Opinion

FACTBOX: Yemen Conflict Risks Spilling Over into Global Oil Sector - by S&P Global Platts


Dubai (Platts)--04 Apr 2018 / 626 am EST/1026 GMT

     (Adds latest details)

     Tensions are starting to simmer across Middle East oil and shipping sectors, including a key global shipping lane, after Yemeni Shi'ite Houthi militants launched a failed attack on a Saudi VLCC.

     Three years on and seemingly in a stalemate, the conflict in Yemen retains the potential to escalate drastically, with the Saudi oil tanker VLCC Abqaiq, carrying 2 million barrels of crude to Egypt's Ain Sukhna, coming under fire on Tuesday.

     This incident even prompted the energy minister of the world's largest crude oil exporter to make a statement reassuring the market of no supply disruptions.

     The attack was "only a desperate attempt to influence the security of international navigation...that will not affect economic activity or disruption of oil supply," Khalid al-Falih said Wednesday in a Tweet.

     The Abqaiq has now dropped anchor in the Red Sea a day after it was attacked, data from S&P Global Platts trade flow software cFlow showed.

     The vessel's destination is still listed as Ain Sukhna in Egypt, according to cFlow data, but it remains unclear when the cargo will reach its destination or whether the ship will require further repairs or examination before it can resume its journey.

         POLITICAL RISK

     Some analysts say they expect this to ramp up growing tensions in the Middle East, especially between Saudi Arabia and Iran.

     "We continue to see Yemen as the most dangerous confrontation for the oil market as it is the one that could be the tripwire for a direct confrontation between Saudi Arabia and Iran," head of commodity strategy at RBC Capital Markets Helima Croft said."

     The US White House also reacted to the incident and said it was "very concerned" by the development and demanded the Houthis "cease further escalation and demonstrate their commitment to a peace process by engaging in constructive dialog."

     "The United States is very concerned about the Houthis' latest attempt to escalate the war in Yemen, this time by attacking a commercial vessel while it transited one of the world's busiest shipping lanes, the Bab al-Mandab, in international waters," White House Press Secretary Sarah Huckabee Sanders said in a statement.

     Shipping sources said there could be heightened security for ships sailing through the area, but there have been no increases in premiums for voyages involving the Red Sea yet.

     The EU Naval Force which operates around the southern Red Sea, the Gulf of Aden and a large part of the Indian Ocean, said it is investigating the incident but added that the flow of ships in this region remains uninterrupted despite the attack.

     "We are still cooperating and investigating with Combined Maritime Forces to understand more about the situation. Information about this is still being assessed. At present we can confirm the vessel remains safe and crew unharmed, there was an apparent attack but we continue to investigate," EU Navfor said in a statement.

     The attack was described by analysts as a signal to deter the coalition from attacking Hodeidah, the only Yemeni port still controlled by the Houthis, which is key to its supplies.

     It comes just days after Saudi air defenses intercepted and destroyed seven ballistic missiles fired from within Yemen toward various targets in the kingdom.

     RED SEA SHIPPING

     This is the first attack by the Houthi militants on any vessels passing through the key choke point between the Arabian Peninsula and Horn of Africa, a major trade artery for Saudi Arabia.

     Some 4.8 million b/d of oil and products passed through the Red Sea in 2016, representing nearly 5% of global maritime trade, according to the US Energy Information Administration.

     Around 1.5 million b/d of crude oil mainly from Saudi Arabia, Kuwait, UAE and Oman moves south from Ain Sukhna on the Red Sea to Sidi Kerir on the Mediterranean in northern Egypt via the SUMED pipeline.

     The bulk of Europe's crude oil imports from the Middle East arrive through this pipeline.

     The Abqaiq was travelling past Hodeidah on its way to Ain Sukhna in Egypt, the main offloading point for the SUMED pipeline into the Mediterranean, and briefly changed course due to the failed attack.

     RISK TO SAUDI REFINING, OIL INFRASTRUCTURE

     As well as being a key transit route for oil, the Bab-el-Mandeb Strait is also critical to Saudi Arabia's own Red Sea refineries, which are largely supplied with crude oil produced in its eastern region shipped from the Persian Gulf.

     The kingdom's 12.5 million b/d upstream production capacity is largely centered on about 12 major reservoirs in the northeastern corner of the kingdom, along with the Shaybah field in the south.

     Saudi Arabia has four major oil and product export terminals -- the 6 million b/d Ras Tanura facility on the Persian Gulf and the Red Sea terminals at Yanbu, which together have about 5 million b/d of capacity.

     These rising tensions come at a time when state-owned Saudi Aramco is building new infrastructure in the regions near the Red Sea. 
     Aramco is currently boosting capacity at the Al-Muajjiz oil terminal on the Red Sea with a major rehabilitation project.

     It also operates a 1,200-km (744-mile) East-West crude oil pipeline runs from Abqaiq in the Eastern Province to Yanbu Sea.

     Crude is also shipped around the Arabian Peninsula to two major refineries -- SAMREF and YASREF at Yanbu, which can process up to 800,000 b/d of crude.

     In addition, Aramco is building another 400,000 b/d refinery in the southwestern Jizan province, which is targeted to startup in the second half of 2018.

     Bordering Yemen, the province has been a target for attacks by the Houthis, including unguided missiles in March.

     YEMEN CONFLICT

     Saudi-led Arab forces are pitted against the Houthis, who seized control of the Yemeni capital Sana'a in late 2014, driving out the government. Mainly Sunni Saudi Arabia accuses mainly Shi'ite Iran of arming the Houthi militants as part of a proxy war.

     The Houthis continue to control the capital and much of northern Yemen, as well as the Red Sea oil terminals at Ras Isa and Hodeidah ports.
     Houthi forces recently unveiled a new short-range ballistic missile, the Badr-1, which it said was developed domestically.

     The coalition says it was supplied by Iran and the Lebanese Shi'ite group, Hezbollah. Houthi officials have previously threatened to block the shipping lane through the Red Sea, if the coalition continued its efforts in the Hodeidah province.

     In response to missiles launched toward Riyadh in December, the coalition imposed a blockade on Yemeni ports, saying it was to stop the flow of arms from Iran.

    

-- Adal Mirza with Eklavya Gupte, Andy Critchlow and Wanda Wang, eklavya.gupte@spglobal.com

-- Edited by Jonathan Dart, newsdesk@spglobal.com



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