Abqaiq is the world’s largest oil-processing facility and handled about half Saudi Aramco’s production last year. It treats the crude from some of Saudi Arabia’s giant onshore fields, removing sulfur and volatile hydrocarbons that vaporize at atmospheric pressure to stabilize the crude before it’s pumped to refineries or export terminals. It was operating at a rate of about 4.5 million barrels a day before the attack.
Khurais is Saudi Arabia’s second largest oil field, with the capacity to pump about 1.45 million barrels a day of Arabian Light crude. It was running at a rate of 1.2 million barrels a day before the attack.
Most of Saudi Arabia’s lighter crude streams are produced at its onshore fields. Other deposits such as Manifa and Safaniyah, which don’t depend on Abqaiq for processing, produce the heavier grades. Photos of the aftermath of the attacks at Abqaiq, released by the U.S., show puncture marks on tanks that form part of the process to remove gas before the crude can pass to the stabilization towers.
Within hours, Houthi rebels in Yemen claimed responsibility, as they did for strikes against Saudi Arabia’s East-West pipeline in May, and the Shaybah oil field in August. Saudi Arabia started a devastating bombing campaign in Yemen in 2015 — with some U.S. backing and weaponry — after the Houthis took control of the capital and other parts of the country. Despite thousands of civilian deaths, terrible human rights abuses on both sides, and a humanitarian catastrophe, the war has settled into an ugly stalemate. Yemen’s Houthi rebels have stepped up retaliatory attacks against Saudi Arabia and say they will target all countries involved in the conflict.
U.S. Secretary of State Mike Pompeo dismissed the Houthis’ claim, pinning the blame on Iran. “There is no evidence the attacks came from Yemen,” he tweeted. French Foreign Minister Jean-Yves Le Drian also dismissed the Houthi claims.
Iran has denied responsibility.
Twenty-five pilotless aircraft and cruise missiles of Iranian origin were used to attack the two sites, the Saudi Defense Ministry said at a press briefing four days after the incidents, where it displayed the remains of some of them. The range and accuracy of the weapons were beyond the capabilities of the Houthis, spokesman Turki al-Maliki said. The kingdom was still working “to determine the exact position of the launch point,” he added.
Saudi Arabia initially expected to re-start most lost oil output within days of the attack, but that early optimism was tempered after evaluation of the damage. Energy Minister Prince Abdulaziz bin Salman and Saudi Aramco
CEO Amin Nasser still painted a positive picture of the kingdom’s ability to restore oil production
and exports after the attack at a briefing on September 17.
Here’s a summary of the key takeaways from the briefing:
Production from the Khurais field restarted 24 hours after the attack, with output running at about 360,000 barrels a day.
Abqaiq was processing 2 million barrels a day - 41% of its pre-attack throughput - and “its entire output is expected to be restored to prior rates by the end of September.”
Saudi Arabia’s oil production
capacity will be restored to 11 million barrels a day by the end of September and to 12 million by the end of November. Oil production will reach 9.8 million barrels a day in October, in line with the volume the country has been pumping in recent months. There will be zero reduction in flows of crude to customers.
Oil analysts have been less optimistic. Repair of the Abqaiq facility is unlikely to be completed by end-September as planned and will instead take months, consultant FGE said in a report September 18, with production likely to average 8 million barrels a day this month. Full restoration of pre-attack capacity at Abqaiq will only be completed “as we approach the end of the year,” according to Rystad Energy.
Exports Continue, Saudi Arabia Seeks Fuel
The attack could affect flows of both crude oil and refined products, as Saudi Arabia cuts deliveries to its own processing plants in order to maintain exports. It will also shift the balance of Saudi crude supply toward its heavier grades from offshore fields at the expense of the lighter supplies mostly produced onshore and processed at Abqaiq.
“will be able to meet all its commitments to customers this month by drawing on its crude oil reserves,” the energy minister said during his briefing. Those stood at 180 million barrels at the end of July, according to the Joint Organisations Data Initiative. It’s unclear how much of this will be available for sale and how much is needed as a minimum operating level.
But some customers have already been informed of delays to some cargoes scheduled to load in early October, while others have been asked to accept heavier crude grades than those originally specified. Aramco’s head of Japan has assured Japanese refiners that the company will meet its contractual obligations.
has accepted all crude nominations from Japanese refiners for loading in October, but some cargoes for Idemitsu Kosan have been delayed by several days.
In order to maintain crude exports, Saudi Arabia’s refineries are expected to run at lower rates as the country scours global fuel markets for refined products. Aramco Trading Co., which buys and sells fuels on behalf of the state oil company, purchased diesel cargoes and also sought one-off supplies of aviation fuel in the days after the attack, according to people involved in those markets.
Fuel oil, which can be used instead of crude for power generation, has also been bought, while exports of naphtha -- a building-block product for making gasoline and plastics -- have been disrupted.
Few other suppliers have the ability to boost crude production to offset such losses from Saudi Arabia, which was the holder of most of the world’s spare oil production capacity. Two nearby countries that can raise output are the United Arab Emirates and Kuwait. Both have offered to supply more crude to Asian refiners. Saudi Arabia’s cut in supplies of lighter crude grades may favor sales of U.S. barrels as refiners seek comparable replacements.
U.S. President Donald Trump authorized the release of crude from the Strategic Petroleum Reserve after the attack. The International
Energy Agency Executive Director Fatih Birol said Wednesday that the oil market remains well supplied but that his agency remains vigilant about risk of disruptions and stands ready to act.
The attack created turmoil on oil trading desks from Tokyo to Houston. “Sunday and Monday were probably the most intense day and a half in the oil market I have had since 2008,” said Doug King, co-founder of the commodity hedge fund Merchant Capital. Order volumes were sky high and hedge funds, refiners and oil trading houses had their top traders staffing operations, according to interviews with multiple market participants. Brokers put special teams in place to beef up skeleton weekend crews.
Brent crude jumped the most on record in dollar terms when oil markets opened after the attacks, adding as much as $11.73 a barrel to reach an intraday high of $71.95. But that only took it back to a price level last seen in May in a market that remains concerned by the prospect of weakening oil demand growth amid ongoing U.S. trade wars and slowing global economic growth.
Asian countries, the biggest buyers of Saudi crude, will be hardest hit by any disruption, with India the most exposed as its own crude stockpiles are the smallest among those of the kingdom’s main customers, according to Wood Mackenzie research director Vima Jayabalan.
The attacks had “zero” impact on Saudi Arabia’s revenue and won’t affect its economy, according to Finance Minister Mohammed Al-Jadaan. Growth in the kingdom, where the oil and gas sector accounts for about 50% of gross domestic product, was on track to slow to 1.9% this year even as the non-oil economy showed signs of revival, according to the International
The fallout could still test Saudi Arabia’s economic defenses. But low public debt and net foreign assets in excess of $500 billion offer significant ammunition.
The stockpile of reserves “gives the monetary authority the ability to intervene in the markets at any time,” the central bank’s governor, Ahmed Abdulkarim Alkholifey, said on Tuesday. Saudi Arabia’s central bank said it’s prepared to inject liquidity in the financial system if needed to help the economy cope with the aftermath of this week’s major attacks on Aramco’s oil facilities.
The attack could have consequences for a planned Saudi Aramco
IPO. A prospectus published in May ahead of the company’s first international
bond sale identified the importance of Abqaiq, noting that “the Company also depends on critical assets to process its crude oil, such as the Abqaiq facility which is the Company’s largest oil processing facility and processed approximately 50% of the Company’s crude oil production for the year ended 31 December 2018.”
But a successful, deliberate attack was not listed under the operational risks and hazards that could have a significant impact on operations. The vulnerability ofthe kingdom’s most important oil asset will now be a focal point for investors.
The reverberations of the attack on the heart of Saudi Arabia’s oil industry have potential to drain the remaining risk appetite from global markets.
Higher oil prices will inevitably feed through into the prices consumers pay at the pump for gasoline and diesel, and to the cost of home heating oil and feedstocks for making plastics and the other products that depend on oil-based chemicals. But the oil shock alone won’t lead to a global recession, according to RBC Capital Markets’ Global Macro Strategist Peter Schaffrik.
Saudi Arabia’s Crown Prince Mohammed bin Salman and U.S. Secretary of State Mike Pompeo have agreed that Iran must be held accountable for the attack. Possible responses range from doing nothing to open military conflict.
The tougher the response, the more oil is likely to move higher. At the same time, a non-response could embolden whoever was responsible for the attacks.
President Trump has announced new sanctions on Iran’s “national bank,” but declined to say Friday whether he is planning for military action. Pompeo visited Saudi Arabia and United Arab Emirates to “build out a coalition to develop a plan to deter” Iran.
Saudi Arabia could accept the Houthi claims that it launched the attack and step up its military action in Yemen, specifically targeting Houthi drone and missile capabilities, but that “might require a larger military commitment from Saudi Arabia at a time when it wants the opposite,” according to Emily Hawthorne, Middle East and North Africa analyst at Texas-based advisory firm Stratfor Enterprises.
Or it might continue to pin the blame on Iran and seek talks with the Houthis to bring the Yemen conflict to an end and deprive Iran of a proxy on its southern border.
A call for direct military strikes on Iran, from Republican Senator Lindsey Graham among others, are seen as unlikely to be the preferred avenue for retaliation. U.S. or Saudi military strikes on Iran would lead to “all-out war,” Iran’s foreign minister Javad Zarif said in an interview with CNN.