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Saudi Arabia is racing to restore oil production after a brazen drone strike on a key Aramco facility slashed its output by half, removing about 5% of world supply.
The assault, claimed by rebels in Yemen but blamed on Iran by the US, shows the very heart of the Saudi economy is vulnerable to escalating tensions in the region. It’s an indication of how Crown Prince Mohammed bin Salman’s aggressive foreign policy could come to threaten his push for economic modernisation.
Aramco can restart a significant volume of the halted oil production within days, but needs weeks to restore full output capacity, said people familiar with the matter. The company could consider declaring itself unable to fulfill contracts on some international shipments - know as force majeure - if the resumption of full capacity at Abqaiq takes weeks, they said.
That would rattle oil markets and cast a shadow on Aramco’s preparations for what could be the world’s biggest initial public offering. It’s also set to escalate a showdown pitting Saudi Arabia and the US against Iran, which backs proxy groups from Yemen to Syria and Lebanon.
If the disruption is “protracted it could be a big challenge for the oil markets,” Mele Kyari, chief executive officer of state producer Nigerian National Petroleum Corporation, told Bloomberg Television on Sunday.
State energy producer Saudi Aramco lost about 5.7 million barrels per day of output on Saturday after 10 unmanned aerial vehicles struck the world’s biggest crude-processing facility in Abqaiq, and also the kingdom’s second-biggest oil field in Khurais.
Stock index tumbles
The attack is the biggest on Saudi Arabia’s oil infrastructure since Iraq’s Saddam Hussein fired Scud missiles into the kingdom during the first Gulf War. The kingdom’s benchmark stock index tumbled as much as 3.1% on Sunday in Riyadh.
Iran-backed Houthi rebels in Yemen claimed responsibility for the attacks, but US Secretary of State Michael Pompeo blamed Iran directly, without offering evidence for that conclusion. Iran’s Foreign Ministry described Pompeo’s remarks as “blind and fruitless accusations.”
Tehran is behind nearly 100 attacks on Saudi Arabia while Rouhani and Zarif pretend to engage in diplomacy. Amid all the calls for de-escalation, Iran has now launched an unprecedented attack on the world’s energy supply. There is no evidence the attacks came from Yemen.
— Secretary Pompeo (@SecPompeo) September 14, 2019
Saudi oil facilities as well as foreign tankers in and around the Persian Gulf have been the target of several attacks over the past year. The escalation coincided with the President Donald Trump’s decision to pull the US out of the 2015 nuclear agreement with Iran and re-imposed crippling economic sanctions against the Islamic Republic.
The Houthis, who are fighting Saudi-backed forces in Yemen, have claimed responsibility for most of the strikes against Aramco installations.
“Work is underway to restore production and a progress update will be provided in around 48 hours,” Amin Nasser, Aramco’s president and chief executive officer, said on in a statement on Sunday.
Crude Reserves
Aramco, which pumped about 9.8 million barrels a day in August, will be able to keep customers supplied for several weeks by drawing on a global storage network. The Saudis hold millions of barrels in tanks in the kingdom itself, plus three strategic locations around the world: Rotterdam in the Netherlands, Okinawa in Japan, and Sidi Kerir on the Mediterranean coast of Egypt.
Instead of supplying some customers with the usual crude oil grades of Arab Light or Arab Extra Light, the company may offer them Arab Heavy and Arab Medium as a replacement, according to a person familiar with the matter.
Smoke Plumes
A satellite picture from a NASA near real-time imaging system published early on Sunday, more than 24 hours after the attack, showed the huge smoke plume over Abqaiq had dissipated completely. But four additional plumes to the south-west, over the Ghawar oilfield, the world’s largest, were still clearly visible.
While that field wasn’t attacked, its crude and gas is sent to Abqaiq for processing. The smoke most likely indicated flaring, the industry term for what happens when a facility stops suddenly and excess oil and natural gas is safely burned off.
For the global oil market, the 5.7 million barrels a day Saudi halt is the single worst sudden disruption ever, surpassing the loss of Kuwaiti and Iraqi petroleum supply in August 1990, when Saddam Hussein invaded his neighbour. It also exceeds the loss of Iranian oil output in 1979 during the Islamic Revolution, according to data from the US Department of Energy.
Government Action
The US government said it’s prepared to dip into the Strategic Petroleum Reserve if necessary to offset any market disruption. The International Energy Agency, which helps coordinate industrialised countries’ emergency fuel stockpiles, said it was monitoring the situation.
The key question for governments, oil traders and the Organization of Petroleum Exporting Countries, in which Saudi Arabia is the largest producer, is how long the disruption lasts.“The global economy can ill afford higher oil prices at a time of economic slowdown,” Ole Hansen, head of commodities strategy at Saxo Bank A/S in Copenhagen, said by email.
- With assistance from Mahmoud Habboush, Verity Ratcliffe, Manus Cranny, Giovanni Prati and Anthony DiPaola.
