World in Search of Solving Hormuz Problem; an Analysis by S&P Global Platts
Monday, 22 Jul, 2019
In brief: Britain’s biggest exposure to Iran closing access to the Persian Gulf is Qatar, which is the largest supplier of liquefied natural gas (LNG) in the UK, which can only be shipped in chilled form onboard gigantic tankers.
Deploying more of the Royal Navy to protect oil tankers from Iranian attack as they sail through the Strait of Hormuz is a short-term fix to a historic problem of providing energy security in the Persian Gulf.
Instead of Britain adding to the crowded fleet of warships converging on the region, new export routes such as pipelines and canals should be opened up to provide long-term peaceful alternatives that would finally reduce the world’s dependence on the narrow 21-mile-wide channel dominated by Iran’s Revolutionary Guards.
Slightly more than 20 million b/d of crude oil – around a fifth of the world’s supply – is shipped out of the region under the gun sights of Iran’s hardline military forces, now overlooking the channel that is currently policed by the US Fifth Fleet. US President Donald Trump wants this to change, and has called for a larger international force to be established to protect the chokepoint, or pay for it, after a series of attacks on oil shipping and threats followed US sanctions on Iran.
The most recent skirmish occurred this week when HMS Montrose was forced to head off Iranian forces allegedly threatening the BP-operated tanker British Heritage. The incident – denied by Tehran – followed the UK seizure of an Iranian vessel near Gibraltar suspected of busting western sanctions on Syria. Both episodes show the real risk of events getting out of control in the Persian Gulf, but it doesn’t have to be this way in the future.
Blueprints have existed for years to construct a giant canal stretching from Dubai to the east coast of the United Arab Emirates, which would allow tankers to avoid the strait altogether on their way to international markets. The scheme initially emerged just over a decade ago when Dubai’s government briefly considered the estimated $200 billion canal dreamed up by British engineers.
If built, the waterway would have stretched for 225 miles across the interior of the emirates and over the Hajjar Mountain range south of the oil port of Fujairah. Like the Suez Canal – linking the Red Sea to the Mediterranean – the cost of construction could have been recovered over time and additional revenue would be generated by charging vessels for its use.
However, the project was eventually mothballed after being deemed unnecessary and too expensive by the emirate’s sheikhs. They may have been right. Towards 2040, global oil demand may peak because of climate change measures and transport electrification. But similar canal schemes continue to resurface, including a proposal floated by a Riyadh-based think-tank in 2015, to build an even longer canal to convey Saudi Arabia’s oil across the desert to ports on the Red Sea coast. Of course canals take time to build, but pipelines already exist.
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Alternative oil routes
Most of Saudi Arabia’s oil exports of just over 7 million b/d are loaded at the country’s Ras Tanura terminal in the Gulf. The kingdom – which despite US shale remains the world’s largest exporter – has alternatives. Its 750-mile-long East-West pipeline, also known as Petroline, linking its oil production to the Red Sea, has the capacity to transport up to 5 million b/d of crude to export terminals and refineries around the industrial port of Yanbu. Of course, pipelines can also be attacked. Petroline was targeted by Houthi militants from Yemen earlier this year.
Abu Dhabi too has a major pipeline capable of transporting a large share of its exports outside the Strait of Hormuz. Opened in 2008, its Fujairah link connects the port on the Arabian Sea with its major production center in Habshan. The pipeline has capacity to transport 1.5 million b/d of crude and could eventually feed a huge 40 million barrel strategic storage facility soon to be blasted out of the mountains. Abu Dhabi is also building a new industrial railway, which could feasibly be used in emergencies to transport oil overland for export from the Persian Gulf to the UAE’s less exposed east coast. However, recent attacks on ships anchored near Fujairah proves even this remote enclave isn’t impervious.
The emirate’s rulers have good reason to fear Iran’s ability to cause havoc near their shores. As the British prepared to withdraw from the region in the early 1970s, Tehran under the rule of the Shah seized the opportunity to take control of three Emirati islands in the Gulf. The status of Abu Musa and the Greater and Lesser Tunb remains an open wound. The countries coexist in a permanent state of distrust.
Iraq – and Europe – exposed
Iraq – which fought a bloody war with Iran during the 1980s – is also being held hostage. OPEC’s second-largest producer exports almost all its crude produced in the south through the Strait of Hormuz. Baghdad is now hurriedly pushing for the construction of an oil export pipeline to the Jordanian port of Aqaba on the Red Sea, far from Iran’s potentially disruptive influence.
However, Britain’s biggest exposure to Iran closing access to the Persian Gulf risk is Qatar. The sheikhdom is the largest supplier of liquefied natural gas (LNG) in the UK, which can only be shipped in chilled form onboard gigantic tankers. In June, LNG mostly from Qatar accounted for 30% of British imported gas supplies.
“Unlike Saudi Arabia and Abu Dhabi, Qatar has no alternative export routes which bypass the Strait of Hormuz,” said Samer Mosis, senior LNG analyst at S&P Global Platts Analytics. “Given the sheer breadth of Qatar’s role in global LNG markets, any interruption of the waterway would effectively block as much as a quarter of global LNG supply from ever reaching key markets, including Europe.”
The stakes are high for the global economy and Iran’s leaders know it. Instead of adding to the tension by committing the Royal Navy to an almost impossible mission, focusing minds and money on finding alternative export routes by building new pipelines and even canals to bypass the Strait of Hormuz could be a safer solution.