Aramco unlikely to reduce oil exports to West after Houthi attack, analysts say

Oil producer has alternative channels to transport crude to its customers in Europe

Saudi Aramco's Ras Tanura oil refinery and oil terminal in the Arabian Gulf. Attacks on energy firms in 2012-13 sent shockwaves through the industry. Reuters 

Saudi Aramco, the world's biggest corporate oil producer, will unlikely reduce its exports to the West following the suspension of its crude shipments through the Bab Al Mandeb strait in the Red Sea, in the wake of attacks on Saudi crude carriers by Iranian-backed Houthi rebels in Yemen, analysts said.

The state-owned company has alternative channels to deliver oil to its customers in Europe and can always use the more expensive and longer route around the Horn of
Africa if needed.

“Overall Saudi export volumes should not be reduced by this decision, although there will be some short-term disruptions and the announcement has created concerns in the crude market and related areas such as shipping insurance,” said Richard Mallinson, an analyst with consultancy Energy Aspects in London.

Aramco announced this week it was temporarily halting shipping oil though the Red Sea choke point after Houthis attacked two very large crude carriers on Wednesday, each with a capacity of 2 million barrels and operated by Saudi shipper Bahri, causing minor damage but no injuries to crew.

Aramco said on last Thursday, it took the decision to halt exports through the waterway to protect its crew and avoid oil spills, adding it would continue to assess the situation.

With a width of 28.9 kilometres at its narrowest point, Bab Al Mandeb is an important route for oil tankers coming from the Arabian Gulf heading to the Suez Canal or the 322km-long Sumed pipeline that transports oil through Egypt from the Red Sea to the Mediterranean Sea, according to the Energy Information Administration of the US.

Around 5.8 million barrels per day of crude and refined products were transported through Bab Al Mandeb in 2016, mainly headed to Europe and the United States, up from 3.3m bpd in 2011, according to the EIA.

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"Should the suspension continue much longer, they can either pipe those volumes from eastern Saudi through their East/West pipeline to Yanbu (refinery on the Red Sea), instead of shipping them from Ras Tanura through the Bab Al Mandab, which has significant capacity of around 4.8 million bpd, and then either export through the Suez Canal or through the pipeline from their storage facility in Egypt," said Iman Nasseri, managing director – Middle East at Facts Global Energy in London.

In 2016, Asia accounted for 66.7 per cent of Aramco’s total crude exports and 46 per cent of refined products, while north western Europe made up 5.9 per cent of crude exports and 11.9 per cent of refined products and the Mediterranean 5.4 per cent for crude and 9.5 per cent for refined products, according to Aramco figures.

"The short-term impact will mean Saudi barrels exported to the West will be marginally more expensive," said John Stewart, a principal analyst at consultancy Wood MacKenzie. "The closure of the Bab Al Mandeb route means exported barrels either have to take the longer shipping charter or utilise the East-West Petroline (in Jeddah on the Red Sea). Any additional costs as a result of the closure will likely be covered by Saudi Aramco. We do not expect a significant decrease in Saudi exported volumes."

Saudi Arabia ships around 500,000 bpd through Bab Al Mandeb, mainly to Europe and another about 400,000 bpd goes through the waterway to Saudi refiners on the Red Sea, Mr Mallinson said.

“The volumes impacted, while significant, are low compared to combined Saudi exports to Asia and the US, which are close to 6 million bpd,” he said. “Shipments to Europe can be diverted around Africa, but this adds around two weeks of sailing time and extra costs based on prevailing freight rates. In recent months, Saudi Arabia appears to have built up stocks in Ain Sukhna, Egypt, which it may use to keep European customers supplied in the interim.”

The impact may be felt mainly in the Red Sea refineries that are fed with crude transported by ships. “Saudi Arabia is likely to find it harder to mitigate the disruption to crude supplies to its Red Sea refineries, which means we may see some run cuts if the halt in shipments continues for any length in time,” said
Mr Mallinson.