The Attack on Saudi Oil Facilities – A Game-Changer?

By Col. (res.) Udi Evental | September 15, 2019

Photos: www.planet.com

Following the attacks on the oil facilities in Abqaiq & Khurais, Saudi Arabia announced that it is suspending the half of its daily oil production – 5.7mbd (million barrels per-day) that account for 5% of global daily production.

The Houthis in Yemen assumed responsibility for the attack and claimed that it was carried out by ten UAVs. However, U.S. Secretary of State, Mike Pompeo, blamed Iran for the unprecedented attack on global energy supply and claimed that the attack did not necessarily originate from Yemen. U.S. media reported that the administration was examining the possibility that the attack involved cruise missile launched from Iraq or Iran. Noteworthy, the U.S. intelligence community assessed that a previous attack on Saudi oil facilities on May 14, for which the Houthis also claimed responsibility, originated in Iraq and was carried out by Shiite militia forces.

Following the attacks, Saudi's oil minister expressed his hope that full production will be resumed within days and that the Kingdom's reserves will be sufficient to account for any shortage. Saudi Arabia holds 188 million barrels of oil in reserve.

Abqaiq is the world largest facility for processing oil (7mbd) and is a critical infrastructure in the Saudi supply chain that channels processed oil to shipping ports in the Arabian Gulf and the Red Sea. Khurais is the second-largest oil field in Saudi Arabia. At Abqaiq, oil is processed for de-sulpharization ("sweetening" the oil) in huge units. Sabotaging these units could cause environmental hazard and prolong the restoration of full capacity.

It remains unclear whether the de-sulpharization units were hit. In any case, to quell the markets, the U.S. announced that it stands ready to use its strategic reserves (SPR) that amount to 645mb "to offset any disruptions to oil markets". Opening the SPRs is a rather rare event that occurred following major nature disasters, and during the first Gulf War and the events leading to the toppling of Libya's Qadhafi. U.S. could supply some 2mbd to the international markets.

International media has reported that the U.S. is examining with International Energy Agency (IEA) global collective measures to prevent shocks to the global energy market. Experts predict that oil prices will rise to USD60-80 and even to USD100 if Saudi Arabia will fail to restore production shortly.

Thus, the attack on the Saudi oil facilities is evolving into a dramatic incident with significant strategic implications. Attacking the facilities and threatening the global oil market harms core U.S. interests.

The attack is a bold move on Iran's behalf that chooses to strike at the height of international efforts to resume negotiations between Iran and the U.S., while President Trump is calling on President Rouhani to meet with him at the UN General Assembly. Iran chose to challenge the U.S., while leaders in Teheran and around the region understand that President Trump is averse to the use of military force that might entangle the U.S. in a war. Presumably, the dismissal of Trump's national security advisor, John Bolton, reinforced this impression across the region. The attacks demonstrate that U.S. government statements – including President Trump's own statements – that U.S. sanctions have led to a decline in Iran's terror activities and support for its proxies – are meaningless.

American deterrence is, therefore, deteriorating, and the ball is in the American end. The American weakness that has based its leveraging on sanctions alone with no credible threat of using military force might entice additional Iranian actions, including vis-à-vis Israel, which seems to be on its own in challenging Iranian threats in the northern arena and Iraq. In the Gulf, Iranian assertiveness might lead to additional withdrawals of U.S. partners following the course change of UAE that reflects non-confidence in U.S. assurances.

At the operational level, the attacks demonstrate that Iran can destabilize the global energy market through proxies and contingencies that will not lead to a frontal military collision with the U.S., such as the attacks on the tankers in the Hormuz Straits.

Thus, while the U.S. is assembling an international coalition to secure the freedom of navigation in the Gulf, the attacks on Saudi's infrastructures and the threat they pose to global markets, show that an international effort to defend Saudi and Gulf oil facilities is required.

At the diplomatic level, it appears that U.S. responses to the attacks and to threats from senior leaders of the Iranian Revolutionary Guards, are blocking the efforts to resume negotiations between the U.S. and Iran. Meanwhile, the attacks in Saudi Arabia along with expanding the nuclear R&D activities announced by Iran earlier this month, are reinforcing Iran's negotiating position and its leverages ahead of a future resumption of negotiations.

With regards to the energy markets – as longer it will take for Saudi Arabia to restore full production capacity, the pressure of the main oil importers – led by China which has limited reserves – will increase. In addition to increasing its revenues following the oil price rise, pressure will mount to allow Iran to expand its export of oil. China's growing demand for oil will drive this process considering that it is already violating American sanctions and with Iran holding on to growing spare capacity due to the sanctions.

Finally, a prolonged supply crisis in Saudi Arabia will have an impact on the stability of the Kingdom. In the short-term, investors' confidence in the initial phases of ARAMCO's IPO will take a shot, and in the longer-term, domestic discontent regarding the leadership of MBS Could be on the rise.

In 2012, the Herzliya Conference held an international war-game simulating a devastating attack on Albqaiq that led to the shutdown of half of Saudi's oil production – a rather similar outcome compared with the weekend attacks. International experts and practitioners – dealing with energy, strategy and international affairs – took part in the exercise. To review the concluding policy paper of the exercise, detailing lessons and observations that remain relevant, go to >>

Authored by Col. (res.) Udi Evental

If you wish to receive the weekly brief regularly, please follow the link to register.