Attack on Saudi Oil Infrastructure: We May Have Dodged a Bullet, at Least for Now . . .

This weekend’s attack on Saudi oil facilities in Khurais and Abqaiq represents the single largest daily oil supply disruption in history—larger than the maximum daily output loss resulting from the Iranian Revolution, the invasion of Iraq, the Venezuelan oil strike of 2002-2003, or any of the Gulf coast hurricanes and almost twice as large as the combined outages produced by U.S. sanctions on Venezuela and Iran. The attacks targeted two critical Saudi facilities: one of the nation’s largest producing fields, Khurais, and the crown jewel of the Saudi oil system, the massive stabilization and processing facility at Abqaiq. The total supply loss from taking these facilities offline amounted to some 5.7 million barrels per day (b/d) in oil output—more than half of Saudi Arabia’s recent output and about 6 percent of global supply—as well as 2 billion cubic feet per day of associated gas.

A rude awakening to be sure given that last week’s oil market discussions focused on increasing Organization of Petroleum Exporting Countries-plus (OPEC+) compliance and overarching concerns relative to trade wars and a global demand meltdown. For an oil market mired in the doldrums of $55-$60 oil, the attacks unsurprisingly produced a pronounced market reaction on Monday morning, with Brent opening at $67/barrel and continuing to increase throughout the day awaiting Saudi Aramco’s release of an updated damage report and restoration schedule. Undoubtedly, speculative positioning (which had been waiting for a bullish signal) coupled with the uncertainty surrounding further attacks or reprisals bolstered trading activity. However, the size and duration of the outage coupled with the availability and timing of other supply options, including the release of strategic stocks, and demand growth considerations will ultimately dictate future price movements.

The attacks are believed to have been initiated through a combination of drone and missile strikes. (The Houthis in Yemen have claimed responsibility for the strikes, but evidence increasingly suggests that the attacks originated from the north.) Secretary of State Pompeo publicly claimed that Iran was responsible. The Iranians predictably deny any involvement. Adding to the confusion, President Trump reversed his earlier statements Tuesday, suggesting government sources had yet to definitely identify the attackers.

What is clear, however, is that the attack represents a clear escalation in ongoing Middle East tensions, and the targeting of 15-18 specific structures, points to increased sophistication with respect to both planning and implementation.

The Significance of Abqaiq

Abqaiq is the largest oil processing and stabilization center in the world. Its criticality resides in that it handles crude oil from various fields in Saudi Arabia, including from the giant Ghawar oil field as well as Shaybah and others. The facility and others like it in Saudi Arabia (notably located at Ras Tanura, Qatif, Juamah, and Jubail) take oil from the gas-oil separation plants located throughout the country and “sweeten” the crude by removing hydrogen sulfide and reducing vapor pressure in order to stabilize the oil to be safely shipped through pipelines and on tankers to refineries for future processing. These facilities also typically contain blending tanks for modifying crude characteristics to create specific crude blends and gas and process tankage for storage and fuel.

Abqaiq is known to have a processing capacity of some 7 million b/d. Eighteen stabilization towers are housed in two plants. During the attacks, at least five towers in the north plant were reported to have sustained damage, although more recent reports suggest at least one tower was taken offline as a precautionary measure. The south plant appears to have escaped unscathed. On Sunday, reports of increased gas flaring at Ghawar and Shaybah were interpreted by some to indicate attempts to increase oil production in the aftermath of the attacks but were more likely attributable to the bottleneck developing at Abqaiq.

Source: U.S. Government via the Associated Press

The Khurais complex is comprised of the Abu Jifan and Mazalij fields, as well as Khurais itself. The production capacity at Khurais is 1.45 million b/d. Satellite imagery indicates that infrastructure at the central production facility sustained strikes, with at least two towers suffering fire damage.

Source: U.S. Government via the Associated Press

The Restoration Effort—How Much, How Quickly?

Late Sunday, the Saudi oil ministry announced that repairs and at least partial restoration (40 percent) of lost production were to be completed by Monday, September 16. No further updates were available into the evening hours, but “unspecified” industry reports suggested repairs were proceeding apace. And on Tuesday morning we learned that Aramco had restored 300 thousand b/d of output at Khurais and is on track to operationalize 2 million b/d of capacity at Abqaiq. Saudi Aramco pared back domestic refining operations to make additional crude volumes available to foreign customers, and Aramco traders were active in securing refined product for domestic consumers. Stocks at Ras Tanura and other facilities are deemed adequate to keep importers supplied until the end of the month. And since refiners typically carry several days of crude stocks at the front of their refineries and product stocks for customers at the back end, supplies were, for now and barring no further disruptions, assessed to be sufficient.

President Trump indicated he would authorize the use of the U.S. Strategic Petroleum Reserve, which currently holds some 660 million barrels of inventory, if the situation required such action. Fatih Birol at the International Energy Agency (IEA) made a similar offering. OPEC announced they were continuing to monitor the situation but offered no additional barrels.

Satellite imagery of the Abqaiq complex indicates damage to the north plant (discussed above) as well as uniform dents on the surface of several of the spheroid modules within the complex. Notably, there is no indication that the pods were perforated or exploded, and Tuesday’s news suggests patchwork repairs could be done on the modules until a more thorough repair or replacement effort can be undertaken.

Late Tuesday afternoon, Saudi oil minister Prince Abdulaziz bin Salman and Aramco president Amin Nasser delivered a much-anticipated recovery update. Consistent with the details provided above, the officials announced that 50 percent (2.8 million b/d) of the weekend’s production loss was restored, presumably bringing current Saudi output to somewhere between 7 and 7.5 million b/d, and that Saudi Arabia’s production capacity would return to 11 million b/d by the end of September and 12 million b/d in November. We had understood that Aramco was planning to ramp up field production in Manifa and Shaybah, for example, as part of the increase, and the recommitment to 12 million b/d may well suggest renewed activity with respect to restarting the Neutral Zone.

In reaction to the announcement, oil prices continued to recede, closing at $64.55/b yesterday.

For oil market watchers, the precipitous diminution of Saudi Arabia’s oil production capabilities carried significant and obvious implications. As a leader of the OPEC+ alliance and an overachiever in reducing output to rebalance the market in support of higher prices, Saudi spare capacity accounted for the lion’s share of excess capacity carried by OPEC. Consequently, a sustained loss of 5 million plus b/d of Saudi output) would have substantially tightened markets and put pressure on global economic growth as prices increased. And while the release of strategic stocks could have helped ameliorate both consumer angst and eventually plugged supply gaps, timing, logistics, and quality considerations could complicate timely and effective deliveries.

Traders and pricing complacency suggest that the oil market is currently well-supplied. Tankers that left Ras Tanura last Friday are en route to their planned destinations and will still unload their cargoes in the coming weeks, so no physical shortage exists just yet. But challenges remain. Restarting complex facilities is a tricky business, geopolitical tensions in the region remain unabated, and the brazen assault on what is arguably the most significant oil facility in the world represents a most worrisome development—and one for which there is seemingly no guaranteed near-term solution.

Frank Verrastro is a senior vice president and trustee fellow with the Energy and National Security Program at the Center for Strategic and International Studies in Washington, D.C. Andrew Stanley is an associate fellow with the CSIS Energy and National Security Program.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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Frank A. Verrastro
Senior Adviser (Non-resident), Energy Security and Climate Change Program

Andrew J. Stanley