July 19, 2012
On
July 15, 2012 Abu Dhabi started to export crude oil through the Abu Dhabi
Crude Oil Pipeline (Adcop) bypassing the Strait of Hormuz. The initial shipment consisted of 500,000 barrels. The
403-kilometer pipeline runs from Habshan, which is a collection point for Abu
Dhabi's onshore oil fields (Habshan is an area in the southwestern part of the
emirate of Abu Dhabi), to the emirate of Fujairah, which is on the Gulf of Oman
(Indian Ocean) past the Strait of Hormuz. From Fujairah, the crude oil continues its trip to Pakistan in order
to be unloaded at the Pak Arab Refinery Ltd., which is a joint venture between the
International Petroleum Investment Company (IPIC) and the government
of Pakistan. In specific, IPIC owns a 40 percent stake of this refinery, which
on a regular basis utilizes 40,000 barrels a day (bbl/d) of Abu Dhabi's crude
oil out of a daily consumption amounting to 100,000 bbl/d. The pipeline is
operated by the Abu Dhabi Company for Onshore Operations (ADCO), which is
the main oil producer of Abu Dhabi's onshore fields.
The
pipeline was paid for (the link was completed as recently as last March) by IPIC,
which is an investment company established — pursuant an Emir's decree of 1984 — by the government of the Emirate of Abu Dhabi (which owns it). The mandate of the investment
company is to invest in energy and energy-related fields across the
globe. During the inauguration ceremony, Khadem al-Qubaisi, IPIC's managing director said that the final cost of the pipeline was $4.2 billion. In the
end, the project was 27 percent more expensive than the $3.3 billion contract
that had been awarded in 2008 to China Petroleum Engineering & Construction
Corporation. Part of the additional costs was due to the a
more-than-one-year delay in completing the project because of some technical
problems.
According
to the released information, the pipeline is able at full capacity to transport
at least 1.5 million bbl/d of Murban crude, which is the oil loaded within the
Gulf — but at periodic intervals the pipeline could pump as much as 1.8 million
bbl/d, officials stated recently. This capacity is quite interesting
considering that, according to data related to last month, the U.A.E. is the fifth largest OPEP oil producer with 2.61
million bbl/d. Were the pipeline operating at 1.5 million bbl/d of
crude oil, 57.4 percent of the UAE's crude oil production (Abu Dhabi holds 90
percent of U.A.E.'s oil) would bypass the Strait of Hormuz. During the next months,
ADCO will gradually increase oil capacity and by December the pipeline should
be ready to operate at full capacity. The system at Fujairah is planned to load
tankers at three offshore mooring buoys. Currently, only one of these three
buoys is already working.
Strategic
reasons are behind the decision of building the pipeline. In fact, up to now
U.A.E.'s oil export route has passed through the Strait of Hormuz, which is located
between Iran and Oman and is wide at its narrowest point 21 nautical miles (39
kilometers). The problem is that the width of the shipping line is in either directions only two
miles separated by a two-mile buffer zone. The Strait of Hormuz is mainly
considered for its importance in relations to crude oil. Around 20
percent of the world's oil (including all of Abu Dhabi's crude oil) or 35
percent of seaborne traded oil, passes through the strait. Thanks to the new
pipeline the U.A.E. wants to have an alternative route for exporting its oil. This is of paramount importance, if Iran blocks the strait. After, at the beginning of the year, the U.S. and the E.U. approved sanction measures in response to Iran's
suspected nuclear-weapons program, Iran later carried out some naval
exercises in the area near the waterway. And it explicitly affirmed that it would
implement a blockade of the Strait of Hormuz if the sanctions undermined its
oil-exporting activity. The current possibility of Iran blocking Hormuz is no
doubt very difficult, but in any case it cannot be completely ruled out. In
fact, it's quite probable that Iran would never use the Strait of Hormuz option
unless Iran was forced to a-last- resort action in order to maintain power or
to countermand an imminent invasion.
Currently,
were the Strait of Hormuz blocked, Bahrain, Kuwait and Qatar would be completely
unable to export oil (and obviously all of Qatar's liquefied natural gas
exports would be similarly blocked). Only Saudi Arabia is partially able to
bypass Hormuz thanks to the 5 million-bbl/d East-West Crude Oil Pipeline
(Petroline) which is used to transport oil from the Abqaiq refineries in the
Eastern Province to the Red Sea terminals (Yanbu). In addition to Petroline,
Saudi Arabia recently has reopened an old pipeline called the Iraqi Pipeline in
Saudi Arabia (IPSA, with a capacity of 1.65 million-bbl/d), which was built in
Saudi Arabia by Iraq in the 1980s with the aim of bypassing the
Strait of Hormuz. In fact, during the eight-year Iraq-Iraq War, oil tankers in
the Persian Gulf were possible targets for the two contending countries so, Saddam Hussein's regime decided to build IPSA, which was useful for
carrying oil from the Persian Gulf to the Red Sea (Mu'ajjiz). This pipeline was
laid across Saudi Arabia by Iraq, but it has not been carrying Iraqi oil since
the Iraqi invasion of Kuwait in 1990. The pipeline was then confiscated in 2001
by Saudi Arabia as a compensation for Iraqi debts and was used for transporting
gas from east of the country to the power plants located in the western part of
Saudi Arabia. In order to carry crude oil Saudi Arabia had to recondition the
pipeline. In practice, reconditioning IPSA is Saudi Arabia's move to secure an
additional alternative route to export its oil.
The
big problem for Riyadh is that Petroline and IPSA are able to move oil towards
the Red Sea, which is not the best location in times of rising oil demand from
Asia and declining demand in Europe. For many customers Yanbu's exports are
economically unattractive in comparison to Ras Tanura's exports (Ras Tanura is Saudi Arabia's main oil port in the Persian Gulf). In practice, for shipping to Asia departing from
Yanbu and passing through Bab al-Mandab adds up to five days than departing
from Ras Tanura.
Summing
up, Petroline and IPSA for Saudi Arabia and Adcop for the U.A.E. are the insurance
tools permitting the two countries to maintain a good percentage of their oil
revenues in the event of an Iranian blockade of the Strait of Hormuz. Surely,
given current market trends where the main buyers of Persian Gulf oil are Asian
countries, Adcop, having access to the Indian Ocean and not to the Red Sea, has a
better location for serving Asian customers.
Putting
aside strategic considerations, commercially the pipeline will be a useful
transporting means if the U.A.E. is able to maintain the same price for the oil to be
loaded at Fujairah and for the oil loaded from inside the
Gulf, stated Robin Mills, the head of Manar Energy Consulting. In practice, had
this pipeline been of paramount importance on pure commercial terms, the U.A.E.
would have built it some years ago. According to some internal sources, the
initial crude oil to be shipped is priced as Murban crude oil. It's possible
that in the next months Abu Dhabi may identify a different pricing formula also
accounting for the cost of using the link.
The
day of the inauguration, on the other side of the Persian Gulf, an Iranian M.P. Mohammad-Hassan
Asferi affirmed that, given the limited capacity of the pipeline,
it would be impossible to consistently reduce the oil that has to pass through
the Strait of Hormuz. He then continued stating that this link is "propaganda and
political maneuvering guided by Western countries, especially the United States
which aims to reduce the strategic importance of the Strait of Hormuz".
There
are three other useful considerations. First, in Fujairah it's possible to
operate with very large crude carriers (V.L.C.C.s), i.e., any oil tanker with 200,000
deadweight or more. Second, loading in the Gulf of Oman will reduce
the shipping traffic through Hormuz. Third, there will be additional economic
development for Fujairah. At this regard, it has to be underlined that IPIC
plans to build there a refinery with a capacity of 250,000 bbl/d. This
refinery will be set in order to produce oil derivatives for both local sale
and export. The refinery — whose cost is esteemed at $3.5 billion — could
increase the importance of Fujairah's port transforming it into a relevant hub
for processing, storage and shipment of fuels.