasfield, after an Israeli strike caused a fire there on Saturday, the country's semi-official Tasnim news agency said.

The South Pars field, offshore in Iran's southern Bushehr province, is the source of most of the gas produced in Iran.

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While the ⁠South Pars gasfield and refineries have been attacked, “production continues and the damage is not catastrophic yet, but we could see further escalation and strikes, which could annihilate Iran’s capacity to tap into this energy field”, said Nicolas Michelon, managing partner of Alagan Partners, a Dubai corporate geopolitics consultancy.

The Shahran oil depot in Tehran was also targeted in an Israeli attack, Iran said, but added the situation was under control.

“The Shahran fuel and gasoline depot in Tehran, which is one of the largest gas depots in the city, stores enough fuel for about three days’ worth of Tehran’s fuel needs. This has been hit by Israeli air forces and possibly some sabotage as well by Mossad operatives on the ground,” he said.

The Shahr Rey oil refinery in Tehran, one of the largest in Iran and vital for domestic fuel production, was also targeted.

Fears about potential disruption to the region's oil exports drove up oil prices more than 7 per cent on Friday even though Israel did not attack Iran's hydrocarbon facilities on the first day.

Israel and Iran continued intense bombardments on one another’s territories for the third day, amid growing concerns over a wider conflict in one of the world’s crucial oil-producing regions.

“From what we know so far, Israel’s main targets have been Iranian nuclear and missile facilities and military personnel,” Vandana Hari, chief executive of Singapore-based Vanda Insights, told The National.

“Of course, it could end up deliberately or accidentally also hitting Iranian oil and gasfields and oil storages and export ports. Crippling a major source of the Islamic Republic’s revenues would make it harder for it to rebuild its nuclear and missile capabilities.”

But striking Iranian energy infrastructure may be a red line for the US. Saudi Arabia, the UAE and Qatar had also pressed Washington in October last year to lean on Israel to not target energy infrastructure for fear that their own sites may come under a retaliatory attack from Tehran, she added.

“I expect [US President Donald] Trump to intervene more assertively if he sees the Israel-Iran attacks starting to encroach on Iranian or regional oil infrastructure, as that could well be the tipping point for a wider regional conflagration and he is loath to higher oil prices.”

Mr Michelon said potential future targets may include the Kharg oil terminal, which is where about 90 per cent of Iran’s oil exports leave the country, mostly to China; the Abadan refinery, which produces fuel for about 25 per cent of Iran’s domestic needs; and ⁠Mahshahr oil terminal, which is one of the country’s main distribution hubs.

Flames emerge from an Israeli attack on the Shahran oil depot in Tehran. Reuters

If Israel strikes these sites, it would “seriously disrupt” both domestic supply and global exports. It would cut off Iranian energy exports from crucial markets such as China, he warned.

Further attacks to Iran’s energy infrastructure could also have a direct impact on energy supply chains, Mr Michelon said.

“We must also consider the Strait of Hormuz, which is a critical chokepoint for global oil and gas trade. It could be threatened if Iran decides to retaliate by trying to block traffic,” he said.

Cascading impact

If the attacks on Iran’s energy infrastructure continue and aggravate, that could also have a cascading effect on countries reliant on Iranian oil, particularly China. About 90 per cent of Iranian oil ends up in China, he said.

Naeem Aslam, chief investment officer at Zaye Capital Markets, said the playbook points to Iran targeting Israeli energy infrastructure next. Oil prices could breach $120 if energy infrastructure gets hit, he added.

Robert Mogielnicki, a senior resident scholar at the Arab Gulf States Institute, agreed that any escalatory actions affecting regional oil infrastructure and crucial energy trade routes could pressurise oil prices.

Striking Iranian energy infrastructure may be a red line for the US

Vandana Hari,
chief executive, Vanda Insights

“Iran’s oil facilities remain a potential target of future Israeli strikes in what [Israeli Prime Minister Benjamin] Netanyahu said could be a multiday battle. Any disruption to Iranian oil infrastructure would directly impact Iran’s domestic fuel supply chain and Chinese customers, which are the primary buyers of Iranian crude oil exports,” he said.

“If the Israeli attacks provoke a steep rise in global oil prices, it will be felt far beyond Tehran and Beijing.”

Mukesh Sahdev, global head of commodity markets – oil at Rystad Energy, said Iran itself is not the central issue; rather, it's caught in the “geopolitical crossfire” between the US, Russia and China.

The key to watch is how Russia and China respond, rather than Iran itself, he added.

US President Donald Trump and Russian President Vladimir Putin discussed the escalating crisis in a roughly hour-long phone call on Saturday. During the call, the Russian leader condemned Israel’s military operation against Iran and voiced serious concern over a potential escalation that could have “unpredictable consequences for the entire region”, Russia’s Tass news agency reported.

However, the oil market overall is very supply resilient today, according to Norbert Ruecker, head of economics and next generation research at Swiss bank Julius Baer.

Storage is ample in the western world and especially in China, which built extensive oil inventories over the past decade.

Petro-nations such as Saudi Arabia also have plentiful spare production capacity, exceeding 5 per cent of global output, which they just began to bring back to the market, Mr Ruecker said.