XX.

Section

Strait of Hormuz remains

a potential flashpoint

Irans threat to close the Strait of Hormuz in response to international sanctions over its nuclear programme
is not grabbing the headlines as it was in 2012. But this is an issue that is far from being resolved, writes
Luay J Al-Khatteeb of the Iraq Energy Institute

Luay J Al
Khatteeb is
the founder
and executive
director of the
Iraq Energy
Institute and is
advisor to the
Iraqi Parliament
on energy
and economic
policies

12 LNG 2013

Global energy markets have been

keeping a wary eye on activities around
the Strait of Hormuz since late 2011,
when Iranian officials started threatening to block the waterway in retaliation for European and US sanctions,
due to concerns over Irans nuclear
ambitions.
These concerns, along with those
over the war in Syria and the unrest
resulting from Arab Spring protests
across the Middle East, have been
reflected in the higher average oil price
on international markets over recent
times.
Iran claims its nuclear programme
is for civil purposes, while the
International Atomic Energy Agency
(IAEA) suggested in November 2011
that Iran had previously researched
nuclear weaponry design.
While the tensions over the Strait are
not making media headlines in the way
they were in mid-2012, the problem has
not gone away. Recent negotiations
between Iran and the 5+1 group of the
UN Security Council member states
plus Germany had failed to produce
any breakthroughs by late March 2013.
Meanwhile, Iranian government officials
have continued to threaten to close the
strait, if military action is taken against
the country, or sanctions are tightened
further. While a direct military attack on
Iran by the US is highly unlikely, especially under a Democrat administration,
action by Israel may still be possible
even without US consent (see below).
The Iranian economys fragility is
another important factor. The impact
of sanctions meant that by early 2013,
Irans oil exports were down more than
50% from 2011, while annual inflation
was running at an annual 30% and the
Iranian currency lost half of its value
against the dollar in 2012. Such economic weakness, together with rising
political volatility in the country as
Junes presidential elections approach,
mean Iran remains desperate and
dangerous.
Of the globes seven main straits
that create maritime bottlenecks, the
Strait of Hormuz is the most significant
energy checkpoint, as the lions share
of global energy exports flow through
it. The strait is 22 nautical miles wide at
its narrowest and contains two shipping
lanes, each 2 miles wide and separated
by a 2-mile buffer zone. On average, 14
tankers a day pass through the strait,

carrying over 17 million barrels of oil

and 2 trillion cubic feet (cf) of liquefied
natural gas (LNG), according to the
US Energy Information Administration
(EIA). That represents around 35% of
sea-traded oil (20% of overall oil trade)
and 20% of LNG trade.
Over 14 million b/d of the oil passing
through the strait travels eastwards
to central- and east-Asian markets.
Imports from the Middle East represent
well over half of Asias overall crude
imports, so disruptions to operations
in the strait will have its biggest impact
on east Asian economies, as their economic growth is heavily dependent on
the security of those energy supplies
(see Figure 1 ).
Given the fragile global economy
may well depend on stimulus from
the east, disruptions to Asian energy
supply may have a multiplier effect,
in terms of damage to the global
economy, by weakening one of its
stronger pillars. Furthermore, a conflict
in the Strait of Hormuz may also affect
non-energy trade going into the Middle
East, further disrupting the global
economy.
The damage does not end there, as
international insurance markets may
well declare force majeure and decide
not to insure shipments or cargoes
passing through the strait. That could
remain an issue long after any conflict
was over, since restoration of insurers
confidence may be an uphill struggle for
all of the regions trade, not just energy.

Alternative outlets

The alternative energy export outlets

that bypass the Strait of Hormuz are
largely inadequate. Only three states
have pipelines that bypass the strait,
namely Iraq, Saudi Arabia and the
UAE. The Iraqi alternative is in the
shape of the Kirkuk-Ceyhan Pipeline,
which transports oil from northern
Iraq, to the Turkish port of Ceyhan on
the Mediterranean. This pipeline has
a nameplate capacity of 1.6 million
b/d, but has been averaging less than
300,000 b/d recently. It has also been
subject to attacks by Kurdish militants
in Turkey, most recently in early 2013.
Reaching full capacity, and diverting
a further 1.2 million b/d from the strait,
requires the Iraqi Strategic Pipeline
to be operational, which would
pump southern Iraqi oil to the north,

eventually connecting to the KirkukCeyhan pipeline. However the Strategic

Pipeline is partially closed for rehabilitation, which requires years to complete,
and is not an operational option in the
meantime.
Saudi Arabia has the Petroline
Pipeline (East-West Pipeline), which
crosses 1,200km of Saudi territory
from its Abqaiq Complex to the Red
Sea. The nameplate capacity of this
option was 3 million b/d in 2011, and
expanded to 4.8 million b/d in 2012.
The spare pipeline capacity for this
option is currently 2.8 million b/d.
The UAE, on the other hand, has
reacted to the renewed Iranian threats
in a proactive manner. The Abu Dhabi
Crude Oil Pipeline (Adcop) was
recently completed, and is currently in
operation transporting 1.5 million b/d
of Abu Dhabis onshore productions
from its Habshan collection point, to
the new Fujairah export terminal on the
Gulf of Oman, thereby bypassing the
strait. The new pipeline will divert more
than 55% of the UAEs overall export
of crude from the Strait of Hormuz and
has the capacity to raise daily shipments to 1.8 million barrels (70% of
the UAEs crude exports), according
to the UAEs Oil Minister Mohammed
al-Hamli. Adcop also includes space for
12 million barrels of crude storage.
Abu Dhabi also plans to start
building an LNG terminal in Fujairah
later in 2013 to avoid disruption to
LNG trade, should the Iranian threat
intensify. This project will be carried out
in partnership between state-owned
Mubadala Development Company and
Abu Dhabi s International Petroleum
Investment Company (IPIC), according
to Mohammed Sahoo al Suwaidi, chief
executive of Abu Dhabi Gas Industries.
Similar projects may follow from other
regional producers, as they seek to
mitigate the Iranian threat.
Other potential but non-operational
options include the additional two Saudi
pipelines running parallel to Petroline.
They are the Abqaiq-Yanbu natural gas
liquids pipeline, which currently ships
its full capacity of 290,000 b/d, and
the confiscated Iraqi Pipeline through
Saudi Arabia (IPSA) with a nameplate
capacity of 1.65 million b/d.
The latter, however, has been converted to carry natural gas, and Saudi
Arabia has made no announcement
about converting the pipeline back to

www.petroleum-economist.com

LNG (billion cm/y)

4.3

44.8

Source:
2012
FigureBP
1:Statistical
Middle Review
Eastern
Energy
Energy Source/Country US
Crude oil (million b/d)
1.919
LNG (billion cm/y)
4.3

4.3

13.5

and perhaps even its nuclear facilities.

Harassment of passing vessels is a
tried-and-tested method for Iran, as they
used this technique during the Iran-Iraq
war to target Iraqi oil tankers. However,
this led to intervention by US Air Forces
and hastened the end of the war, which
was perceived as a loss for Iran.
The impact of such harassment on
oil markets and participants will depend
on its extent, nature and duration. The
other Iranian option is to continue with
threats, but not action. However, that
would only work for Iran if these threats
were considered credible by participants and the oil markets.
The Article 44 of the United Nations
Convention on the Law of the Sea 1982
(UNCLOS) says states bordering international straits (such as Iran) shall not
hamper transit passage There shall
be no suspension of transit passage.
So any form of blocking, full or partial,
of the Strait of Hormuz will constitute a
breach of international law. It is worth
noting that both Iran and the US are
signatories of the
1982 convention but have not ratified
it. However, this convention is also a
codification of Customary International
Law, which by implication applies to all
states, whether they have ratified the
convention or not.

The Opec perspective

Iran remains a member of the

Organisation of Petroleum Exporting
Countries (Opec) and is bound by its
statute and objectives. Opec was originally formed to preserve the oil sector
interests of its members and stabilise
oil markets both purposes being considerably undermined by the Iranian
threats. The situation as it stands could
lead to crisis within Opec, as well as
global markets.
Opec internal politics traditionally fell
into two camps, with the Gulf states in
one, and Iran and others in the other.
However, Iraq has developed as a third
camp, creating a balance between the
Japan
Restcould
of Asia
other
two. InSingapore
this respect, Iraq
have
1.234
an3.534
important role
to play in the4.582
current
29.2

N/A

25.7

Japan
3.534
29.2

Singapore
1.234
N/A

Rest of Asia
4.582
25.7

Exports 2011

Europe
2.543
44.8

China
2.774
4.3

India
2.224
13.5

Source: BP Statistical Review 2012

crisis, as it has softer relations with Iran

than the GCC states and is also Opecs
current president. Such an intermediary
role is also a matter of self-preservation,
since Iraq will be the most affected of the
regions producers should the Strait of
Hormuz become non-operational, since
it has the least effective alternative shipment routes to fall back on.
Threatening trade routes for leverage
is not a recent phenomenon. The
Ottoman Empire attempted to do so,
accelerating its demise in World War I,
for example. Nor is an Iranian threat of
such a tactic new, as such threats have
been renewed regularly to protect the
countrys interests.
However, Iran could be pushed into
greater isolation, should sanctions
tighten, further alienating the country
from its consumers and the rest of the
world in general. That could turn it into
a country with no concern for international relations, which may be more
prepared to entertain the concept of
war. That, of course, would have catastrophic consequences for international
energy markets.
A further trigger point could be
Israels position. Israel is voicing everincreasing fears of a nuclear attack
from Iran, with a progressively harsher
tone. Should these concerns translate
into a pre-emptive strike on Iran, then
Iranian retaliatory measures may also
include blocking the Strait of Hormuz
for leverage over Israels allies.
Israel has previously demonstrated the
willingness to act without US consultation
and even go against US foreign policy in
the region. In the 1980s, Israel launched
an attack on civil nuclear facilities in Iraq,
which it incorrectly thought was developing nuclear weapon capabilities. This
occurred at a time when the US was an
ally of Iraq in its war against Iran. Thus
the danger of rogue-state behaviour on
the part of Israel still stands.
Allowing the dispute to escalate into
any form of armed conflict will have a
catastrophic impact on the struggling
global economy, through disruption
caused to energy supplies. A far more
viable approach would be greater investment in positive foreign policy by the
international community, through backchannel negotiations and a more proactive involvement of the International
Atomic Energy Agency. This could ease
the escalating regional tensions, the
impact of which, are far reaching beyond
the confines of the Middle East.

Figure 2: Estimated campaign length and military commitments

Iranian threat
Mines
Antiship cruise missiles

Estimated time (optimisitic) Estimated time (pessimistic) Military commitment

28 days
40 days
All mine countermeasure capabilities, plus allies (to clear 80% of mines)
9 days
72 days
Multiple Aegis ships, port support, AWACS, JSTARS, UAVs, tankers,
jammers, at least one carrier battle group
Air
defence
Figure
2: Estimated campaign length and military commitments 2-3 squadrons F-16CJ, 30+ Prowlers, Compass Call, Rivet joints
Total
37days
112 days
Iranian threat
Estimated time (optimisitic) Estimated time (pessimistic) Military commitment
Source:
Closing Time: Assessing the
Mines Caitlin Talmadge, MIT,
28 days
40Iranian
days Threat (2008).
All mine countermeasure capabilities, plus allies (to clear 80% of mines)
Antiship cruise missiles 9 days
72 days
Multiple Aegis ships, port support, AWACS, JSTARS, UAVs, tankers,
jammers, at least one carrier battle group
Air defence

2-3 squadrons F-16CJ, 30+ Prowlers, Compass Call, Rivet joints

www.petroleum-economist.com
LNG 2013
Total
37days
112 days
Source: Caitlin Talmadge, MIT, Closing Time: Assessing the Iranian Threat (2008).

13

XX. Section

crude. Nonetheless, should the need

to do so arise, this option may be exercised by Saudi Arabia. Further options
would include renovating the TransArabian Pipeline (Tapline) running from
Qaisumah in Saudi Arabia to Sidon in
Lebanon, and truck-shipping crude over
land, neither of which is a realistically
viable option.
In summary, the current pipeline
network able to bypass the strait has a
combined nameplate capacity of 6.7 million b/d, of which 4.3 million b/d is spare
and could be used to accommodate
diverted shipments from the strait. This
is nowhere near enough to handle the full
17 million b/d passing through the strait,
in the event of closure, and it does not
address any disruption to the LNG trade.
It is worth mentioning here that Saudi
Arabia and the UAE have both established storage facilities near their main
customers, such as Saudi Aramcos
facilities in the Netherlands and the Abu
Dhabi National Oil Companys facilities
in Japan. Non-Opec Oman is also considering building crude storage facilities
with up to 200 million barrels of capacity.
However, these options, like oil stocks
held by Organisation for Economic
Co-operation and Development (OECD)
member states and oil companies, are
mere short-term solutions to ease the
immediate supply crunch in the event
of disruptions, so their adequacy will
depend on the extent and duration of
any potential disruptions.
Outright blocking of the Strait of
Hormuz would represent an unprecedented disruption to international oil
markets. When the Arab-Israeli war of
1973 deprived the markets of 4 million
b/d, and the Iraq-Iran war of the 1980s
took 6.5 million b/d off the market,
crude oil prices quadrupled and doubled respectively.
Various military strategies could be
employed by Iran in an effort to block the
strait (see Figure 2). However, it seems
unlikely that Iran would take such action,
asFigure
it may 1:
well
trigger Eastern
a full- blown
wipe- Exports 2011
Middle
Energy
out of Iranian capabilities to threaten
Energy
US the US
Europe
China
India
the
StraitSource/Country
and potentially give
an
Crude oil (million b/d)
2.543
2.774
2.224
excuse
to further damage1.919
Irans military