By Beatrice Bedeschi – A month after the drone attacks on the Abqaiq and Khurais oil facilities, Saudi Arabia has surprised observers by being able to bring oil production capacity to nearly pre-attack levels, which has quickly stabilised oil prices after the spikes seen in the immediate aftermath of the incidents.
Nonetheless, in the long-term the country remains heavily exposed to potential further similar incidents, raising the issue of security of supply at key production assets, commentators told Hedgeweek.
On 14 September, a number of explosions were recorded at Saudi Arabia’s Khurais oil field and Abqaiq oil processing plants, owned by State company Saudi Aramco.
Abqaiq is the world’s largest oil processing plant, refining two-thirds of Saudi Arabia’s oil supply.
The attacks had been reportedly carried out by drones.
As a consequence, nearly half of Saudi Arabia’s oil production, around 5 million barrels per day or 5 per cent of global daily oil supply was curtailed.
Yemeni Iran-aligned rebel army Houthis claimed responsibility for the attacks, although Western and Saudi governments believe Iran assisted the Houthis in gaining drone technology, according to media reports.
Brent crude oil prices surged 20 per cent in the immediate aftermath of the attacks to around USD72/barrels, retracing after news that US president Trump pledged to release oil reserves to stabilises supply.
But despite fears of a prolonged bullish trend amid concerns that Saudi Arabia could not restore production quickly enough, one month later the premium seems to have been reabsorbed almost completely.
In its October oil market report published 11 October, the International Energy Agency (IEA) noted that “Saudi Aramco’s achievement in restoring operations and maintaining customer confidence was very impressive. This is reflected in the fact that as we publish this report, the price of Brent is close to USD58/bbl, actually USD2/bbl below the pre-attack level.”
“Intuitively, the precision attacks on Saudi Arabia and the possibility of a repeat should keep the market on edge. There should be talk of a geopolitical premium on top of oil prices,” the report also stressed. “For now, though, there is little sign of this with security fears having been overtaken by weaker demand growth and the prospect of a wave of new oil production coming on stream,” it added.
In addition, “a key lesson from recent weeks is that the world has a big insurance policy in the form of stockholdings” as ”commercial and strategic inventories go a long way to offsetting the lack of spare crude production capacity outside of Saudi Arabia, limited mainly to 1 mb/d in Iraq, UAE, Kuwait and Russia” IEA said.
“Remarkably, the actual measurable impact of the Abqaiq attacks, nearly one month later, are negligible as far as the crude oil benchmarks are concerned,” agrees Tom Kloza, global head of energy analysis at price reporting company Oil Price Information Service (OPIS). “The Saudis had to cut back on internal refinery runs and perhaps some refined products’ output with overseas joint ventures, but they have essentially met their pledge and kept exports about where they were before the September 14 attacks.”
Gasoil, diesel and heating oil prices as well as and gasoline prices, which are tied to the lower refinery runs, saw a brief increase in the short term.
“But those increases with the exception of the wild US West Coast have abated,” with risks of an intensification of a trade war and recession in 2020 proving much stronger drivers.
“Abqaiq exposed the vulnerability of oil infrastructure, but the expectation of a lower crude oil price one year from now has kept traditional buyers out of the market,” adds Kloza. “The hot spot has now moved to Iraq, which has proved to be unpredictable for decades. But the fund managers who oversee billions of dollars of investment in oil refuse to attach a substantial geopolitical premium to either Brent crude or WTI, on the fear that prices could drop drastically in 2020.”
Risk of further attacks remains
Nonetheless, oil facilities in Saudi Arabia remain heavily exposed to similar attacks.
“Further incidents of this nature in the strategically important Gulf region could happen and cause even greater disruption” the IEA has warned.
“Restoring production and capacity … is only one side of the coin,” agrees Torbjorn Soltvedt, principal MENA analyst at risk consultancy Verisk Maplecroft.
“Until a clear military or political solution takes shape Saudi Arabia will continue to face a highly complex security landscape where progress will be measured not in weeks or months, but years,” he says. “Unless Saudi Arabia can find a solution to diffuse regional tensions, or deter hostility from regional state and non-state actors, its energy infrastructure and tankers will remain vulnerable to attack.”
From a strictly geographical point of view, Saudi Arabia faces a “highly complex security challenge,” being threatened by Houthi at the south, as well as potential attacks from the north from Shia militias based in Iraq.
With key energy infrastructure on Saudi Arabia’s east coast located less than 200km from Iran, 350km from Iraq, and 1,200km from Houthi controlled territory in Yemen “a wide array of missiles and drones are within striking distance,” says Soltvedt.
Although it is unclear if Houthi militants played a part in the 14 September attacks, Soltvedt says: “There is no doubt that Saudi Arabia’s southern border will remain a for the country’s political and military leadership.”
And while “efforts to improve defences around critical oil and gas infrastructure are already underway”, Soltvedt believes that effectively defending against cruise missiles and swarms of drones on several fronts will prove difficult in practice with anti-missile technology having limited efficacy in drone-led attacks.
On the diplomatic front, Soltvedt adds that UN-led efforts to broker a solution have gained some traction during 2019, while a limited ceasere between Saudi and Houthi forces in late September 2019 has raised the prospects for a more permanent and broader truce.”
“Previous truces have all proved short-lived, however, and the risk of either side breaking the cease fire is high” he says. “And while the incentive for Riyadh to find a solution to the conflict has increased after the 14 September attacks, the likelihood of a permanent solution to end more than 15 years of hostilities is low.”
