Dependence on the Strait of Hormuz is unlikely to end despite plans to build pipelines, say analysts, as the narrow channel will remain critical for container shipping and transporting natural gas.
US Treasury Secretary Scott Bessent on Monday said that the strait “will be a worthless piece of water” in two years, once new pipelines are built that will help Gulf countries bypass it to transport oil to global markets.
He estimated that up to 70 per cent of the energy that usually went through the waterway would end up in pipelines.
His come as Gulf countries and Iraq invest heavily in building pipelines while the Strait of Hormuz remains shut. Before the regional conflict, more than 20 per cent of global energy trade was shipped through the strait.
Salih Yilmaz, senior energy analyst at Bloomberg Intelligence, told The National:“Oil has meaningful alternatives that can expand relatively quickly but LNG and container shipping are much harder to replicate, which means the strait is likely to remain strategically important well beyond the next two years.”
Only a few ships are crossing the strait daily, amid attacks by Iran's Islamic Revolutionary Guard Corps, compared to more than 100 a day before the war began more than six months ago.
New pipelines
The UAE, the Arab world’s second largest economy, and Iraq, Opec’s second biggest producer, have unveiled plans for pipelines to bypass the Strait of Hormuz. The UAE is expanding the 360km Habshan–Fujairah pipeline to double its export capacity from its current levels of 1.5 million barrels per day of crude oil. The project is expected to be completed by next year.
Iraq and Syria are working together to revive a pipeline that was damaged during the 2003 US-led invasion. The pipeline connecting Kirkuk in Iraq to Baniyas in Syria is expected to have an initial production of two million bpd of crude oil.
Another pipeline, linking Basra to Haditha with a capacity of 2.5 million bpd, is also being built in Iraq to give it an alternative route to export crude.
Saudi Aramco, the world's largest oil exporting company, is studying an expansion of its East-West pipeline and the establishment of new export routes as the “maritime blockade” by Yemen's Houthi rebels squeezes access through the Red Sea.
The new pipelines give “the region substantial optionality, but it still falls well short of fully replacing the roughly 20 million barrels a day of oil and products that normally transit Hormuz”, Mr Yilmaz said.
Saudi Arabia's East-West pipeline can move around 7 million bpd to the Red Sea, but together with the UAE's 1.5 million bpd through Fujairah they do not make up even half of the strait's normal flow.
There are alternatives for container traffic too, but they are “less efficient and much harder to scale”, he added.
Following the outbreak of war on February 28, cargo has been redirected to ports in Oman and the UAE outside the Strait, and then moved overland by lorry.
“These routes can provide resilience for some trade, but they cannot replicate the capacity, economics or convenience of major Gulf ports such as Jebel Ali,” Mr Yilmaz added.
No alternative route for LNG
For LNG exports, however, the Strait of Hormuz is harder to replace. Qatar’s Ras Laffan LNG facilities sit inside the Gulf, so virtually all seaborne Qatari LNG destined for global markets still needs to transit the strait.
Unlike crude, there is no existing pipeline network capable of rerouting those LNG exports to an alternative coast at anything close to current volumes. That is why LNG remains one of the most structurally exposed parts of the Gulf energy system.
“Geography is destiny and the Strait of Hormuz is too critical an artery to be completely bypassed,” said Sasha Foss, energy markets analyst at Marex. “Its importance will [only] be diminished as alternatives are found such as more oil and gas from the Americas.”
The latest comments from Mr Bessent “should more be seen as a negotiation posture and are consistent with the US administration’s successful campaign of 'jawboning' the market – talking it down,” Mr Foss said.
“The comments are unlikely to move the market in any meaningful way as it relates to two years out. Furthermore, the comments are unlikely to stand the test of time – the Strait of Hormuz will not be a worthless piece of water,” he added.
Oil remained volatile on Wednesday following a 4.6 per cent surge on Tuesday as renewed fighting between the US and Iran fuelled concerns about increased disruption through the strait.
Brent, the benchmark for two thirds of the world's oil, fell 0.3 per cent to $94.37 a barrel at 3.40pm UAE time. West Texas Intermediate, the gauge that tracks US crude, was trading 0.7 per cent lower at $89.68 a barrel.
Oil prices rose in the morning as the US and Iran exchanged fire in a new escalation overnight. American forces struck military targets near the strait and Iran launched missile and drone attacks towards US-linked sites in Bahrain, Jordan, Iraq and Kuwait.
“Middle East commodity producers are building alternative routes that circumvent Hormuz. However, newly expanded pipelines and ports might prove equally vulnerable to drone and missile attack [disrupting supplies],” said Hasnain Malik, head of geopolitical risk and emerging markets equity strategy at Tellimer.
