“Battles, campaigns, and even wars have been won or lost primarily because of logistics,” observed Dwight D Eisenhower, not a great field commander but an outstanding military leader. The Gulf countries are not combatants in this war. But how they manage their energy logistics is crucial to coming out of the crisis safely.
The UAE, Saudi Arabia, Qatar, Bahrain and Kuwait have all seen direct Iranian attacks against their energy industries – tankers, oil storage, refineries, rigs, offshore platforms, and liquefied natural gas plants. So far, damage appears not too serious, but disruption is considerable.
On Saturday night, Israel attacked oil depots around Tehran, causing large fires and explosions, a dangerous escalation to deliberate destruction of energy sites, raising the possibility of Iranian retaliation.
Already, nearly all ship transit out or into the Gulf has stopped. As oil and LNG tanks fill up, production has to be cut back. This happened first in Iraq; Qatar last Monday, then Kuwait on Saturday, announced they were reducing output too.
It is not surprising that the amateurs directing this US war failed to think of Gulf energy logistics. There were hard-edged warnings that Iran and allies would attack petroleum infrastructure and transit: the 2019 drone and missile strikes against Saudi Arabia’s Abqaiq oil processing plant, and the successful near-blockade of the southern Red Sea by Houthi forces in Yemen from October 2023 onwards. The Red Sea episode made it clear that most shippers would not risk sailing into a war zone, even if only a few vessels were actually sunk or damaged.
In contrast, Kuwait Petroleum Corporation, Saudi Aramco and Adnoc all anticipated as far as possible this conflict by moving oil into storage in logistical hubs such as Egypt, or near customers in Japan and South Korea.
Outside attention has focused so far mainly on the threat to global crude oil supplies, and to some extent LNG.
Saudi Aramco has begun shifting exports through its east-west pipeline to the Red Sea port of Yanbu. That is a valuable alternative, but faces logistical constraints. After supplying nearby refineries, it might be able to sustain up to 5 million barrels per day of exports, most but not all of prewar exports of about 7 million bpd.
For LNG from Qatar, there is no way out. QatarEnergy declared force majeure on Wednesday, giving it the legal right to halt contracted sales due to reasons beyond its control. Beyond the drone attack on the Ras Laffan complex, it has no choice but to shut down, as its storage was rapidly filling up. Qatar also stopped industrial production from gas at its urea, methanol, polymers and aluminium facilities.
Qatar’s gas production comes with large volumes of associated hydrocarbon liquids, normally a valuable product. Its two refineries have capacity of 439,000 barrels per day, but it would normally produce about 1.3 million barrels per day of condensate and natural gas liquids. It needs to keep some gas production going to supply domestic power generation. It is therefore essential that it can continue handling even a reduced amount of associated liquids.
Adnoc, meanwhile, is pursuing a flexible, case-by-case approach. Using a detailed crisis playbook integrated with AI, the company aims to work with its customers to find solutions. This includes using its alternative export routes that bypass the Strait of Hormuz, deferring deliveries, sourcing products from its extensive trading network, or drawing on storage outside the Gulf.
A company statement issued on Saturday notes Adnoc is “carefully managing offshore production levels to address storage requirements”.
Refining is another complex juggling act. The Gulf is a key supplier of refined products to other regions, particularly jet fuel and diesel to Europe, and naphtha, a light petrochemical feedstock, to Asia. Even Oman’s big new Duqm refinery, well outside the Gulf, relies on crude from Kuwait for a large part of its inputs. Prices for refined fuels in Asia have soared, with diesel $41 per barrel more expensive than Brent crude oil – itself at $93 per barrel – and jet fuel nearly $57 above Brent.
If Gulf refineries cannot export their output, and not all is consumed domestically, they have to cut back. Refineries cannot run at arbitrarily low levels – they might be able to reduce throughput to, for example, 60 per cent of maximum, but not below that without stopping entirely. They also take days to restart. The interruption in regional air travel, as in the Covid era, threatens a surplus of jet fuel output relative to products such as petrol and diesel more needed at home.
From the point of view of domestic requirements, the timing of this crisis is not as bad as it could have been. Temperatures across the Gulf are still moderate; air conditioning requirements not that high. Yet Iraq already suffered a massive blackout, apparently triggered by a stoppage of associated gas production as oil output was cut back, which in turn led to an abrupt shutdown of the Rumaila power plant near Basra.
The Gulf countries’ electricity systems are more robust. They are also interconnected, allowing for some sharing in emergencies. Apart from Qatar, all rely on large amounts of associated gas – a by-product from oil – to run power generation. Desalination also depends on gas, directly or indirectly.
If oil production has to be scaled back, and as electricity demand rises into the summer, they could face some tough choices between shuttering industries or rationing power. Kuwait looks particularly vulnerable, as it imports large volumes of LNG in normal times, and saw strains in its power generation even last year.
The UAE has the advantage of its large nuclear and solar generation. Solar power with batteries can be built quickly; there are a few months before summer in which all the Gulf countries might urgently install some extra solar power.
The unprecedented demands of this conflict will reveal new, unexpected strains in the energy systems throughout the region. Combining tested plans with ingenuity and improvisation can create solutions for both international customers and national residents. The Gulf countries did not ask for this war, but they will keep their energy systems functioning as long as it takes.
