Europe’s oil supply has come under fresh pressure with the closure of Saudi Arabia’s important East-West oil pipeline. If the pipeline stays shut for a long period, European refineries will have to source crude from alternative suppliers, which could raise both oil prices and transport costs. The price of diesel and other fuels could rise as well.
The Saudi energy ministry announced the temporary closure of the pipeline on September 10. It followed a drone attack on the pipeline in the Riyadh and Medina regions on September 9. The attack has been blamed on the Iran-backed Houthis and allied groups in Iraq.
The pipeline, roughly 1,200 kilometres long, opened in 1981. It is used to carry oil from the eastern Saudi oilfields to the Red Sea port of Yanbu, allowing supplies to bypass the Strait of Hormuz.
About 20 percent of the world’s oil and gas passes through the Strait of Hormuz. After the Iran-Israel conflict began on February 28, the strait became effectively unusable, and the Saudi pipeline emerged as an important alternative route for Europe. Before it closed, the pipeline was carrying roughly 4 to 5 million barrels of oil a day, about 4 to 5 percent of total world supply.
The effects of the closure have already begun to be felt in Europe. Saudi Arabia has cancelled or delayed several oil shipments bound for Europe from the port of Yanbu. An Argus report on September 15 said late-September shipments to at least three European refineries had been cancelled or postponed, with some of them possibly slipping to November.
European refineries have set about finding alternatives. Poland’s state oil company Orlen has bought an additional 16 oil cargoes from Norway, the United Kingdom, Algeria, Kazakhstan, Azerbaijan and the United States to secure supply through October.
On September 16, Orlen said these supplies were continuing and were sufficient to meet demand.
Finding alternatives to Saudi oil will not solve the problem on its own, however. Refineries are built to process crude of a particular grade, and many European refineries depend on Saudi Arabia’s medium and comparatively heavy, sulphurous crude. Using other grades may mean blending oil from several sources, which raises costs and may require operational changes at some refineries.
June Goh, senior oil markets analyst at Sparta Commodities, said European refineries that take Arab crude through the Red Sea need alternatives, because not every grade of crude is a direct substitute for another.
The prospect of tighter supply alone may push oil prices up. Since the pipeline was damaged, analysts have spoken of roughly 3.5 to 4 million barrels a day of supply being at risk. Brent has recently risen above $113 a barrel, and several European countries are already trying to ease the pressure of higher diesel prices.
How long the crisis lasts depends on how quickly Saudi Arabia can repair the pipeline and whether there are further attacks. Homayoun Falakshahi, chief oil analyst at Kpler, said that even if minor damage to the pipeline is repaired, restoring the whole system including pumping stations could take up to six weeks.
By Kpler’s calculation on September 14, a temporary arrangement has been put in place bypassing the damaged pumping station. But refineries on Saudi Arabia’s west coast have cut output and are relying on stocks, and oil exports from the port of Yanbu have been partially disrupted.
According to Kpler’s figures, crude stocks at the Yanbu terminal stand at about 9,000 barrels, with roughly 16,500 barrels at the west coast refineries. If no fresh oil comes through the pipeline, those stocks would sustain shipments from Yanbu for about three days and the refineries for about nine days at current rates.
On September 16, however, Saudi Arabia said half the pipeline’s capacity could be restored within the next few days, creating scope for the supply situation to ease somewhat. The risk of fresh attacks on the infrastructure nonetheless remains.
If the pipeline is not fully restored quickly, prices for crude and refined fuels in Europe could rise further. A regional supply crisis in Saudi Arabia could then become a serious energy and inflationary pressure for Europe’s refineries, industry and consumers.