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August 21, 2019

Saudi pipeline expansion does little to solve Strait of Hormuz risks

Saudi Arabia’s announced expansion of its East-West Pipeline does little to solve the risks linked to a closure of the Strait of Hormuz.

By GlobalData Energy

Saudi Arabia’s announced expansion of its East-West Pipeline will give the country more flexibility in exporting oil but does little to solve the risks linked to the Strait of Hormuz closure or having limited accessibility, according to a recent GlobalData report.

In April 2019 Saudi Aramco stated that the capacity of the pipeline, which in 2018 transported on average 2.1 million barrels per day (mmbd) of oil, is expected to increase from 5 mmbd to 6.5 mmbd in 2023.

However, while the expansion of the pipeline capacity provides Saudi Arabia with the possibility of moving additional quantities of oil across the Arabian Peninsula, it cannot solve the Strait of Hormuz’s risks.

The bulk of Saudi Arabia’s production- 7.9 mmbd out of 12.9 mmbd in 2019- comes from the Eastern Province, which abuts into the Persian Gulf.

Saudi Arabia’s main exporting markets are in Asia. Exporting oil to Asia from the Red Sea also means passing through the Bab El Mandeb Strait, another politically dangerous choke point between Djibouti and Eritrea on the African side, and Yemen on the Arabian Peninsula side.

All Persian Gulf countries have limited options concerning the export routes from the Persian Gulf. Iran, Kuwait, Qatar, and Bahrain export their output through the Strait of Hormuz. Apart from Saudi Arabia only the United Arab Emirates (UAE) and Iraq have infrastructure, albeit limited, capable of bypassing the strait.

The risks around the Strait of Hormuz have an impact on natural gas as more than a quarter of the world’s LNG, primarily from Qatar and in part from the UAE, has to pass via the Strait of Hormuz. For LNG, as the main markets are in Asia, there is no real viable alternative to LNG exports via the Persian Gulf.

As limiting or closing the Strait of Hormuz’s accessibility would not provide benefits to any of the involved countries, Iran’s menaces are a brinkmanship exercise intended to obtain a wider negotiating leverage.

Because of the geographic position and the sheer number of hydrocarbons passing through it, there is no real replacement for the closure of or even a limited accessibility to the Strait of Hormuz unless several pipelines are built.

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