May 2012, Vol. 239 No. 5
Features
Baker Institute Paper Suggests Pipeline Alternative To Hormuz Oil Route
Improvements to the pipelines crossing the Arabian Peninsula would allow more of the oil produced in the Persian Gulf to avoid the Strait of Hormuz, according to a new paper from Rice University’s Baker Institute for Public Policy.
“Creating a pipeline system that permits a substantial fraction of the Middle Eastern oil to be shipped to markets from Red Sea ports weakens the political influence of Iran by reducing the amount of oil that transits the Strait of Hormuz,” wrote Dagobert Brito, formerly Rice’s Peterkin Professor of Political Economy and Rice Scholar at the Baker Institute.
The latest tensions in the Middle East have policymakers looking for alternative ways to get petroleum from its source to world markets, said Brito, author of a paper titled “Revisiting Alternatives to the Strait of Hormuz.”
Brito noted that 20% of the world’s supply of crude oil transits through the Strait of Hormuz, the narrow sea lane between Iran and Oman. This volume includes oil exports from Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, Iraq and Iran. These countries account for 90% of the world’s spare productive capacity that could be called upon instantly in an oil supply crisis. Almost all of this spare capacity – approximately 3.5 million b/d – is in Saudi Arabia.
Consequently, free passage of oil through Hormuz is crucial to the world’s economy. Tensions have continued to rise between Iran and the West as a result of worldwide concern over Iran’s nuclear program that has led to economic sanctions imposed by the United States and its allies. Iran’s geographic location gives it the power to interdict free passage through the waterway, gaining the regime considerable political leverage and influence, the study noted.
Brito cited increased threats to international shipping as Iranian military and Revolutionary Guards have invested in submarines, missile boats and mining capability.
He focused on a combination of geography and technology to resolve the dilemma. Two pipelines already transport Persian Gulf oil across Saudi Arabia to ports on the Red Sea, thus obviating the need to transit the Strait of Hormuz in tankers. But neither pipeline has the capacity to carry the volume required, so Brito suggested using drag reduction agents (DRA), “chemicals that are injected into pipelines to reduce the friction and to increase throughput in pipelines.”
An injection of about 30 parts per million reduces the friction factor by approximately 35%; an injection of about 70 parts per million reduces the friction factor by approximately 50%. This is equivalent to doubling the available horsepower. The chemicals, however, degrade as they go through pump stations and it is necessary to inject additional DRA after each pump station.
Citing a 2000 study he worked on with the Center for Naval Analysis on the feasibility of augmenting the capacity of the pipelines across Arabia by using DRAs, Brito found “that with a relatively low amount of investment, it would be possible to ship as much as 11 million barrels per day of Middle East oil production through the Red Sea.”
There are two pipelines in Saudi Arabia that could be augmented to greatly increase the percentage of Middle East oil transported to the Mediterranean or from the Red Seas around the Arabian Peninsula to Asia:
1. The East-West Pipeline (Petroline) (52-inch and 48-inch), which runs across Saudi Arabia to the port of Yanbu on the Red Sea. This pipeline system has a designed capacity of 5.1 million b/d. Storage at Yanbu currently totals only 11 million barrels and its port has berthing for 6.6 million b/d.
2. The Iraqi-Saudi Arabia IPSA (48-inch) pipeline system that runs from the Iraq border across Saudi Arabia to the port of al-Mu’ajjiz on the Red Sea. IPSA has 1.65 million b/d capacity but has been out of operation since the Gulf crisis. The terminal at al-Mu’ajjiz has 10 million barrels of storage and loading facilities for handling tankers up to 400,000 tons.
In addition to these two pipelines, the Fujairah Pipeline to the Indian Ocean will become operational this year and is expected to carry 1.4 million b/d of Abu Dhabi production.
The report offers six options for installing DRA capability in the Saudi pipeline system. The options differ in whether additional horsepower is added or only new pump impellers are installed; and in whether the IPSA pipeline is upgraded, used during the crisis without prior upgrades, or not used at all.
The options range in cost from $100 million to $600 million – based on the technology of 2000 – and would require the purchase and installation of major capital equipment. The latter figure calls for installing DRA injectors and extra pump horsepower on both the Petroline and IPSA. This option also requires the additional pipeline segment from Abqaiq, Saudi Arabia, to Pump Station No. 3. It would provide combined pipeline capacity of 11 million b/d.
The lead times for pumps, impellers and turbines are typically 12-18 months and the items must be installed once acquired, the report states. The IPSA pipeline requires 2-3 months of maintenance before it could be brought into operation.
The naval analysis study in 2000 concluded:
“The pipeline upgrade has several important strategic benefits. It can assure the world oil markets that the Saudis can be relied on to produce and deliver oil even in the face of instability in the Gulf region, thus reducing the chance that other countries will develop production as a hedge, and thereby protect Saudi oil market share. It can reduce the economic damage to the U.S. in the event of a Strait of Hormuz crisis allowing the U.S. to respond to a closure on a deliberate and risk-minimizing timeline, and may reduce the need for U.S. forces to be based in the region. It can reduce Iranian motivation to close the Strait, and also reduce the political leverage they get from threatening to do so.”
With the price of oil now more than $100 a barrel, the economies of the world are more vulnerable to an oil shock, particularly as Iran has invested substantially in assets close to the Strait. The growing regional rivalry between Saudi Arabia and Iran, Brito suggested, may make the Saudis “more receptive to proposals to augment trans-Arabian pipelines.”
In the end, any decision comes down to economics, Brito wrote. “The question that must be addressed is whether the probability that passage through the Strait of Hormuz will be disrupted and the resulting damage to the world economy is high enough to warrant the investment necessary to bypass it. A related questions is whether it is too late.”
To view the study, visit www.bakerinstitute.org/publications/BI-pub-RevisitingAltHormuz-012512.pdf.
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