Newly-appointed Saudi oil minister Prince Abdulaziz bin Salman has had a harsh introduction to his post. In the wake of Saturday morning’s attacks on the critical Abqaiq oil processing plant, he reassured the market at a Jeddah press conference on Tuesday. The lost supply may be less than first feared, but there are still important lessons to learn.
Some 5.7 million barrels per day of production capacity, from state oil giant Saudi Aramco’s total 12 million bpd, were lost to the strikes on Abqaiq and the nearby Khurais oil-field. Khurais is now pumping again, though it is not clear whether it is at full capacity. Abqaiq, with normal capacity of 7 million bpd, is back to 2 million bpd operational, with its immediate pre-attack level of 4.9 million bpd planned to be regained by the end of September, and nearly full capacity restored at the end of November.
If indeed Aramco can meet customers’ needs from storage during September, then restore sufficient production by the end of the month, that would be an impressive achievement and far better than seemed likely after the shocking images from Saturday.
Once full production and exports return to the market, oil prices should sink back towards pre-attack levels. Futures prices gained $2 per barrel for nearby years, and $1 per barrel for long-dated futures. This represents a slightly elevated level of concern over future threats to supply. It is, though, much less dramatic than the tight market of 2007-8, when a much less volatile geopolitical situation was assessed to add a $10 “fear premium” to oil prices.
We are still at a very early stage of assessing and understanding the attacks, their impact and recovery from them. If the largest ever abrupt loss of oil production indeed proves transient, the oil market will have dodged a bullet – this time.
This is the time to learn some key lessons, to improve the resilience of global energy supply. Firstly, Saudi Arabia and Aramco will, no doubt, be reviewing their defences, the redundancy of key industry functions given the extraordinary concentration of equipment at Abqaiq, and the procedures for emergency response and repair.
Secondly, assuming this attack was indeed directly or indirectly Tehran’s doing, the confrontation between Iran on the one side, and the US and its Arabian Gulf supporters on the other, has heated up several notches. There have already been attacks, albeit limited, on pipelines and tankers. Energy infrastructure could be at risk not just in Saudi Arabia, but in important producers such as Iraq. Future strikes could be more devastating or more subtle, and could include cyberwar, like the Shamoon virus that struck Aramco in 2012.
Conversely, US senator Lindsey Graham called for a retaliatory attack on “Iranian oil refineries”, which would set a dangerous precedent that attacks on energy facilities are legitimate. The country’s exports have already been mostly cut off by US sanctions.
Some vulnerabilities have been strengthened, such as building bypass pipelines to the Red Sea in Saudi Arabia and the UAE’s Indian Ocean coast, that bypass the Strait of Hormuz, always previously identified as a chokepoint. Strategic stock holdings continue to be constructed, not just in Saudi Arabia, Fujairah and the Omani port of Duqm, but also close to consumers, as in India. Nevertheless, those who threaten regional energy security have proved adept at finding new openings to exploit.
Thirdly, the international response has not been very coordinated. Donald Trump said that he had authorised a release from the US’s Strategic Petroleum Reserve, “if needed, in a to-be-determined amount”. Meanwhile, the International Energy Agency, whose job it is to coordinate developed countries’ response to energy supply shocks, said that “for now, markets are well-supplied”, and did not immediately recommend a release of emergency stocks. Russia, which of course benefits from higher oil prices, condemned the attack but criticised the US for its campaign against Iran.
Fourthly, despite this well-supplied market, spare capacity is concentrated and quite tight. Most of it, some 2 million barrels per day, was held in Saudi Arabia. Another 700,000 bpd or so is spread between three Gulf countries: the UAE, Kuwait and Saudi Arabia. A further 500,000 bpd is in the Neutral Zone between Saudi Arabia and Kuwait, shut off for four years by a political dispute, and would take several months to restart even following a deal. Russia, which suffered its own major production hiccup in May with contamination of oil in its Druzhba pipeline to Europe, might have as much as 300,000 bpd spare.
That is essentially it. And spare capacity could be required to meet further losses from Venezuela’s economic collapse, insecurity in Libya or Nigeria, or other surprises. The deal on production limits between Opec, Russia and some other non-Opec producers has held for now, but needs some flexibility to cope with the unexpected.
And as analyst Anas Alhajji likes to remind us, “quality matters”. US light crude or Russian condensate is far from a perfect substitute for the medium-grade Saudi crudes processed at Abqaiq, or the heavy sludge that emerges from Venezuela. Saudi domestic gas output was also badly hit by the attacks; gas has become an ever more critical but underappreciated part of the regional energy economy.
The market has been sanguine about the limitations of quality and quantity, partly because of confidence in the buoyancy of US shale producers, partly because of a gloomy outlook for demand. But serious disruptions and price spikes are not just bad news for consumers. From the perspective of oil producers, they dent demand, and advance the attractions of non-oil technologies, such as electric vehicles. Now is a good time to dampen the combustible mix of threats to regional energy.
Robin M. Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis